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

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FORM 10-Q

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the Quarterly Period Ended June 30, 2005                 
|Or                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to

Commission File No. 0-11321

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

|New York(State or other jurisdiction of
incorporation or organization)                         |  | 11-2580136(IRS Employer Identification No.)
|---------------------------------------------------------------------------------------------- |  | -------------------------------------------
|Six International Drive, Suite 190
Rye Brook, New York(Address of principal executive offices) |  | 10573(Zip code)                            
|(914) 934-5200(Registrant's telephone number, including area code)                            

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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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes ý    No o

The number of shares of the registrant's common stock, par value $0.01 per share, outstanding as of August 1, 2005 was 58,622,591.



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UNIVERSAL AMERICAN FINANCIAL CORP.  FORM 10-Q

CONTENTS

|                             |  |                                                                                       |  | Page No.
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | --------
|PART IFINANCIAL INFORMATION
|Item 1.                      |  | Financial Statements (unaudited)                                                      |  |         
|                             |  | Consolidated Balance Sheets                                                           |  | 4       
|                             |  | Consolidated Statements of OperationsThree Months                                    |  | 5       
|                             |  | Consolidated Statements of OperationsSix Months                                      |  | 6       
|                             |  | Consolidated Statements of Stockholders' Equity and Comprehensive Income              |  | 7       
|                             |  | Consolidated Statements of Cash Flows                                                 |  | 8       
|                             |  | Notes to Consolidated Financial Statements                                            |  | 9       
|Item 2.                      |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 22      
|Item 3.                      |  | Quantitative and Qualitative Disclosure of Market Risk                                |  | 47      
|Item 4.                      |  | Controls and Procedures                                                               |  | 49      
|PART IIOTHER INFORMATION   
|Item 1.                      |  | Legal Proceedings                                                                     |  | 49      
|Item 2.                      |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 50      
|Item 3.                      |  | Defaults Upon Senior Securities                                                       |  | 50      
|Item 4.                      |  | Submission of Matters to a Vote of Security Holders                                   |  | 50      
|Item 5.                      |  | Other Information                                                                     |  | 51      
|Item 6.                      |  | Exhibits                                                                              |  | 52      
|Signatures                   |  | 53                                                                                   

2

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

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

Portions of the information in this Quarterly Report on Form 10-Q and certain oral statements made from time to time by representatives of the
Company may be considered "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of
1995. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act and the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, without limitation, the Company's future economic performance, plans and objectives for future operations and
projections of revenue and other financial items. Forward-looking statements can be identified by the use of words such as "prospects," "outlook," "believes," "estimates," "intends," "may," "will,"
"should," "anticipates," "expects" or "plans," or the negative or other variation of these or similar words, or by discussion of trends and conditions, strategy or risks and uncertainties.
Forward-looking statements are inherently subject to risks, trends and uncertainties, many of which are beyond the Company's ability to control or predict with accuracy and some of which the Company
might not even anticipate. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions at the time made, it can give no
assurance that its expectations will be achieved. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements.

Important
factors that may cause actual results to differ materially from forward-looking statements include, but are not limited to, the risks and uncertainties set forth in this report
in Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as those other risks detailed in our filings with the SEC, including our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The Company assumes no obligation to update and 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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PART 1.    FINANCIAL INFORMATION

Item 1.    Financial Statements (Unaudited).

UNIVERSAL AMERICAN FINANCIAL CORP.  CONSOLIDATED BALANCE SHEETS

|                                                                                                            |                                                                                                         | June 30,
2005                              |         | December 31,
2004 |          
|----------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ----------------- | ---------
|
|
|ASSETS                                                                                                      |                                                                                                         |                                            |         |                   |          
|Investments (Notes 2 and 6):                                                                                |                                                                                                         |                                            |         |                   |          
|                                                                                                            | Fixed maturities available for sale, at fair value
(amortized cost: 2005, $1,149,810; 2004, $1,109,678) |                                            | $       | 1,223,165         |          
|                                                                                                            | Equity securities, at fair value (cost: 2005, $1,303; 2004, $749)                                       |                                            |         | 1,298             |          
|                                                                                                            | Policy loans                                                                                            |                                            |         | 23,672            |          
|                                                                                                            | Other invested assets                                                                                   |                                            |         | 1,080             |          
|                                                                                                            |                                                                                                         |                                            |         |                   |          
|                                                                                                            |                                                                                                         | Total investments                          |         |                   | 1,249,215
|Cash and cash equivalents                                                                                   |                                                                                                         |                                            | 217,426 |                   |          
|Accrued investment income                                                                                   |                                                                                                         |                                            | 13,153  |                   |          
|Deferred policy acquisition costs                                                                           |                                                                                                         |                                            | 241,557 |                   |          
|Amounts due from reinsurers                                                                                 |                                                                                                         |                                            | 208,169 |                   |          
|Due and unpaid premiums                                                                                     |                                                                                                         |                                            | 7,867   |                   |          
|Present value of future profits and other amortizing intangible assets                                      |                                                                                                         |                                            | 54,760  |                   |          
|Goodwill and other indefinite lived intangible assets (Note 4)                                              |                                                                                                         |                                            | 72,825  |                   |          
|Income taxes receivable                                                                                     |                                                                                                         |                                            | 4,925   |                   |          
|Other assets                                                                                                |                                                                                                         |                                            | 67,430  |                   |          
|                                                                                                            |                                                                                                         |                                            |         |                   |          
|                                                                                                            |                                                                                                         | Total assets                               |         | $                 | 2,137,327
|                                                                                                            |                                                                                                         |                                            |         |                   |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                        |                                                                                                         |                                            |         |                   |          
|LIABILITIES                                                                                                 |                                                                                                         |                                            |         |                   |          
|Policyholder account balances                                                                               |                                                                                                         | $                                          | 489,540 |                   | $        
|Reserves for future policy benefits                                                                         |                                                                                                         |                                            | 764,815 |                   |          
|Policy and contract claimslife                                                                             |                                                                                                         |                                            | 12,517  |                   |          
|Policy and contract claimshealth                                                                           |                                                                                                         |                                            | 98,264  |                   |          
|Loan payable (Note 9)                                                                                       |                                                                                                         |                                            | 98,438  |                   |          
|Other long term debt (Note 10)                                                                              |                                                                                                         |                                            | 75,000  |                   |          
|Amounts due to reinsurers                                                                                   |                                                                                                         |                                            | 4,457   |                   |          
|Deferred income tax liability                                                                               |                                                                                                         |                                            | 20,355  |                   |          
|Other liabilities                                                                                           |                                                                                                         |                                            | 60,478  |                   |          
|                                                                                                            |                                                                                                         |                                            |         |                   |          
|                                                                                                            |                                                                                                         | Total liabilities                          |         |                   | 1,623,864
|                                                                                                            |                                                                                                         |                                            |         |                   |          
|STOCKHOLDERS' EQUITY (Note 8)                                                                               |                                                                                                         |                                            |         |                   |          
|Common stock (Authorized: 100 million shares, issued: 2005, 58.0 million shares; 2004, 55.3 million shares) |                                                                                                         |                                            | 580     |                   |          
|Additional paid-in capital                                                                                  |                                                                                                         |                                            | 223,318 |                   |          
|Accumulated other comprehensive income                                                                      |                                                                                                         |                                            | 48,939  |                   |          
|Retained earnings                                                                                           |                                                                                                         |                                            | 241,049 |                   |          
|Less: Treasury stock (2005, 0.1 million shares; 2004, 0.1 million shares)                                   |                                                                                                         |                                            | (423    | )                 |          
|                                                                                                            |                                                                                                         |                                            |         |                   |          
|                                                                                                            |                                                                                                         | Total stockholders' equity                 |         |                   | 513,463  
|                                                                                                            |                                                                                                         |                                            |         |                   |          
|                                                                                                            |                                                                                                         | Total liabilities and stockholders' equity |         | $                 | 2,137,327
|                                                                                                            |                                                                                                         |                                            |         |                   |          

See notes to unaudited consolidated financial statements.

4

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UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF OPERATIONS  (Unaudited)

Three months ended June 30,2005

2004(In thousands, except per
share amounts)Revenues:Direct premiums and policyholder fees earned

$
251,464

$
199,517Reinsurance premiums assumed


8,127


8,786Reinsurance premiums ceded


(54,689
)

(61,706
)Net premiums and policyholder fees earned


204,902


146,597Net investment income


17,334


16,084Realized gains on investments


3,030


209Fee and other income


4,354


3,617Total revenues


229,620


166,507Benefits, claims and expenses:Net change in future policy benefits


5,261


(271
)Net claims and other benefits


141,198


99,918Interest credited to policyholders


4,630


4,258Net increase in deferred acquisition costs


(17,569
)

(14,902
)Amortization of present value of future profits


1,193


948Commissions


37,672


34,417Commission and expense allowances on reinsurance


(14,392
)

(12,179
)Interest expense


2,670


1,762Other operating costs and expenses


41,279


32,631Total benefits, claims and expenses


201,942


146,582Income before taxes


27,678


19,925Income tax expense


9,030


6,874Net income

$
18,648

$
13,051Earnings per common share:Basic

$
0.33

$
0.24Diluted

$
0.32

$
0.23


See
notes to unaudited consolidated financial statements.

5

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UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF OPERATIONS  (Unaudited)

Six months ended June 30,2005

2004(In thousands, except per share amounts)Revenues:Direct premiums and policyholder fees earned

$
504,807

$
389,823Reinsurance premiums assumed


17,197


18,319Reinsurance premiums ceded


(114,833
)

(125,694
)Net premiums and policyholder fees earned


407,171


282,448Net investment income


34,015


32,162Realized gains on investments


4,103


3,801Fee and other income


8,533


6,752Total revenues


453,822


325,163Benefits, claims and expenses:Net change in future policy benefits


11,042


7,864Net claims and other benefits


278,854


186,389Interest credited to policyholders


9,175


8,478Net increase in deferred acquisition costs


(33,256
)

(31,223
)Amortization of present value of future profits


2,871


1,871Commissions


75,866


69,499Commission and expense allowances on reinsurance


(28,800
)

(24,528
)Interest expense


5,181


3,285Other operating costs and expenses


80,554


62,418Total benefits, claims and expenses


401,487


284,053Income before taxes


52,335


41,110Income tax expense


17,615


14,183Net income

$
34,720

$
26,927Earnings per common share:Basic

$
0.62

$
0.50Diluted

$
0.60

$
0.48


See
notes to unaudited consolidated financial statements.

6

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UNIVERSAL AMERICAN FINANCIAL CORP.  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  AND COMPREHENSIVE INCOME  (Unaudited)

|Six months ended June 30,                   |  | Common
Stock |     | Additional
Paid-In
Capital |   | Accumulated
Other
Comprehensive
Income (Loss) |  | Retained
Earnings |         | Treasury
Stock |   | Total   | 
|------------------------------------------- |  | ------------ | --- | -------------------------- | - | --------------------------------------------- |  | ----------------- | ------- | -------------- | - | ------- | 
|
|2004                                        |  |              |     |                            |   |                                               |  |                   |         |                |   |         | 
|Balance, January 1, 2004                    |  | $            | 541 |                            | $ | 164,355                                       |  | $                 | 39,774  |                | $ | 142,458 | 
|Net income                                  |  |              |    |                            |   |                                              |  |                   |        |                |   | 26,927  | 
|Other comprehensive loss (Note 7)           |  |              |    |                            |   |                                              |  |                   | (19,296 | )              |   |        | 
|                                            |  |              |     |                            |   |                                               |  |                   |         |                |   |         | 
|Comprehensive income                        |  |              |     |                            |   |                                               |  |                   |         |                |   |         | 
|                                            |  |              |     |                            |   |                                               |  |                   |         |                |   |         | 
|Issuance of common stock (Note 8)           |  |              | 7   |                            |   | 2,405                                         |  |                   |        |                |   |        | 
|Stock-based compensation                    |  |              |    |                            |   | 219                                           |  |                   |        |                |   |        | 
|Loans to officers                           |  |              |    |                            |   | 38                                            |  |                   |        |                |   |        | 
|Treasury shares purchased, at cost (Note 8) |  |              |    |                            |   |                                              |  |                   |        |                |   |        | 
|Treasury shares reissued (Note 8)           |  |              |    |                            |   | 215                                           |  |                   |        |                |   |        | 
|                                            |  |              |     |                            |   |                                               |  |                   |         |                |   |         | 
|Balance, June 30, 2004                      |  | $            | 548 |                            | $ | 167,232                                       |  | $                 | 20,478  |                | $ | 169,385 | 
|                                            |  |              |     |                            |   |                                               |  |                   |         |                |   |         | 
|2005                                        |  |              |     |                            |   |                                               |  |                   |         |                |   |         | 
|Balance, January 1, 2005                    |  | $            | 553 |                            | $ | 172,525                                       |  | $                 | 40,983  |                | $ | 206,329 | 
|Net income                                  |  |              |    |                            |   |                                              |  |                   |        |                |   | 34,720  | 
|Other comprehensive income (Note 7)         |  |              |    |                            |   |                                              |  |                   | 7,956   |                |   |        | 
|                                            |  |              |     |                            |   |                                               |  |                   |         |                |   |         | 
|Comprehensive income                        |  |              |     |                            |   |                                               |  |                   |         |                |   |         | 
|                                            |  |              |     |                            |   |                                               |  |                   |         |                |   |         | 
|Issuance of common stock (Note 8)           |  |              | 27  |                            |   | 49,189                                        |  |                   |        |                |   |        | 
|Stock-based compensation                    |  |              |    |                            |   | 985                                           |  |                   |        |                |   |        | 
|Loans to officers                           |  |              |     |                            |   | 20                                            |  |                   |        |                |   |        | 
|Treasury shares purchased, at cost (Note 8) |  |              |    |                            |   |                                              |  |                   |        |                |   |        | 
|Treasury shares reissued (Note 8)           |  |              |    |                            |   | 599                                           |  |                   |        |                |   |        | 
|                                            |  |              |     |                            |   |                                               |  |                   |         |                |   |         | 
|Balance, June 30, 2005                      |  | $            | 580 |                            | $ | 223,318                                       |  | $                 | 48,939  |                | $ | 241,049 | 
|                                            |  |              |     |                            |   |                                               |  |                   |         |                |   |         | 

See
notes to unaudited consolidated financial statements.

7

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UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)

|                                                                                                                                               |                                                                       | Six months ended June 30, |        
|---------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ------------------------- | -------
|
|
|Cash flows from operating activities:                                                                                                          |                                                                       |                           |        
|Net income                                                                                                                                     |                                                                       | $                         | 34,720 
|Adjustments to reconcile net income to net cash provided by operating activities, net of balances acquired (see Note 3Business Combinations): |                                                                       |                           |        
|                                                                                                                                               | Deferred income taxes                                                 |                           |        
|                                                                                                                                               | Change in reserves for future policy benefits                         |                           |        
|                                                                                                                                               | Change in policy and contract claims                                  |                           |        
|                                                                                                                                               | Change in deferred policy acquisition costs                           |                           |        
|                                                                                                                                               | Amortization of present value of future profits and other intangibles |                           |        
|                                                                                                                                               | Net accretion of bond discount                                        |                           |        
|                                                                                                                                               | Amortization of capitalized loan origination fees                     |                           |        
|                                                                                                                                               | Change in policy loans                                                |                           |        
|                                                                                                                                               | Change in accrued investment income                                   |                           |        
|                                                                                                                                               | Change in reinsurance balances                                        |                           |        
|                                                                                                                                               | Realized gains on investments                                         |                           |        
|                                                                                                                                               | Change in income taxes payable                                        |                           |        
|                                                                                                                                               | Other, net                                                            |                           |        
|                                                                                                                                               |                                                                       |                           |        
|Net cash provided (used) by operating activities                                                                                               |                                                                       |                           | 20,339 
|                                                                                                                                               |                                                                       |                           |        
|Cash flows from investing activities:                                                                                                          |                                                                       |                           |        
|                                                                                                                                               | Proceeds from sale or redemption of fixed maturities                  |                           |        
|                                                                                                                                               | Cost of fixed maturities purchased                                    |                           |        
|                                                                                                                                               | Purchase of business, net of cash acquired (Note 3)                   |                           |        
|                                                                                                                                               | Other investing activities                                            |                           |        
|                                                                                                                                               |                                                                       |                           |        
|Net cash used by investing activities                                                                                                          |                                                                       |                           | (40,714
|                                                                                                                                               |                                                                       |                           |        
|Cash flows from financing activities:                                                                                                          |                                                                       |                           |        
|                                                                                                                                               | Net proceeds from issuance of common stock                            |                           |        
|                                                                                                                                               | Cost of treasury stock purchases                                      |                           |        
|                                                                                                                                               | Change in policyholder account balances                               |                           |        
|                                                                                                                                               | Change in reinsurance on policyholder account balances                |                           |        
|                                                                                                                                               | Issuance of debt (Note 10)                                            |                           |        
|                                                                                                                                               | Principal repayment on loan payable                                   |                           |        
|                                                                                                                                               |                                                                       |                           |        
|Net cash provided by financing activities                                                                                                      |                                                                       |                           | 56,544 
|                                                                                                                                               |                                                                       |                           |        
|Net increase (decrease) in cash and cash equivalents                                                                                           |                                                                       |                           | 36,169 
|Cash and cash equivalents at beginning of period                                                                                               |                                                                       |                           | 181,257
|                                                                                                                                               |                                                                       |                           |        
|                                                                                                                                               | Cash and cash equivalents at end of period                            |                           | $      
|                                                                                                                                               |                                                                       |                           |        
|Supplemental cash flow information:                                                                                                            |                                                                       |                           |        
|                                                                                                                                               | Cash paid during the period for interest                              |                           | $      
|                                                                                                                                               |                                                                       |                           |        
|                                                                                                                                               | Cash paid during the period for income taxes                          |                           | $      
|                                                                                                                                               |                                                                       |                           |        

See notes to unaudited consolidated financial statements.

8

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

1.BASIS OF PRESENTATION



Universal American Financial Corp. (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. Collectively, the insurance company subsidiaries are licensed to sell life and
accident & health insurance and annuities in all fifty states, the District of Columbia, Puerto Rico and all the provinces of Canada. The principal insurance products currently sold by the
Company are Medicare Supplement and Select, fixed benefit accident and sickness disability insurance, senior life insurance and fixed annuities. The Company distributes these products through an
independent general agency system and a career agency system. The career agents focus on sales for Pennsylvania Life, Pyramid Life and Penncorp Life (Canada) while the independent general agents sell
for American Pioneer, American Progressive, Constitution and Union Bankers. Heritage operates Medicare Advantage plans in Houston and Beaumont Texas through SelectCare of Texas, L.L.C., and our
Medicare Advantage private fee-for-service plan in the northeastern portion of the United States. CHCS, the Company's administrative services company, acts as a service
provider for both affiliated and unaffiliated insurance companies for senior market insurance and non-insurance programs.

The
interim financial information herein is unaudited, but in the opinion of management, includes all adjustments (consisting of normal, recurring adjustments) necessary to present
fairly the financial position and results of operations for such periods. The results of operations for the three months or
six months ended June 30, 2005 and 2004 are not necessarily indicative of the results to be expected for the full year. The accompanying consolidated financial statements and notes should be
read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2004.

Certain
reclassifications have been made to prior year's financial statements to conform to current period classifications.



The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and consolidate
the accounts of Universal American Financial Corp. ("Universal American") and its subsidiaries (collectively the "Company"), American Progressive Life & Health Insurance Company of New York
("American Progressive"), American Pioneer Life Insurance Company ("American Pioneer"), American Exchange Life Insurance Company ("American Exchange"), SelectCare of Oklahoma, Inc. (formerly
Eagle Life Insurance Company), Pennsylvania Life Insurance Company ("Pennsylvania Life"), Peninsular Life Insurance Company ("Peninsular"), Union Bankers Insurance Company ("Union Bankers"),
Constitution Life Insurance Company ("Constitution"), Marquette National Life Insurance Company ("Marquette"), Penncorp Life Insurance Company, a Canadian company ("Penncorp Life (Canada)"), The
Pyramid Life Insurance Company ("Pyramid Life"), Heritage Health Systems, Inc ("Heritage") and CHCS Services, Inc. ("CHCS"). Heritage was acquired on May 28, 2004. Operating results for
Heritage prior to the date of its acquisition are not included in Universal American's consolidated results of operations. All material intercompany transactions and balances between Universal
American and its subsidiaries have been eliminated.

9

---





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



For a description of significant accounting policies, see Note 2Summary of Significant Accounting Policies in the notes to the Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K.

2.RECENT AND PENDING ACCOUNTING PRONOUNCEMENTS



The Company has various stock-based incentive plans for its employees, non-employee directors and its agents. Detailed information for activity in the
Company's stock plans can be found in Note 9Stock-Based Compensation, to the consolidated financial statements in the Company's Annual Report on Form 10-K. As
permitted by SFAS 123, the Company measures its stock-based compensation for employees and directors using the intrinsic value approach under APB 25. Accordingly, the Company does not recognize
compensation expense upon the issuance of its stock options because the option terms are fixed and the exercise price equaled the market price of the underlying common stock on the grant date. The
Company complies with the provisions of SFAS 123 by providing pro forma disclosures of net income and related per share data giving consideration to the fair value method provisions of
SFAS 123. The Company uses a modified Black-Scholes option pricing model to estimate fair value. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied during each period presented.

|                                                                                                           |                      | Three months ended
June 30, |        | Six months ended
June 30, |  
|---------------------------------------------------------------------------------------------------------- | -------------------- | --------------------------- | ------ | ------------------------- | -
|
|
|Reported net income                                                                                        |                      | $                           | 18,648 |                           | $
|Add back: Stock-based compensation expense included in reported net income, net of tax                     |                      |                             | 471    |                           |  
|Less: Stock based compensation expense determined under fair value based method for all awards, net of tax |                      |                             | (1,083 | )                         |  
|                                                                                                           |                      |                             |        |                           |  
|Pro forma net income                                                                                       |                      | $                           | 18,036 |                           | $
|                                                                                                           |                      |                             |        |                           |  
|Net income per share:                                                                                      |                      |                             |        |                           |  
|                                                                                                           | Basic, as reported   |                             | $      | 0.33                      |  
|                                                                                                           | Basic, pro forma     |                             | $      | 0.32                      |  
|                                                                                                           | Diluted, as reported |                             | $      | 0.32                      |  
|                                                                                                           | Diluted, pro forma   |                             | $      | 0.31                      |  

10

---



Pro
forma compensation expense reflected for prior periods is not indicative of future compensation expense that would be recorded by the Company if it were to adopt the fair value based
recognition provisions of SFAS 123 for stock based compensation for its employees and directors. Future expense may vary based upon factors such as the number of awards granted by the Company
and the then-current fair market value of such awards.



In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS 123 and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS 123(R) requires all companies to recognize compensation costs for share-based payments to employees based
on the grant-date fair value of the award for financial statements for annual periods beginning after June 15, 2005. The pro forma disclosures previously permitted under
SFAS 123 will no longer be an alternative to financial statement recognition.

As
permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB 25's intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)'s fair value method will have a significant impact on our results of operations, although it will have no
impact on our overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future.
However, had we adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the above disclosure of pro forma net
income and earnings per share. SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company
cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized for such
excess tax deductions were $1.4 million for the six months ended June 30, 2005. There were no operating cash flows recognized for such excess tax deductions for the six months ended
June 30, 2004.

3.BUSINESS COMBINATIONS



On May 28, 2004, the Company acquired 100% of the outstanding common stock of Heritage, a privately owned managed care company that operates Medicare
Advantage plans in Houston and Beaumont Texas, for $98 million in cash plus transaction costs of $2.0 million. Heritage generates its revenues and profits from three sources. First,
Heritage owns an interest in SelectCare of Texas, L.L.C. ("SelectCare"), a health plan that offers health insurance coverage to Medicare beneficiaries under a contract with CMS. Next, Heritage
operates three separate Management Service Organizations ("MSO's") that manage the business of SelectCare and two affiliated Independent Physician Associations ("IPA's"). Last, Heritage participates
in the net results derived by these IPA's. The acquisition was financed with $66.5 million of net proceeds derived from the amendment of the Company's credit facility (See
Note 9Loan Payable) and $33.5 million of cash on hand. As of the date of acquisition, Heritage had approximately 16,000 Medicare members and annualized revenues of
approximately $140 million. Operating results generated by Heritage prior to May 28, 2004, the date of acquisition, are not included in the Company's consolidated financial statements.

As
of May 28, 2005, the company finalized the purchase accounting for the acquisition, resulting in an increase in the fair value of net tangible assets of Heritage of $4.8 as of
the date of acquisition to $28.0 million, as a result of the resolution of pre-acquisition contingencies. The excess of the purchase price over the fair value of net tangible assets
acquired was $72.0 million, which the Company allocated to identifiable intangible assets. Based on this allocation, approximately $12.2 million was assigned to

11

---



amortizing
intangible assets, including $10.0 million (net of deferred income taxes of $5.4 million), which was assigned to the value of the membership in force and determined to have a
weighted average life of 6 years and $2.2 million (net of deferred taxes of $1.2 million), which was assigned to the value of the IPA's, and determined to have a weighted average
lives of between 6 and 13 years. Approximately $5.2 million was allocated to non-amortizing intangible assets, including $4.4 million assigned to the value of
trademarks and $0.8 million assigned to the value of Heritage's licenses. Each of these items was determined to have indefinite lives. The balance of $54.3 million was assigned to
goodwill.

The
consolidated pro forma results of operations, assuming that Heritage was purchased on January 1, 2004 are as follows:

Three months ended
June 30,

Six months ended
June 30,2005

2004

2005

2004(In thousands, except per share amounts)Total revenue

$
229,620

$
188,994

$
453,822

$
382,203Income before taxes

$
27,678

$
20,904

$
52,335

$
45,247Net income

$
18,648

$
13,688

$
34,720

$
29,616Earnings per common share:Basic

$
0.33

$
0.26

$
0.62

$
0.55Diluted

$
0.32

$
0.25

$
0.60

$
0.53


The
pro forma results of operations reflect management's best estimate based upon currently available information. The pro forma adjustments are applied to the historical
financial statements of Universal
American and Heritage to account for the acquisition of Heritage under the purchase method of accounting. In accordance with SFAS No. 141, "Business Combinations", the total purchase cost was
allocated to the assets and liabilities of Heritage based on their relative fair values. These allocations are subject to valuations as of the date of the acquisition based upon appraisals and other
information at that time. Management has provided its best estimate of the fair values of assets and liabilities for the purpose of this pro forma information. The pro forma information presented
above is for disclosure purposes only and is not necessarily indicative of the results of operations that would have occurred if the acquisition had been consummated on the dates assumed, nor is the
pro forma information intended to be indicative of Universal American's future results of operations.

4.INTANGIBLE ASSETS

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

June 30, 2005

December 31, 2004Value
Assigned

Accumulated
Amortization

Value
Assigned

Accumulated
Amortization(In thousands)Senior Health Insurance:Present value of future profits ("PVFP")

$
18,472

$
4,697

$
18,472

$
3,628Distribution Channel


22,055


1,654


22,055


1,287Life Insurance/AnnuityPVFP


4,127


1,500


4,127


1,308Senior Managed CareMedicare Advantage:PVFP


15,381


2,470


18,554


1,667Value of IPA's


3,459


435


3,459


234Senior Administrative ServicesPVFP


7,672


7,138


7,672


7,035Value of future override fees


1,796


308


1,796


172Total

$
72,962

$
18,202

$
76,135

$
15,331


12

---



The following table shows the changes in the present value of future profits and other amortizing intangible assets.

Three months ended
June 30,

Six months ended
June 30,2005

2004

2005

2004(In thousands)Balance, beginning of year

$
59,126

$
43,100

$
60,804

$
44,047Additions and adjustments


(3,173
)

20,200


(3,173
)

20,176Amortization, net of interest


(1,193
)

(948
)

(2,871
)

(1,871
)Balance, end of year

$
54,760

$
62,352

$
54,760

$
62,352


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

2005 (remainder of year)

$
3,4182006


6,3762007


6,0602008


5,6742009


4,612Thereafter


28,620$
54,760


The
carrying amounts of goodwill and intangible assets with indefinite lives are shown below.

June 30,
2005

December 31,
2004(In thousands)Senior Market Health Insurance

$
8,760

$
8,760Senior Managed CareMedicare Advantage


59,708


62,063Senior Administrative Services


4,357


4,357Total

$
72,825

$
75,180


5.EARNINGS PER SHARE

The reconciliation of the numerators and the denominators for the computation of basic and diluted EPS is as follows:

Three months ended June 30,2005

2004Income
Numerator

Shares
Denominator

Per Share
Amount

Income
Numerator

Shares
Denominator

Per Share
Amount(In thousands)Weighted average common stock outstanding




55,986







54,624Less: Weighted average treasury shares




(51
)






(146
)Basic earnings per share

$
18,648

55,935

$
0.33

$
13,051

54,478

$
0.24Effect of dilutive securities




2,055







1,992Diluted earnings per share

$
18,648

57,990

$
0.32

$
13,051

56,470

$
0.23


13

---



Six months ended June 30,2005

2004Income
Numerator

Shares
Denominator

Per Share
Amount

Income
Numerator

Shares
Denominator

Per Share
Amount(In thousands)Weighted average common stock outstanding




55,686







54,447Less: Weighted average treasury shares




(76
)






(177
)Basic earnings per share

$
34,720

55,610

$
0.62

$
26,927

54,270

$
0.50Effect of dilutive securities




2,027







2,016Diluted earnings per share

$
34,720

57,637

$
0.60

$
26,927

56,286

$
0.48


6.INVESTMENTS

Fixed maturity securities are classified as investments available for sale and are carried at fair value, with the unrealized gain or loss, net of tax and other
adjustments (deferred policy acquisition costs), included in accumulated other comprehensive income.

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

June 30, 2005Classification

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value(In thousands)U.S. Treasury securities and obligations of U.S. government

$
139,447

$
1,326

$
(418
)
$
140,355Corporate debt securities


453,102


26,373


(691
)

478,784Foreign debt securities(1)


201,789


39,976


(9
)

241,756Mortgage and asset-backed securities


355,472


7,190


(392
)

362,270$
1,149,810

$
74,865

$
(1,510
)
$
1,223,165


December 31, 2004Classification

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value(In thousands)U.S. Treasury securities and obligations of U.S. government

$
87,552

$
718

$
(327
)
$
87,943Corporate debt securities


486,142


27,467


(1,830
)

511,779Foreign debt securities(1)


209,583


28,797


(33
)

238,347Mortgage and asset-backed securities


326,401


6,879


(527
)

332,753$
1,109,678

$
63,861

$
(2,717
)
$
1,170,822


---

The
amortized cost and fair value of fixed maturities by contractual maturity at June 30, 2005 are shown below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

14

---





Amortized
Cost

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

$
78,435

$
78,839Due after 1 year through 5 years


230,338


239,305Due after 5 years through 10 years


298,708


319,777Due after 10 years


186,857


222,974Mortgageand asset-backed securities


355,472


362,270$
1,149,810

$
1,223,165


The
Company did not write down the value of any fixed maturity securities during the six months ended June 30, 2005 or 2004.

7.COMPREHENSIVE INCOME

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

|                                                                                                 |  | 2005 |        | 2004 |  
|------------------------------------------------------------------------------------------------ |  | ---- | ------ | ---- | -
|
|
|Net unrealized gain (loss) arising during the year (net of deferred acquisition cost adjustment) |  | $    | 28,890 |      | $
|Less: Reclassification adjustment for gains included in net income                               |  |      | (3,030 | )    |  
|                                                                                                 |  |      |        |      |  
|Net unrealized gains (losses)                                                                    |  |      | 25,860 |      |  
|Cash flow hedge                                                                                  |  |      | (438   | )    |  
|Currency translation adjustments                                                                 |  |      | (393   | )    |  
|                                                                                                 |  |      |        |      |  
|Other comprehensive income (loss)                                                                |  | $    | 25,029 |      | $
|                                                                                                 |  |      |        |      |  

|                                                                                                 |  | 2005 |        | 2004 |  
|------------------------------------------------------------------------------------------------ |  | ---- | ------ | ---- | -
|
|
|Net unrealized gain (loss) arising during the year (net of deferred acquisition cost adjustment) |  | $    | 16,744 |      | $
|Less: Reclassification adjustment for gains included in net income                               |  |      | (4,103 | )    |  
|                                                                                                 |  |      |        |      |  
|Net unrealized gains (losses)                                                                    |  |      | 12,641 |      |  
|Cash flow hedge                                                                                  |  |      | 219    |      |  
|Currency translation adjustments                                                                 |  |      | (620   | )    |  
|                                                                                                 |  |      |        |      |  
|Other comprehensive income (loss)                                                                |  | $    | 12,240 |      | $
|                                                                                                 |  |      |        |      |  

15

---



8.STOCKHOLDERS' EQUITY



The Company has 2.0 million authorized shares of preferred stock with no such shares issued or outstanding at June 30, 2005 or December 31,
2004.



The par value of common stock is $.01 per share with 100 million shares authorized for issuance. Changes in the number of shares of common stock issued
were as follows:

Six months ended June 30,

2005

2004Common stock issued, beginning of year

55,326,092

54,111,923Equity Offering

2,000,000

Stock options exercised

603,322

665,270Agent stock award

60,002

Stock purchases pursuant to agents' stock plans

6,751

3,100Common stock issued, end of period

57,996,167

54,780,293


On
June 22, 2005, the Company issued 2.0 million shares of its common stock at a price of $23.61 per share, in connection with a public offering pursuant to a shelf
registration. The issuance of these shares generated proceeds to the Company of $44.2 million, net of underwriters discount and other issuance costs. Additionally, 5.0 million shares
were sold by Capital Z Financial Services Fund II, L.P. and its affiliates ("Capital Z"), the Company's largest shareholder, under the same shelf registration. On July 20, 2005, the
underwriters exercised their over-allotment option and the Company
issued an additional 660,000 shares of its common stock at $23.61 per share, generating additional net proceeds of $14.8 million. Following the offering, Capital Z owned 20.2 million
shares, or 34.5% of Universal American's outstanding common stock.



The Board of Directors has approved a plan for the Company to repurchase up to 1.5 million shares of the Company's common stock in the open market. The
primary purpose of the plan is to fund employee stock bonuses.

|                                                   |  | 2005    |   |   |      |   |   |      
|-------------------------------------------------- |  | ------- | - | - | ---- | - | - | -----
|
|
|
|
|Treasury stock beginning of year                   |  | 124,941 |   | $ | 969  |   | $ | 7.75 
|Shares repurchased                                 |  | 1,674   |   |   | 31   |   |   | 18.73
|Shares distributed in the form of employee bonuses |  | (74,081 | ) |   | (577 | ) |   | 15.87
|                                                   |  |         |   |   |      |   |   |      
|Treasury stock, end of period                      |  | 52,534  |   | $ | 423  |   | $ | 8.05 
|                                                   |  |         |   |   |      |   |   |      

Through
June 30, 2005, the Company had repurchased 792,793 shares at an aggregate cost of $4.5 million. As of June 30, 2005, 707,207 shares remained available for
repurchase under the program. Additional repurchases may be made from time to time at prevailing prices, subject to restrictions on volume and timing.

16

---





The components of accumulated other comprehensive income are as follows:

June 30,
2005

December 31,
2004(In thousands)Net unrealized appreciation on investments

$
73,350

$
61,150Deferred acquisition cost adjustment


(7,335
)

(7,776
)Foreign currency translation gains (losses)


8,225


8,845Fair value of cash flow swap


1,051


832Deferred tax on the above


(26,352
)

(22,068
)Accumulated other comprehensive income

$
48,939

$
40,983


9.LOAN PAYABLE



In connection with the acquisition of Heritage on May 28, 2004 (see Note 3Business Combinations), the Company amended the Credit
Agreement by increasing the facility to $120 million from $80 million (the "Amended Credit Agreement"), including an increase in the term loan portion to $105 million from
$36.4 million (the balance outstanding at May 28, 2004) and maintaining the $15 million revolving loan facility. None of the revolving loan facility has been drawn as of
June 30, 2005. Under the Amended Credit Agreement, the spread over LIBOR was reduced to 225 basis points. Effective
July 1, 2005, the interest rate on the term loan is 5.6%. Principal repayments are scheduled at $5.3 million per year over a five-year period with a final payment of
$80.1 million due upon maturity on March 31, 2009.

The
Company made regularly scheduled principal payments of $2.6 million and paid $2.5 million in interest in connection with its credit facilities during the six months
ended June 30, 2005. During the six months ended June 30, 2004, the Company made regularly scheduled principal payments of $3.1 million and paid $1.0 million in interest in
connection with its credit facilities.

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

2005 (remainder of year)

$
2,6252006


5,2502007


5,2502008


5,2502009


80,063$
98,438


10.OTHER LONG TERM DEBT

The Company has formed statutory business trusts, which exist for the exclusive purpose of issuing trust preferred securities representing undivided beneficial
interests in the assets of the trust, investing the gross proceeds of the trust preferred securities in junior subordinated deferrable interest debentures of the Company and engaging in only those
activities necessary or incidental thereto. In accordance with the adoption of FIN 46R, the Company has deconsolidated the trusts. Separate subsidiary trusts of the Company (the "Trusts") have issued
a combined $75.0 million in thirty year trust preferred securities that mature in 2032 and 2033.

The
Company paid $2.6 million in interest in connection with the Junior Subordinated Debt during the six months ended June 30, 2005 and paid $2.2 million during the
six months ended June 30, 2004.

17

---



11.DERIVATIVE INSTRUMENTSCASH FLOW HEDGE

Effective September 4, 2003, the Company entered into a swap agreement whereby it pays a fixed rate of 6.7% on a $15.0 million notional amount
relating to the December 2002 trust preferred securities issuance, in exchange for a floating rate of LIBOR plus 400 basis points, capped at 12.5%. The swap contract expires in
December 2007. Effective April 29, 2004, the Company entered into a second swap agreement whereby it pays a fixed rate of 6.98% on a $20.0 million notional amount relating to the
October 2003 trust preferred securities issuance, in exchange for a floating rate of LIBOR plus 395 basis points, capped at 12.45%. The swap contract expires in October 2008. The swaps
are designated and qualify as cash flow hedges, and changes in their fair value are recorded in accumulated other comprehensive income. The combined fair value of the swaps was $1.1 million at
June 30, 2005 and $0.8 million at December 31, 2004 and is included in other assets.

12.STATUTORY FINANCIAL DATA

The insurance subsidiaries are required to maintain minimum amounts of statutory capital and surplus as required by regulatory authorities. However, substantially
more than such minimum amounts are needed to meet statutory and administrative requirements of adequate capital and surplus to support the current level of our insurance subsidiaries' operations. Each
of the life insurance subsidiaries' statutory capital and surplus exceeds its respective minimum statutory requirement at levels we believe are sufficient to support their current levels of operation.
Additionally, the National Association of Insurance Commissioners ("NAIC") imposes regulatory risk-based capital ("RBC") requirements on life insurance enterprises. At June 30,
2005, all of our life insurance subsidiaries maintained ratios of total adjusted capital to RBC in excess of the "authorized control level". The combined statutory capital and surplus, including asset
valuation reserve, of the U.S. life insurance subsidiaries totaled $138.0 million at June 30, 2005 and $127.9 million at December 31, 2004.

SelectCare
is also required to maintain minimum amounts of capital and surplus, as required by regulatory authorities and is also subject to RBC requirements. At June 30, 2005,
SelectCare's statutory capital and surplus exceeds its minimum requirement and its RBC is in excess of the "authorized control level". The statutory capital and surplus for SelectCare was
$14.5 million at June 30, 2005 and $9.6 million at December 31, 2004.

Penncorp
Life (Canada) reports to Canadian regulatory authorities based upon Canadian statutory accounting principles that vary in some respects from U.S. statutory accounting
principles. Penncorp Life (Canada)'s net assets based upon Canadian statutory accounting principles were C$63.0 million (US$51.4 million) as of June 30, 2005 and were
C$57.4 million (US$47.8 million) as of December 31, 2004. Penncorp Life (Canada) maintained a Minimum Continuing Capital and Surplus Requirement Ratio ("MCCSR") in excess of the
minimum requirement at June 30, 2005.

13.BUSINESS SEGMENT INFORMATION

The Company's principal business segments are based on product and include: Senior Market Health Insurance, Senior Managed CareMedicare Advantage,
Specialty Health Insurance, Life Insurance/Annuities and Senior Administrative Services. The Company also reports the activities of our holding company in a separate segment. Prior to our Annual
Report of Form 10-K for the year ended December 31, 2004, the Company reported its segments based on distribution channel. The Company's former Senior Market Brokerage and
Career Agency segments have been replaced with the three new segments: Senior Market Health Insurance, Life Insurance/Annuity and Specialty Health Insurance. The Senior Managed
CareMedicare Advantage and Administrative Services segments remain unchanged. Management believes that this new segmentation will provide even greater clarity to the

18

---



results
of the Company. Reclassifications have been made to conform prior year amounts to the current year presentation. A description of these segments follows:



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

19

---



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

2005

2004Three months ended June 30,

Segment
Revenue

Segment
Income

Segment
Revenue

Segment
Income(In thousands)Senior Market Health Insurance

$
97,806

$
8,449

$
89,705

$
8,021Senior Managed CareMedicare Advantage


57,852


7,089


11,958


838Specialty Health Insurance


43,713


6,798


42,859


7,263Life Insurance and Annuity


23,368


3,405


20,869


3,035Senior Administrative Services


14,703


3,041


13,953


3,333Corporate


58


(4,134
)

34


(2,774
)Intersegment revenues


(10,902
)




(11,044
)

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


3,030


3,030


209


209Premium revenue adjustment(2)


(8
)




(2,036
)

Total

$
229,620

$
27,678

$
166,507

$
19,925


2005

2004Six months ended June 30,

Segment Revenue

Segment Income

Segment Revenue

Segment Income(In thousands)Senior Market Health Insurance

$
197,037

$
15,279

$
178,030

$
15,961Senior Managed CareMedicare Advantage


111,129


14,130


11,958


838Specialty Health Insurance


87,827


12,372


87,405


13,003Life Insurance and Annuity


46,201


7,445


40,362


6,279Senior Administrative Services


29,611


6,656


27,925


6,487Corporate


109


(7,650
)

70


(5,259
)Intersegment revenues


(22,212
)




(22,110
)

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


4,103


4,103


3,801


3,801Premium revenue adjustment(2)


17





(2,278
)

Total

$
453,822

$
52,335

$
325,163

$
41,110


---

20

---



Identifiable
assets by segment are as follows:

June 30,
2005

December 31,
2004(In thousands)Senior Market Health Insurance

$
405,079

$
385,487Senior Managed CareMedicare Advantage


151,261


136,349Specialty Health Insurance


749,466


732,680Life Insurance and Annuity


746,694


723,343Senior Administrative Services


18,168


19,401Corporate


696,796


608,722Intersegment assets(1)


(630,137
)

(588,894
)Total Assets

$
2,137,327

$
2,017,088


---

14.FOREIGN OPERATIONS

A portion of the Company's operations is conducted in Canada through Penncorp Life (Canada). These assets and liabilities are located in Canada where the
insurance risks are written. Revenues, excluding capital gains and losses, of the Company by geographic distribution by country are as follows:

Three months ended
June 30,

Six months ended
June 30,2005

2004

2005

2004(In thousands)United States

$
208,668

$
150,155

$
413,342

$
287,917Canada


17,922


16,143


36,377


33,445Total

$
226,590

$
166,298

$
449,719

$
321,362


Total
assets and liabilities of Penncorp Life (Canada), located entirely in Canada, are as follows:

June 30,
2005

December 31,
2004(In thousands)Assets

$
251,834

$
233,741Liabilities

$
191,336

$
188,125


21

---



Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.

RESULTS OF OPERATIONS

Introduction

The following discussion and analysis presents a review of the Company as of June 30, 2005, and its results of operations for the three months and six
months ended June 30, 2005. This Management's Discussion and Analysis of Financial Condition and Results of Operation should be read in conjunction with the consolidated financial statements as
well as the Management's Discussion and Analysis of Financial Condition and Results of Operation included in the Company's 2004 Annual Report on Form 10-K.

Overview

Our principal business segments are based on product and include: Senior Market Health Insurance, Senior Managed CareMedicare Advantage, Specialty
Health Insurance, Life Insurance/Annuities and Senior Administrative Services. We also report the activities of our holding company in a separate segment. Previously, we reported our segments based on
distribution channel. Our former Senior Market Brokerage and Career Agency segments have been replaced with the three new segments: Senior Market Health Insurance, Life Insurance/Annuity and Specialty
Health Insurance. Our Senior Managed CareMedicare Advantage and Senior Administrative Services segments are unchanged. We believe that this new segmentation will provide even greater
clarity to our results. Reclassifications have been made to conform prior year amounts to the current
year presentation. See Note 13Business Segment Information in our consolidated financial statements included in this Form 10-Q for a description of our segments.

Critical Accounting Policies

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



We calculate and maintain reserves for the estimated future payment of claims to our policyholders using the same actuarial assumptions that we use in the pricing
of our products. For our accident and health insurance business, we establish an active life reserve for expected future policy benefits, plus a liability for due and unpaid claims, claims in the
course of settlement and incurred but not reported claims. Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation, hospital and pharmaceutical costs,
changes in doctrines of legal liability, premium rate increases and extra contractual damage awards. Therefore, the reserves and liabilities we establish are based on extensive estimates, assumptions
and prior years' statistics. When we acquire other insurance companies or blocks of insurance, our assessment of the adequacy of acquired policy liabilities is subject to similar estimates and
assumptions. Establishing reserves involves inherent uncertainties, and it is possible that actual claims could materially exceed our reserves and have a material adverse effect

22

---



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



The cost of acquiring new business, principally non-level commissions and agency production, underwriting, policy issuance, and associated costs, all
of which vary with, and are primarily related to the production of new and renewal business, are deferred. For interest-sensitive life and annuity products, these costs are amortized in relation to
the present value of expected gross profits on the policies arising principally from investment, mortality and expense margins in accordance with SFAS No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments". For other life and health products, these costs are amortized in
proportion to premium revenue using the same assumptions used in estimating the liabilities for future policy benefits in accordance with SFAS No. 60, "Accounting and Reporting by Insurance
Enterprises." Amortization of deferred acquisition costs for Medicare supplement policies is periodically adjusted for significant changes in benefit structures and differences in assumed premium
rates on a prospective basis, consistent with assumptions used in the related reserves for future policy benefits. During 2005, the Company determined that the actual approved rate increases and
persistency were higher than assumed levels. The prospective unlocking of these assumptions resulted in a slower amortization of Medicare supplement deferred acquisition costs.

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



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

Amortization
of present value of future profits is based upon the pattern of the projected cash flows of the in-force business acquired, over weighted average lives ranging
from six to forty years. Other identified intangibles are amortized over their estimated lives.

On
a periodic basis, management reviews the unamortized balances of present value of future profits, goodwill and other identified intangibles to determine whether events or
circumstances indicate the carrying value of such assets is not recoverable, in which case an impairment charge would be

23

---



recognized.
Management believes that no impairments of present value of future profits, goodwill or other identified intangibles existed as of June 30, 2005.



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

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



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

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

Significant Transactions and Initiatives



On March 23, 2005, we announced that we established a strategic alliance with PharmaCare Management Services, Inc. ("PharmaCare"), a wholly owned
subsidiary of CVS Corporation, to offer Medicare Part D Prescription Drug Benefit Plans ("PDPs"). Certain of Universal American's insurance subsidiaries have filed applications with the Centers
for Medicare and Medicaid Services ("CMS") to become PDP sponsors in 32 of the 34 CMS regions. PharmaCare, a leading pharmacy benefit manager, will provide comprehensive pharmacy benefit management
services to the Universal American companies for this program. The PDP sponsors and an affiliate of PharmaCare have entered into a 50% quota share reinsurance agreement on the products to be sold. The
products will be sold by the Universal American field force which consists of career agents who work through the Universal

24

---



American
Senior Solutions® program, as well independent agents who specialize in the sale of Medicare supplement products. As part of the strategic alliance, CVS will assist in marketing
the products through its 5,400 CVS/pharmacy stores, subject to the CMS guidelines. Although CVS has agreed to promote our PDPs on a preferred basis, CVS is not precluded from entering into marketing
arrangements with other PDP sponsors. We believe that this program has the potential to have a meaningful impact on our business. We have incurred $1.0 million in costs to prepare for the
implementation of the plans and we estimate that during the remainder of 2005, we will expense an additional $5.0 million to $6.0 million of incremental out of pocket costs relating to
product development, systems development and upgrades and marketing costs, before we receive any revenues from the program starting in 2006. Additionally, we anticipate that we will be funding up to
$15 million in costs that will be capitalized.

There
are significant risks associated with our participation in the Medicare Part D program. These include the following:



25

---





Additional
discussion of the risks and speculative factors inherent in and affecting our business in general as well as our participation in the Medicare Part D program, are
detailed in our filings with the Securities and Exchange Commission, including our prospectus supplement, dated June 16, 2005 and our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K. The Company assumes no obligation to update and supplement any forward-looking statements that may become
untrue because of subsequent events, whether as a result of new information, future events or otherwise.



On May 28, 2004, we acquired Heritage, a privately owned managed care company that operates Medicare Advantage plans in Houston and Beaumont Texas, for
$98 million in cash plus transaction costs of $2.0 million. The acquisition was financed with $66.5 million of net proceeds derived from the amendment of our credit facility and
$33.5 million of cash on hand. As of the date of acquisition, Heritage had approximately 16,000 Medicare members and annualized revenues of approximately $140 million. Operating results
generated by Heritage prior to the date of acquisition are not included in our consolidated financial statements.



On June 22, 2005, we issued 2.0 million shares of our common stock at a price of $23.61 per share, in connection with a public offering pursuant to
a shelf registration. The issuance of these shares generated proceeds to us of $44.2 million, net of underwriters discount and other issuance costs. Additionally, 5.0 million shares were
sold under the same shelf registration by Capital Z Financial Services Fund II, L.P. and its affiliates ("Capital Z"), our largest shareholder. On July 20, 2005, the underwriters exercised
their over-allotment option and we issued an additional 660,000 shares of our common stock at $23.61 per share, generating additional net proceeds of $14.8 million. Following the
offering, Capital Z owned 20.2 million shares, or 34.5% of our outstanding common stock. (See Shelf Registration and Equity Offering in the Liquidity section of this Management's Discussion and
Analysis).

26

---



Results of OperationsConsolidated Overview

The following table reflects income from each of our segments (1) and contains a reconciliation to reported net income:

Three months ended
June 30,

Six months ended
June 30,2005

2004

2005

2004(In thousands)Senior Market Health Insurance(1)

$
8,449

$
8,021

$
15,279

$
15,961Senior Managed CareMedicare Advantage(1)


7,089


838


14,130


838Specialty Health Insurance(1)


6,798


7,263


12,372


13,003Life Insurance and Annuities(1)


3,405


3,035


7,445


6,279Senior Administrative Services(1)


3,041


3,333


6,656


6,487Corporate(1)


(4,134
)

(2,774
)

(7,650
)

(5,259
)Realized gains


3,030


209


4,103


3,801Income before income taxes(1)


27,678


19,925


52,335


41,110Income taxes, excluding capital gains


8,970


6,801


17,179


12,853Income taxes on capital gains


60


73


436


1,330Total income taxes


9,030


6,874


17,615


14,183Net income

$
18,648

$
13,051

$
34,720

$
26,927Per Share Data (Diluted):Net income

$
0.32

$
0.23

$
0.60

$
0.48


---



Net income for the second quarter of 2005 increased 43% to $18.6 million, or $0.32 per diluted share, compared to $13.1 million, or $0.23 per
diluted share in 2004. Net income for the second quarter of 2005 includes after-tax realized investment gains of $3.0 million, or $0.05 per diluted share, which reflects the benefit
from a $1.0 million release of a tax valuation allowance relating to net capital loss carryforwards. Net income for the second quarter of 2004 includes after-tax realized investment
gains of $0.1 million. The realized investment gains during the second quarter of 2005 were generated as we took advantage of the tightening of the yield curve and sold longer duration
investments. Additionally, net income for the second quarter of 2005 was reduced by after-tax expenses of $0.7 million, or $0.01 per diluted share, relating to the implementation of
our Part D program. Our overall effective tax rate was 32.6% for the second quarter of 2005, reflecting the release of the valuation allowance noted above, and 34.5% for the second quarter of
2004.

Our
Senior Market Health Insurance segment generated segment income of $8.4 million during the second quarter of 2005, an increase of 5% compared to $8.0 million in 2004,
primarily as a result of the increase in net retained business, offset by higher claim costs in our Medicare supplement lines. Additionally, segment income for the second quarter of 2005 was reduced
by expenses of $0.4 million relating to the implementation of our Part D program. Excluding these expenses, segment income would have been $8.8 million, an increase of 10% from
the 2004 amount.

27

---



Our
Senior Managed CareMedicare Advantage segment generated segment income of $7.1 million during the second quarter of 2005, compared to $0.8 million in 2004.
This segment includes the results of Heritage and our other initiatives in Medicare managed care, including our Medicare Advantage private fee-for-service plans, since our
acquisition or inception during the second quarter of 2004.

Our
Specialty Health Insurance segment generated segment income of $6.8 million for the second quarter of 2005, down 6% compared to $7.3 million for the second quarter of
2004, primarily as a result of higher claim costs.

Results
for our Life Insurance and Annuities segment improved by $0.4 million, or 12%, to $3.4 million compared to the second quarter of 2004, primarily as a result of an
increase in business.

Segment
income for our Senior Administrative Services segment decreased by $0.3 million, or 9%, to $3.0 million, compared to the second quarter of 2004, primarily as a
result of the $0.6 million of expenses incurred in this segment relating to our implementation of Part D. Excluding these expenses, segment income would have been $3.6 million, an
increase of 9% from the 2004 amount.

The
loss from our Corporate segment increased by $1.4 million, or 50%, compared to the second quarter of 2004. The increase was primarily due to higher interest cost as a result
of an increase in the amount of the debt outstanding during the year, relating to the amendment of our credit facility in connection with our acquisition of Heritage, and an increase in the weighted
average interest rates, as compared to the second quarter of 2004.



Net income for the first six months of 2005 increased 29% to $34.7 million, or $0.60 per diluted share, compared to $26.9 million, or $0.48 per
diluted share in 2004. Net income for the first six months of 2005 includes realized investment gains, net of tax, of $3.7 million, or $0.06 per diluted share. The realized investment gains
during 2005 were generated as we took advantage of the tightening of the yield curve and sold longer duration investments. Additionally, net income for the first six months of 2005 was reduced by
after-tax expenses of $0.7 million, or $0.01 per diluted share, relating to the implementation of our Part D program. Net income for the first six months of 2004 includes
realized investment gains, net of tax, of $2.5 million, or $0.04 per diluted share. The realized investment gains during 2004 were generated at Penncorp Life (Canada) as a result of the sale of
investments to fund the dividend of approximately $19.6 million paid to the parent company during the first quarter of 2004 and the tax payments made during the first quarter of 2004 relating
to 2003 taxable income. See "Liquidity and Capital ResourcesObligations of the Parent Company to Affiliates" for additional information regarding the dividend. Our overall effective tax
rate was 34.8% for the first six months of 2005 and 34.5% for the first six months of 2004.

Our
Senior Market Health Insurance segment generated segment income of $15.3 million during the first six months of 2005, a 4% decline compared to $16.0 million in 2004,
primarily as a result of higher claim costs in our Medicare supplement lines, although net retained business increased by 11%. Additionally, segment income for the six months ended June 30,
2005 was reduced by expenses of
$0.4 million relating to the implementation of our Part D program. Excluding these expenses, segment income would have been $15.7 million, a decrease of 2% from the 2004 amount.

Our
Senior Managed CareMedicare Advantage segment generated segment income of $14.1 million during the first six months of 2005. This segment includes the results of
Heritage and our other initiatives in Medicare managed care, including our Medicare Advantage private fee-for-service plans, since our acquisition or inception during the
second quarter of 2004.

28

---



Our
Specialty Health Insurance segment income of $12.4 million for the first six months of 2005 declined by 5% compared to $13.0 million for the first six months of 2004,
primarily as a result of higher claim costs.

Results
for our Life Insurance and Annuities segment improved by $1.2 million, or 19%, to $7.4 million compared to the first six months of 2004, primarily as a result of an
increase in business and lower claim costs.

Segment
income for our Senior Administrative Services segment increased by $0.2 million, or 3%, to $6.7 million compared to the first six months of 2004, primarily as a
result of growth in premiums managed, offset by the $0.6 million of expenses incurred in this segment relating to our implementation of Part D. Excluding these expenses, segment income
would have been $7.3 million, an increase of 12% from the 2004 amount.

The
loss from our Corporate segment increased by $2.4 million, or 46%, compared to the first six months of 2004. The increase was due to higher interest cost as a result of an
increase in the amount of the debt outstanding during the year, relating to the amendment of our credit facility in connection with our acquisition of Heritage, and an increase in the weighted average
interest rates, as compared to the first six months of 2004.

Segment ResultsSenior Market Health Insurance

Three months ended
June 30,

Six months ended
June 30,2005

2004

2005

2004(In thousands)Premiums:Direct and assumed

$
141,134

$
141,517

$
289,589

$
286,546Ceded


(44,474
)

(53,462
)

(95,066
)

(111,240
)Net premiums


96,660


88,055


194,523


175,306Net investment income


1,147


1,053


2,363


2,077Other income


(1
)

597


151


647Total revenue


97,806


89,705


197,037


178,030Policyholder benefits


69,892


61,892


141,161


124,192Change in deferred acquisition costs


(10,365
)

(7,913
)

(18,983
)

(16,598
)Amortization of intangible assets


554


395


1,094


953Commissions and general expenses, net of allowances


29,276


27,310


58,486


53,522Total benefits, claims and other deductions


89,357


81,684


181,758


162,069Segment income

$
8,449

$
8,021

$
15,279

$
15,961




Our Senior Market Health Insurance segment generated segment income of $8.4 million during the second quarter of 2005, an increase of 5% compared to
$8.0 million in 2004, primarily as a result of the increase in net retained business, offset by higher claim costs in our Medicare supplement lines. Additionally, income was reduced by expenses
of $0.4 million relating to the implementation of our Part D program. Excluding these expenses, segment income would have been $8.8 million, an increase of 10% from the 2004
amount.

29

---



Revenues.Net premiums for the Senior Market Health Insurance segment increased by $8.6 million, or 10%, compared to
the second quarter of 2004, due to rate increases, new sales and increased retention of the Medicare supplement business.

Net
investment income increased by approximately $0.1 million, or 9%, compared to the second quarter of 2004.

Benefits, Claims and Expenses.Policyholder benefits incurred increased by $8.0 million, or 13%, compared to the
second quarter of 2004, as a result of the increase in net premiums and an increase in loss ratios. Overall loss ratios for the segment increased 200 basis points to 72.3% for the second quarter of
2005 compared to 70.3% for the second quarter of 2004. The increase in deferred acquisition costs was $2.5 million more for the second quarter of 2005, compared to the increase in the second
quarter of 2004, as a result of higher retained premium and the effect of prospective unlocking resulting from higher than anticipated rate increases and better than anticipated persistency. The
amortization of intangibles relates to intangibles recorded from the acquisition of Pyramid Life, and increased by $0.2 million compared to the second quarter of 2004.

Commissions
and general expenses increased by $2.0 million, or 7%, compared to the second quarter of 2004, consistent with the increase in premiums. The following table details
the components of commission and other operating expenses:

Three months ended June 30,2005

2004(In thousands)Commissions

$
20,622

$
21,298Other operating costs


18,229


18,053Reinsurance allowances


(9,575
)

(12,041
)Commissions and general expenses, net of allowances

$
29,276

$
27,310


The
ratio of commissions to gross premiums decreased to 14.6% for the second quarter of 2005, from 15.1% for the second quarter of 2004, as a result of a leveling off of new production
as well as lower overall commission rates associated with the continued growth of our in force renewal premium, including the effects of better persistency and rate increases. Other operating costs as
a percentage of gross premiums were 12.9% for the second quarter of 2005, consistent with the second quarter of 2004. Commission and expense allowances received from reinsurers as a percentage of the
premiums ceded decreased to 21.5% for the second quarter of 2005 from 22.5% for the second quarter of 2004, primarily due to the reduction in new business ceded and the effects of normal lower
commission allowances on our aging base of ceded renewal business.



Our Senior Market Health Insurance segment generated segment income of $15.3 million during the first six months of 2005, a 4% decline compared to
$16.0 million in 2004, primarily as a result of higher claim costs in our Medicare supplement lines, although net retained business increased by 11%. Additionally, income was reduced by
expenses of $0.4 million relating to the implementation of our Part D program. Excluding these expenses, income would have been $15.7 million, a decrease of 2% from the 2004
amount.

Revenues.Net premiums for the Senior Market Health Insurance segment increased by $19.2 million, or 11%, compared to
the first six months of 2004, due to rate increases, new sales and increased retention of the Medicare supplement business.

30

---



Net investment income increased by approximately $0.3 million, or 14%, compared to the first six months of 2004.

Benefits, Claims and Expenses.Policyholder benefits incurred increased by $17.0 million, or 14%, compared to the
first six months of 2004, as a result of the increase in net premiums and an increase in loss ratios. Overall loss ratios for the segment increased 180 basis points to 72.6% for the first six months
of 2005 compared to 70.8% for the first six months of 2004. The increase in deferred acquisition costs was $2.4 million more for the first six months of 2005, compared to the increase in the
first six months of 2004, as a result of higher retained premium and the effect of prospective unlocking resulting from higher than anticipated rate increases and better than anticipated persistency.
As a percentage of premium, the increase in deferred acquisition costs was 9.8% for the first six months of 2005 compared to 9.5% for the first six months of 2004. The amortization of intangibles
relates to intangibles recorded from the acquisition of Pyramid Life, and increased by $0.2 million compared to the first six months of 2004.

Commissions
and general expenses increased by $5.0 million, or 9%, compared to the first six months of 2004, consistent with the increase in premiums. The following table details
the components of commission and other operating expenses:

Six months ended June 30,2005

2004(In thousands)Commissions

$
41,435

$
42,586Other operating costs


36,705


36,007Reinsurance allowances


(19,654
)

(25,071
)Commissions and general expenses, net of allowances

$
58,486

$
53,522


The
ratio of commissions to gross premiums decreased to 14.3% for the first six months of 2005, from 14.9% for the first six months of 2004, as a result of lower overall
commission rates associated with the continued growth of our in force renewal premium, including the effects of better persistency and rate increases. Other operating costs as a percentage of gross
premiums were 12.7% for the first six months of 2005, consistent with the first six months of 2004. Commission and expense allowances received from reinsurers as a percentage of the premiums ceded
decreased to 20.7% for the first six months of 2005 from 22.5% for the first six months of 2004, primarily due to the reduction in new business ceded and the effects of normal lower commission
allowances on our aging base of ceded renewal business.

Segment ResultsSenior Managed CareMedicare Advantage

|                                                                             |                                             | Three months ended
June 30, |        | Six months ended
June 30,
|---------------------------------------------------------------------------- | ------------------------------------------- | --------------------------- | ------ | -------------------------
|
|
|Net premiums                                                                 |                                             | $                           | 57,093 |                          
|Net investment and other income                                              |                                             |                             | 759    |                          
|                                                                             |                                             |                             |        |                          
|                                                                             | Total revenue                               |                             |        | 57,852                   
|                                                                             |                                             |                             |        |                          
|Medical expenses                                                             |                                             |                             | 41,512 |                          
|Amortization of intangible assets                                            |                                             |                             | 247    |                          
|Commissions and general expenses                                             |                                             |                             | 9,004  |                          
|                                                                             |                                             |                             |        |                          
|                                                                             | Total benefits, claims and other deductions |                             |        | 50,763                   
|                                                                             |                                             |                             |        |                          
|Segment income                                                               |                                             | $                           | 7,089  |                          
|                                                                             |                                             |                             |        |                          
|Depreciation, amortization and interest                                      |                                             |                             | 403    |                          
|                                                                             |                                             |                             |        |                          
|Earnings before interest, taxes, depreciation and amortization ("EBITDA")(1) |                                             | $                           | 7,492  |                          
|                                                                             |                                             |                             |        |                          

31

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---

Our
Senior Managed CareMedicare Advantage segment includes the operations of Heritage and our other initiatives in Medicare managed care, including our
Medicare Advantage private fee-for-service plans. Heritage generates its revenues and profits from three sources. First, Heritage owns an interest in SelectCare, a health plan
that offers coverage to Medicare beneficiaries under a contract with CMS. Next, Heritage operates three separate Management Service Organizations ("MSO's") that manage the business of SelectCare and
two affiliated Independent Physician Associations ("IPA's"). Lastly, Heritage participates in the profits derived from these IPA's.

Starting
in June 2004, American Progressive, an insurance subsidiary of Universal American, began enrolling members in its private fee-for-service ("PFFS")
product, a Medicare Advantage program that allows its members to have more flexibility in the delivery of their health care services than other Medicare Advantage plans. In addition to premium
received from CMS, American Progressive receives modest premium payments from the members. Beginning August 1, 2005, we have expanded our PFFS product offering to Medicare eligibles in 258
counties in seven new states. We plan on expanding the PFFS product to an additional 151 counties in six states on January 1, 2006, subject to CMS approval.

The
components of the revenues and results within the segment are as follows:

Three months ended
June 30, 2005

Six months ended
June 30, 2005Revenue

Segment
Income

Revenue

Segment
Income(In thousands)Health Plan

$
52,905

$
2,330

$
102,572

$
4,962Affiliated IPA's


28,890


2,838


57,655


5,556MSO's and Corporate


8,145


1,633


15,834


3,316Private Fee-for Service


4,606


288


7,963


296Eliminations


(36,694
)




(72,895
)

Total

$
57,852

$
7,089

$
111,129

$
14,130


Intrasegment
revenues are reported on a gross basis in each of the above components of the Medicare Advantage segment. These intrasegment revenues are eliminated in the consolidation for
the segment totals. The eliminations include premiums received by the IPA's from the Health Plan amounting to $28.8 million for the three months ended June 30, 2005 and
$57.4 million for the six months ended June 30, 2005 and management fees received by the MSO's from the Health Plan and the IPA's amounting to $7.9 million for the three months
ended June 30, 2005 and $15.5 million for the six months ended June 30, 2005.

Heritage
operates a health plan through SelectCare, a provider sponsored organization ("PSO"). SelectCare offers a Medicare Advantage coordinated care plan operating in southeastern
Texas, including Beaumont and Houston and receives its premiums primarily from CMS. SelectCare makes capitated risk payments to IPA's or medical groups in the Houston and Beaumont regions, two of
which are affiliated IPA's. In addition, SelectCare retains the risk for certain other types of care, primarily out

32

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of
area emergency and transplants. As of June 30, 2005, SelectCare had approximately 22,180 members enrolled. During the second quarter of 2005, SelectCare had revenues of $52.9 million
and reported a medical loss ratio of 82.6%. For the six months ended June 30, 2005, SelectCare had revenues of $102.6 million and reported a medical loss ratio of 82.0%.

Heritage
participates in the profits from the two affiliated IPA's that receive capitated payments from SelectCare. As of June 30, 2005, the affiliated IPA's managed the care for
approximately 14,770 SelectCare members. During the second quarter of 2005, the IPA's earned $2.8 million on $28.9 million in revenues received from SelectCare. For the six months ended
June 30, 2005, the IPA's earned $5.6 million on $57.7 million in revenues received from SelectCare.

Heritage
owns three MSO's that provide comprehensive management services to SelectCare and its affiliated IPA's as part of long-term management agreements. Services provided
include strategic planning, provider network services, marketing, finance and accounting, enrollment, claims processing, information systems, utilization review, credentialing and quality management.
For the three months ended June 30, 2005, these MSO's earned $1.6 million of income on $8.1 million of fees collected. For the six months ended June 30, 2005, these MSO's
earned $3.3 million of income on $15.8 million of fees collected.

As
of June 30, 2005, American Progressive had 2,792 members enrolled in its private fee-for-service plans. During the second quarter of 2005, American
Progressive collected $4.6 million of premium from CMS and the members, and reported a medical loss ratio of 68.9%. For the six months ended June 30, 2005, American Progressive collected
$8.0 million of premium from CMS and the members, and reported a medical loss ratio of 71.5%.

Segment ResultsSpecialty Health Insurance

|                                                    |                    | Three months ended
June 30,                 |        | Six months ended
June 30, |       
|--------------------------------------------------- | ------------------ | ------------------------------------------- | ------ | ------------------------- | ------
|
|
|Premiums:                                           |                    |                                             |        |                           |       
|                                                    | Direct and assumed |                                             | $      | 42,398                    |       
|                                                    | Ceded              |                                             |        | (5,632                    | )     
|                                                    |                    |                                             |        |                           |       
|                                                    |                    | Net premiums                                |        |                           | 36,766
|Net investment income                               |                    |                                             | 6,608  |                           |       
|Other income                                        |                    |                                             | 339    |                           |       
|                                                    |                    |                                             |        |                           |       
|                                                    |                    | Total revenue                               |        |                           | 43,713
|                                                    |                    |                                             |        |                           |       
|Policyholder benefits                               |                    |                                             | 25,150 |                           |       
|Change in deferred acquisition costs                |                    |                                             | (2,158 | )                         |       
|Commissions and general expenses, net of allowances |                    |                                             | 13,923 |                           |       
|                                                    |                    |                                             |        |                           |       
|                                                    |                    | Total benefits, claims and other deductions |        |                           | 36,915
|                                                    |                    |                                             |        |                           |       
|Segment income                                      |                    | $                                           | 6,798  |                           | $     
|                                                    |                    |                                             |        |                           |       



Our Specialty Health Insurance segment generated segment income of $6.8 million for the second quarter of 2005, down 6% compared to $7.3 million for
the second quarter of 2004, primarily as a result of higher claim costs. The operations of Penncorp Life (Canada), which are included in our Specialty Health segment results, are transacted using the
Canadian dollar as the functional currency.

33

---



The
Canadian dollar strengthened relative to the U.S. dollar in 2005. The average conversion rate increased 9%, to C$0.8028 per U.S.$1.00 for the second quarter of 2005, from C$0.7346 per U.S.$1.00
for the second quarter of 2004. This strengthening added approximately $0.3 million of pre-tax income to the Specialty Health segment results compared to the second quarter of 2004.
See discussion below under the heading "Quantitative and Qualitative Disclosures about Market Risk" for additional information.

Revenues.Net premiums for the Specialty Health Insurance segment increased by $0.5 million, or 2%, compared to the
second quarter of 2004. Canadian business accounted for approximately 42% of the net premiums of this segment for the second quarter of 2005 and 39% of the net premiums for the second quarter of 2004.
The stronger Canadian dollar generated an increase in premiums of approximately $1.3 million, which was offset by a reduction in long term care premium as a result of our decision to
discontinue marketing that product, beginning in late 2003.

Net
investment income increased by approximately $0.1 million, or 1%, compared to the second quarter of 2004.

Benefits, Claims and Expenses.Policyholder benefits incurred increased by $2.6 million, or 12%, compared to the
second quarter of 2004, primarily as a result of higher loss ratios for our long term care and U.S. fixed benefit accident and sickness lines. Overall loss ratios for the segment increased to 68.4%
during the second quarter of 2005 compared to 62.1% in the second quarter of 2004.

The
increase in deferred acquisition costs was $0.1 million less in the second quarter of 2005 than the increase in the second quarter of 2004.

Commissions
and general expenses decreased by $1.4 million, or 9%, in the second quarter of 2005 compared to 2004.



Our Specialty Health Insurance segment segment income of $12.4 million for the first six months of 2005 declined by 5% compared to $13.0 million for
the first six months of 2004, primarily as a result of higher claim costs. The operations of Penncorp Life (Canada), which are included in our Specialty Health segment results, are transacted using
the Canadian dollar as the functional currency. The Canadian dollar strengthened relative to the U.S. dollar in 2005. The average conversion rate increased 8%, to C$0.8097 per U.S.$1.00 for the first
six months of 2005, from C$0.7474 per U.S.$1.00 for the first six months of 2004. This strengthening added approximately $0.5 million of pre-tax income to the Specialty Health
segment results compared to the first six months of 2004. See discussion below under the heading "Quantitative and Qualitative Disclosures about Market Risk" for additional information.

Revenues.Net premiums for the Specialty Health Insurance segment increased by $0.3 million, or less than 1%, compared
to the first six months of 2004. Canadian business accounted for approximately 43% of the net premiums of this segment for the first six months of 2005 and 39% of the net premiums for the first six
months of 2004. The stronger Canadian dollar generated an increase in premiums of approximately $2.4 million, which was offset by a reduction in long term care premium as a result of our
decision to discontinue marketing that product, beginning in late 2003.

Net
investment income decreased by approximately $0.3 million, or 2%, compared to the first six months of 2004. The decrease is due primarily to lower yields during the first six
months of 2005.

Benefits, Claims and Expenses.Policyholder benefits incurred increased by $3.1 million, or 7%, compared to the first
six months of 2004, primarily as a result of higher loss ratios for our long term care and U.S. fixed benefit accident and sickness lines. Overall loss ratios for the segment increased to 68.1% during
the first six months of 2005 compared to 64.2% in the first six months of 2004.

34

---



The
increase in deferred acquisition costs was $0.4 million more in the first six months of 2005 than the increase in the first six months of 2004.

Commissions
and general expenses decreased by $1.7 million, or 6%, in the first six months of 2005 compared to 2004.

Segment ResultsLife Insurance and Annuities

|                                                    |                    | Three months ended
June 30,                 |        | Six months ended
June 30, |       
|--------------------------------------------------- | ------------------ | ------------------------------------------- | ------ | ------------------------- | ------
|
|
|Premiums:                                           |                    |                                             |        |                           |       
|                                                    | Direct and assumed |                                             | $      | 19,074                    |       
|                                                    | Ceded              |                                             |        | (4,684                    | )     
|                                                    |                    |                                             |        |                           |       
|                                                    |                    | Net premiums                                |        |                           | 14,390
|Net investment income                               |                    |                                             | 8,908  |                           |       
|Other income                                        |                    |                                             | 70     |                           |       
|                                                    |                    |                                             |        |                           |       
|                                                    |                    | Total revenue                               |        |                           | 23,368
|                                                    |                    |                                             |        |                           |       
|Policyholder benefits                               |                    |                                             | 10,093 |                           |       
|Interest credited to policyholders                  |                    |                                             | 4,630  |                           |       
|Change in deferred acquisition costs                |                    |                                             | (5,047 | )                         |       
|Amortization of intangible assets                   |                    |                                             | 269    |                           |       
|Commissions and general expenses, net of allowances |                    |                                             | 10,018 |                           |       
|                                                    |                    |                                             |        |                           |       
|                                                    |                    | Total benefits, claims and other deductions |        |                           | 19,963
|                                                    |                    |                                             |        |                           |       
|Segment income                                      |                    | $                                           | 3,405  |                           | $     
|                                                    |                    |                                             |        |                           |       



Results for our Life Insurance and Annuities segment improved by $0.4 million, or 12%, to $3.4 million compared to the second quarter of 2004,
primarily as a result of an increase in business.

Revenues.Net premiums for the segment increased by $2.0 million, or 16%, compared to the second quarter of 2004.
Approximately $1.4 million of the increase relates to increased sales of our senior life product and $0.8 million relates to the net business produced by the former Guarantee Reserve
field force. The balance relates to increased sales of our senior life product and an increase in policy fees on our interest sensitive life and annuity business as a result of the growth in the level
of deposits for those products. Ceded premiums increased by approximately $1.4 million as a result of the Guarantee Reserve business. Prior to receiving approval to write the business through
the insurance subsidiaries of Universal American during the first quarter of 2004, 50% of the Guarantee Reserve business was assumed from Swiss Re. As we received the regulatory approvals, we wrote
the business through our insurance subsidiaries and ceded 50% to Swiss Re.

Our
agents sold $9.6 million of fixed annuities during the second quarter of 2005 and $12.1 million during the second quarter of 2004. Annuity deposits are not considered
premiums for reporting in accordance with generally accepted accounting principles. The reduction in annuity sales was the result of lower interest crediting rates on policy account balances and a
decrease in minimum guaranteed crediting rates on our policies as compared to the crediting rates in 2004.

35

---



Net investment income increased by approximately $0.5 million, or 6%, compared to the second quarter of 2004, as a result of the increase in policyholder account balances as a
result of the additional deposits received as noted above, offset by a decline in yields on the portfolio.

Benefits, Claims and Expenses.Policyholder benefits incurred increased by $1.4 million, or 16%, compared to the
second quarter of 2004, primarily as a result of the increase in business. Interest credited increased by $0.4 million, due to the increase in policyholder account balances as a result of
continued annuity sales, offset by a reduction in credited rates. The increase in deferred acquisition costs was approximately $0.3 million more during the second quarter of 2005, as compared
to the increase in 2004. This is directly related to the increase in senior life business produced during the quarter. The amortization of intangible assets relates to the present value of the future
profits of the life business acquired with Pyramid Life. Commissions and general expenses increased by $0.6 million, or 6%, compared to the second quarter of 2004, primarily as a result of the
increase in business.



Results for our Life Insurance and Annuities segment improved by $1.2 million, or 19%, to $7.4 million compared to the first six months of 2004,
primarily as a result of an increase in business and lower claim costs.

Revenues.Net premiums for the segment increased by $4.9 million, or 21%, compared to the first six months of 2004.
Approximately $2.8 million of the increase relates increased sales of our senior life product and $1.8 relates to the net business produced by the former Guarantee Reserve field force. Ceded
premiums increased by approximately $2.8 million as a result of the Guarantee Reserve business. Prior to receiving approval to write the business through the insurance subsidiaries of Universal
American during the first quarter of 2004, 50% of the Guarantee Reserve business was assumed from Swiss Re. As we received the regulatory approvals, we wrote the business through our insurance
subsidiaries and ceded 50% to Swiss Re.

Our
agents sold $25.6 million of fixed annuities during the first six months of 2005 and $38.7 million during the first six months of 2004. Annuity deposits are not
considered premiums for reporting in accordance with generally accepted accounting principles. The reduction in annuity sales was the result of lower interest crediting rates on policy account
balances and a decrease in minimum guaranteed crediting rates on our policies as compared to the crediting rates in 2004.

Net
investment income increased by approximately $1.0 million, or 6%, compared to the first six months of 2004, as a result of the increase in policyholder account balances as a
result of the additional deposits received as noted above, offset by a decline in yields on the portfolio.

Benefits, Claims and Expenses.Policyholder benefits incurred increased by $2.8 million, or 17%, compared to the first
six months of 2004. Policyholder benefits increased by approximately $3.3 million as a result of the increase in business, offset by favorable mortality. Interest credited increased by
$0.7 million, due to the increase in policyholder account balances as a result of continued annuity sales, offset by a reduction in credited rates. The increase in deferred acquisition costs
was approximately $0.7 million less during the first six months of 2005, as compared to the increase in 2004. This is directly related to the decline in annuity business produced during the
first six months of 2005 compared to 2004. The amortization of intangible assets relates to the present value of the future profits of the life business acquired with Pyramid Life. Commissions and
general expenses increased by $0.4 million, or 2%, compared to the first six months of 2004.

36

---



Segment ResultsSenior Administrative Services

|                                                                             |                        | Three months ended
June 30, |        | Six months ended
June 30,
|---------------------------------------------------------------------------- | ---------------------- | --------------------------- | ------ | -------------------------
|
|
|Affiliated Fee Revenue                                                       |                        |                             |        |                          
|                                                                             | Medicare supplement    |                             | $      | 7,585                    
|                                                                             | Long term care         |                             |        | 673                      
|                                                                             | Life insurance         |                             |        | 886                      
|                                                                             | Other                  |                             |        | 694                      
|                                                                             |                        |                             |        |                          
|                                                                             |                        | Total Affiliated Revenue    |        |                          
|                                                                             |                        |                             |        |                          
|Unaffiliated Fee Revenue                                                     |                        |                             |        |                          
|                                                                             | Medicare supplement    |                             |        | 2,124                    
|                                                                             | Long term care         |                             |        | 2,077                    
|                                                                             | Non-insurance products |                             |        | 374                      
|                                                                             | Other                  |                             |        | 290                      
|                                                                             |                        |                             |        |                          
|                                                                             |                        | Total Unaffiliated Revenue  |        |                          
|                                                                             |                        |                             |        |                          
|                                                                             |                        | Total revenue               |        |                          
|                                                                             |                        |                             |        |                          
|Amortization of present value of future profits                              |                        |                             | 120    |                          
|General expenses                                                             |                        |                             | 11,542 |                          
|                                                                             |                        |                             |        |                          
|                                                                             |                        | Total expenses              |        |                          
|                                                                             |                        |                             |        |                          
|                                                                             |                        | Segment income              |        | $                        
|                                                                             |                        |                             |        |                          
|Depreciation, amortization and interest                                      |                        |                             | 542    |                          
|                                                                             |                        |                             |        |                          
|Earnings before interest, taxes, depreciation and amortization ("EBITDA")(1) |                        | $                           | 3,583  |                          
|                                                                             |                        |                             |        |                          

---

Included
in unaffiliated revenue are fees received to administer certain business of our insurance subsidiaries that is 100% reinsured to an unaffiliated reinsurer, which
amounted to $1.0 million for the three months ended June 30, 2005, and $1.4 million for the three months ended June 30, 2004 and $2.1 million for the six months
ended June 30, 2005, and $2.9 million for the six months ended June 30, 2004. These fees, together with the affiliated revenue, were eliminated in consolidation.



Segment income for our Senior Administrative Services segment decreased by $0.3 million, or 9%, to $3.0 million compared to the second quarter of
2004, primarily as a result of the $0.6 million of expenses incurred in this segment relating to our implementation of Part D. Excluding these expenses, income would have been
$3.6 million, an increase of 9% from the 2004 amount. EBITDA for this segment also decreased $0.3 million compared to the second quarter of 2004.

37

---



Service
fee revenue increased by $0.8 million, or 7%, compared to the second quarter of 2004. Affiliated service fee revenue increased by $0.2 million compared to the
second quarter of 2004 as a result of the increase in Medicare supplement/select business in force at our insurance subsidiaries over this period. Unaffiliated service fee revenue increased by
approximately $0.6 million compared to the second quarter of 2004, primarily due to an increase in fees for services for long term care products. General expenses for the segment increased by
$1.0 million, or 10%, due primarily as a result of the $0.6 million of expenses incurred in this segment relating to our implementation of Part D as well as the increase in
business.



Segment income for our Senior Administrative Services segment increased by $0.2 million, or 3%, to $6.7 million compared to the first six months of
2004, primarily as a result of growth in premiums managed, offset by the $0.6 million of expenses incurred in this segment relating to our implementation of Part D. Excluding these
expenses, income would have been $7.3 million, an increase of 12% from the 2004 amount. EBITDA for this segment also increased $0.2 million compared to the first six months of 2004.

Service
fee revenue increased by $1.7 million, or 6%, compared to the first six months of 2004. Affiliated service fee revenue increased by $0.9 million compared to the
first six months of 2004 as a result of the increase in Medicare supplement/select business in force at our insurance subsidiaries over this period. Unaffiliated service fee revenue increased by
approximately $0.8 million compared to the first six months of 2004. An increase of $1.2 million, or 40%, for services for long term care products was offset, in part, by a decline in
fees for Medicare supplement of $0.3 million. General expenses for the segment increased by $1.5 million, or 7%, due primarily to the increase in business, as well as the Part D
implementation costs.

Segment ResultsCorporate

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

|                                                  |              | Three months ended
June 30, |       | Six months ended
June 30,
|------------------------------------------------- | ------------ | --------------------------- | ----- | -------------------------
|
|
|Interest                                          |              | $                           | 2,670 |                          
|Amortization of capitalized loan origination fees |              |                             | 227   |                          
|Stock-based compensation expense                  |              |                             |      |                          
|Other parent company expenses, net                |              |                             | 1,237 |                          
|                                                  |              |                             |       |                          
|                                                  | Segment loss |                             | $     | 4,134                    
|                                                  |              |                             |       |                          



The loss from our Corporate segment increased by $1.4 million, or 50%, compared to the second quarter of 2004. The increase was due to higher interest cost
as a result of an increase in the amount of the debt outstanding during the year, relating to the amendment of our credit facility in connection with our acquisition of Heritage, and an increase in
the weighted average interest rates, as compared to the same period of 2004. Our combined outstanding debt was $173.4 million at June 30,, 2005 compared to $178.7 million at
June 30, 2004. The weighted average interest rate on our loan payable increased to 5.3% for the second quarter of 2005 from 4.0% for the second quarter of 2004. The weighted average interest
rate on our other long term debt also increased to 7.1% for the second quarter of 2005 from 6.3% for the second quarter of 2004. See "Liquidity and Capital Resources" for additional information
regarding our loan payable and other long term debt.

38

---





The loss from our Corporate segment increased by $2.4 million, or 46%, compared to the first six months of 2004. The increase was due to higher interest
cost as a result of an increase in the amount of the debt outstanding during the year, relating to the amendment of our credit facility in connection with our acquisition of Heritage, and an increase
in the weighted average interest rates, as compared to the same period of 2004. The weighted average interest rate on our loan payable increased to 5.0% for the first six months of 2005 from 4.1% for
the first six months of 2004. The weighted average interest rate on our other long term debt also increased to 7.0% for the first six months of 2005 from 6.2% for the first six months of 2004. See
"Liquidity and Capital Resources" for additional information regarding our loan payable and other long term debt.

Liquidity and Capital Resources

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

We
require cash at our parent company to meet our obligations under our credit facility and our outstanding debenture held by our subsidiary, Pennsylvania Life. In January 2002,
our parent company issued a debenture to Pennsylvania Life in conjunction with the transfer of the business of Pennsylvania Life's Canadian Branch to Penncorp Life (Canada). The outstanding balance on
the debenture was $3.4 million at June 30, 2005. We anticipate funding the repayment of the debenture from dividends of Penncorp Life (Canada). We also require cash to pay the operating
expenses necessary to function as a holding company (applicable insurance department regulations require us to bear our own expenses), and to meet the costs of being a public company.

We
believe that our current cash position, the availability of our $15.0 million revolving credit facility, the expected cash flows of our administrative service company and
management service organizations (acquired in the acquisition of Heritage) and the surplus note interest payments from American Exchange (as explained below) can support our parent company obligations
for the foreseeable future. However, there can be no assurance as to our actual future cash flows or to the continued availability of dividends from our insurance company subsidiaries.

Contractual Obligations and Commercial Commitments



In connection with the acquisition of Pyramid Life, the Company obtained an $80 million credit facility (the "Credit Agreement") on March 31, 2003
to repay the then existing loan and provide funds for the acquisition of Pyramid Life. The Credit Agreement consisted of a $65 million term loan which was drawn to fund the acquisition and a
$15 million revolving loan facility. The Credit Agreement initially called for interest at the London Interbank Offering Rate ("LIBOR") for one, two or three months, at the option of the
Company, plus 300 basis points. Effective March 31, 2004, the spread over LIBOR was reduced to 275 basis points in accordance with the terms of the Credit Agreement. Principal repayments were
scheduled over a five-year period with a final maturity date of March 31, 2008. The Company incurred loan origination fees of approximately $2.1 million, which were
capitalized and are being amortized on a straight-line basis over the life of the Credit Agreement.

In
connection with the acquisition of Heritage on May 28, 2004 (see Note 3Business Combinations), the Company amended the Credit Agreement by increasing the
facility to $120 million from $80 million (the "Amended Credit Agreement"), including an increase in the term loan portion to $105 million from $36.4 million (the balance
outstanding at May 28, 2004) and maintaining the $15 million revolving loan facility. None of the revolving loan facility has been drawn as of June 30, 2005. Under the Amended
Credit Agreement, the spread over LIBOR was reduced to 225 basis points.

39

---



Effective
July 1, 2005, the interest rate on the term loan is 5.6%. Principal repayments are scheduled at $5.3 million per year over a five-year period with a final payment
of $80.1 million due upon maturity on March 31, 2009. The Company incurred additional loan origination fees of approximately $2.1 million, which were capitalized and are being
amortized on a straight-line basis over the life of the Amended Credit Agreement along with the continued amortization of the origination fees incurred in connection with the Credit
Agreement. The Company pays an annual commitment fee of 50 basis points on the unutilized revolving loan facility. The obligations of the Company under the Amended Credit Facility are guaranteed by
WorldNet Services Corp., CHCS Services Inc., CHCS Inc., Quincy Coverage Corporation, Universal American Financial Services, Inc., Heritage, HHS-HPN
Network, Inc., Heritage Health Systems of Texas, Inc., PSO Management of Texas, LLC, HHS Texas Management, Inc. and HHS Texas Management LP (collectively the "Guarantors") and
secured by substantially all of the assets of each of the Guarantors. In addition, as security for the performance by the Company of its obligations under the Amended Credit Facility, the Company,
WorldNet Services Corp., CHCS Services Inc., Heritage and HHS Texas Management, Inc. have each pledged and assigned substantially all of their respective securities (but not more than
65% of the issued and outstanding shares of voting stock of any foreign subsidiary), all of their respective limited liability company and partnership interests, all of their respective rights, title
and interest under any service or management contract entered into between or among any of their respective subsidiaries and all proceeds of any and all of the foregoing.

The
Amended Credit Facility requires the Company and its subsidiaries to meet certain financial tests, including a minimum fixed charge coverage ratio, a minimum risk based capital test
and a minimum consolidated net worth test. The Amended Credit Facility also contains covenants, which among other things, limit the incurrence of additional indebtedness, dividends, capital
expenditures, transactions with affiliates, asset sales, acquisitions, mergers, prepayments of other indebtedness, liens and encumbrances and other matters customarily restricted in such agreements.

The
Amended Credit Facility contains customary events of default, including, among other things, payment defaults, breach of representations and warranties, covenant defaults,
cross-acceleration, cross-defaults to certain other indebtedness, certain events of bankruptcy and insolvency and judgment defaults.

The
Company made regularly scheduled principal payments of $2.6 million and paid $2.5 million in interest in connection with its credit facilities during the six months
ended June 30, 2005. During the six months ended June 30, 2004, the Company made regularly scheduled principal payments of $3.1 million and paid $1.0 million in interest in
connection with its credit facilities.

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

2005 (remainder of year)

$
2,6252006


5,2502007


5,2502008


5,2502009


80,063$
98,438




The Company has formed statutory business trusts, which exist for the exclusive purpose of issuing trust preferred securities representing undivided beneficial
interests in the assets of the trust, investing the gross proceeds of the trust preferred securities in junior subordinated deferrable interest debentures of the Company (the "Junior Subordinated
Debt") and engaging in only those activities necessary or incidental thereto. In accordance with the adoption of FIN 46R, the Company has deconsolidated the trusts.

40

---



Separate subsidiary trusts of the Company (the "Trusts") have issued a combined $75.0 million in thirty year trust preferred securities (the "Capital Securities") as detailed in
the following table:

Maturity Date

Amount
Issued

Term

Spread
Over LIBOR

Rate as of
June 30, 2005(In thousands)



(Basis points)December 2032

$
15,000

Fixed/Floating

400
(1)
6.7
%March 2033


10,000

Floating

400

7.1
%May 2033


15,000

Floating

420

7.5
%May 2033


15,000

Fixed/Floating

410
(2)
7.4
%October 2033


20,000

Fixed/Floating

395
(3)
7.0
%$
75,000


---

The
Trusts have the right to call the Capital Securities at par after five years from the date of issuance (which ranged from December 2002 to
October 2003). The proceeds from the sale of the Capital Securities, together with proceeds from the sale by the Trusts of their common securities to the Company, were invested in
thirty-year floating rate Junior Subordinated Debt of the Company. From the proceeds of the trust preferred securities, $26.0 million was used to pay down debt during 2003. The
balance of the proceeds has been used, in part to fund acquisitions, to provide capital to the Company's insurance subsidiaries to support growth and to be held for general corporate purposes.

The
Capital Securities represent an undivided beneficial interest in the Trusts' assets, which consist solely of the Junior Subordinated Debt. Holders of the Capital Securities have no
voting rights. The Company owns all of the common securities of the Trusts. Holders of both the Capital Securities and the Junior Subordinated Debt are entitled to receive cumulative cash
distributions accruing from the date of issuance, and payable quarterly in arrears at a floating rate equal to the three-month LIBOR plus a spread. The floating rate resets quarterly and is limited to
a maximum of 12.5% during the first sixty months. Due to the variable interest rate for these securities, the Company would be subject to higher interest costs if short-term interest rates
rise. The Capital Securities are subject to mandatory redemption upon repayment of the Junior Subordinated Debt at maturity or upon earlier redemption. The Junior Subordinated Debt is unsecured and
ranks junior and subordinate in right of payment to all present and future senior debt of the Company and is effectively subordinated to all
existing and future obligations of the Company's subsidiaries. The Company has the right to redeem the Junior Subordinated Debt after five years from the date of issuance.

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

41

---



The
Company paid $2.6 million in interest in connection with the Junior Subordinated Debt during the six months ended June 30, 2005 and paid $2.2 million during the
six months ended June 30, 2004.



We are obligated under certain lease arrangements for our executive and administrative offices in New York, Florida, Indiana, Tennessee, Texas, and Ontario,
Canada. Annual minimum rental commitments, subject to escalation, under non-cancelable operating leases (in thousands) are as follows:

2005 (remainder of year)

$
1,2632006


2,6052007


2,5882008


2,3282009 and thereafter


9,236Totals

$
18,020


In
addition to the above, Pennsylvania Life and Penncorp Life (Canada) are the named lessees on 71 properties occupied by Career Agents for use as field offices. The
Career Agents reimburse Pennsylvania Life and Penncorp Life (Canada) the actual rent for these field offices. The total annual rent paid by the Company and reimbursed by the Career Agents for these
field offices during 2004 was approximately $1.1 million.



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

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

On
June 22, 2005, we issued 2.0 million shares of our common stock at a price of $23.61 per share, in connection with a public offering pursuant to the shelf registration.
The issuance of these shares generated proceeds to us of $44.2 million, net of underwriters discount and other issuance costs. Additionally, 5.0 million shares were sold by Capital Z
Financial Services Fund II, L.P. and its affiliates ("Capital Z"), our largest shareholder, under the same shelf registration. On July 20, 2005, the underwriters exercised their
over-allotment option and we issued an additional 660,000 shares of our common stock at $23.61 per share, generating additional net proceeds of $14.8 million. Following the
offering, Capital Z owned 20.2 million shares, or 34.5% of our outstanding common stock.

Subsequent
to the offering noted above, the aggregate offering that remains available on the shelf registration is $77.2 million.



In January 2002, our parent company issued an $18.5 million, 8.5% debenture to Pennsylvania Life in connection with the transfer of the business of
Pennsylvania Life's Canadian Branch to Penncorp

42

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Life
(Canada). The debenture is scheduled to be repaid in full during 2005. As of June 30, 2005, the outstanding balance was $3.4 million. Our parent holding company paid
$0.1 million in interest on these debentures during the six months ended June 30, 2005 and $0.3 million during the three months ended June 30, 2004. The interest on these
debentures is eliminated in consolidation. Dividends from Penncorp Life (Canada) funded the interest and principal paid on the debenture to date and it is anticipated that they will fund all future
payments made on this debenture.



We have several sources of liquidity to fund the obligations of the parent company and provide the capital required to grow our business. On an operating basis,
we have four distinct and uncorrelated sources of cash flow as follows:



In
addition, we have access to our unutilized $15.0 million revolving credit facility. Finally, we have the ability, from time to time, to access the capital markets for
additional capital. There can be no assurance as to our actual future cash flows, to the continued availability of dividends from our insurance company subsidiaries or from access to the capital
markets.

Senior Administrative Services Company.Liquidity for our senior administrative services subsidiary is measured by its
ability to pay operating expenses and pay dividends to our parent company. The primary source of liquidity is fees collected from clients. We believe that the sources of cash for our senior
administrative services company exceed scheduled uses of cash and results in amounts available to dividend to our parent holding company. We measure the ability of the senior administrative services
company to pay dividends based on its earnings before interest, taxes, depreciation and amortization ("EBITDA"). EBITDA for our Senior Administrative Services segment was $7.7 million for the
six months ended June 30, 2005, and was $7.6 million for the six months ended June 30, 2004.

Senior Managed Care Company.Liquidity for our managed care company is measured by its ability to pay operating expenses and
pay dividends to our parent company. The primary source of liquidity is management fees for administration of SelectCare and services provided to the IPA's. Dividend payments by SelectCare to Heritage
are subject to the approval of the insurance regulatory authorities of the state of Texas, SelectCare's state of domicile. SelectCare is not able to pay dividends during 2005 without prior approval.
We believe that the sources of cash to our managed care holding company exceed scheduled uses of cash which will result in funds available to dividend to our parent holding company. We measure the
ability of the senior managed care holding company to pay dividends based on its EBITDA. EBITDA for our senior managed care holding company was $15.4 million for the six months ended
June 30, 2005.

Penncorp Life (Canada) Dividends.Penncorp Life (Canada) is a Canadian insurance company. Canadian law provides that a life
insurer may pay a dividend after such dividend declaration has been approved by its board of directors and upon at least 10 days prior notification to the Superintendent of Financial
Institutions. Such a dividend is limited to retained net income (based on Canadian GAAP) for the preceding two years, plus net income earned for the current year. In considering approval of a
dividend, the board of directors must consider whether the payment of such dividend would be in contravention of the Insurance Companies Act of Canada. No dividends were paid during the six months
ended June 30, 2005. During the first quarter of 2004, Penncorp Life (Canada) paid dividends of C$26.7 million (approximately US$20.0 million) to Universal American, relating to
2003 net income. The amount of the dividend was larger than normal due to a benefit received by Penncorp Life (Canada) from an actuarial experience study that allowed Penncorp Life (Canada) to reduce
its policy

43

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benefit
reserves at December 31, 2003 on a Canadian GAAP basis. The actuarial experience study did not have an impact on Penncorp Life (Canada)'s policy benefit reserves on a U.S. GAAP basis.
During the remainder of 2004, Penncorp Life (Canada) paid dividends totaling C$7.2 million (US$5.6 million) relating to net income for 2004. We anticipate that Penncorp Life (Canada)
will be able to pay dividends equal to its net income earned during 2005, less $2.5 million.

Insurance SubsidiariesSurplus Note, Dividends and Capital Contributions.Cash generated by our insurance company
subsidiaries may be made available to our holding company, principally through periodic payments of principal and interest on the surplus note owed to our holding company by our subsidiary, American
Exchange. As of June 30, 2005, the principal amount of the surplus note was $44.2 million. The note bears interest to our parent holding company at LIBOR plus 325 basis points. We
anticipate that the surplus note will be primarily serviced by dividends from Pennsylvania Life, a wholly owned subsidiary of American Exchange, and by tax-sharing payments among the
insurance companies that are wholly owned by American Exchange and file a consolidated Federal income tax return. American Exchange made principal payments totaling $4.3 million during
the six months ended June 30, 2005 and $3.5 million during the six months ended June 30, 2004. American Exchange paid interest on the surplus note of $1.0 million during
the six months ended June 30, 2005 and $1.3 million during the six months ended June 30, 2004.

Our
parent holding company made capital contributions to American Exchange amounting to $6.6 million during 2005. American Exchange made capital contributions of
$2.8 million to Union Bankers, $1.7 million to Constitution and $2.0 million to American Pioneer during the six months ended June 30, 2005.

Our
parent holding company made capital contributions to American Exchange amounting to $3.5 million during the six months ended June 30, 2004. In March 2004,
Pennsylvania Life declared and paid a dividend in the amount of $10.6 million to American Exchange. American Exchange made capital contributions of $7.0 million to Union Bankers and
$4.0 million to American Progressive and $1.5 million to American Pioneer during the six months ended June 30, 2004.

Dividend
payments by our U.S. insurance companies to our holding company or to intermediate subsidiaries are limited by, or subject to the approval of the insurance regulatory
authorities of each insurance company's state of domicile. Such dividend requirements and approval processes vary significantly from state to state. Pennsylvania Life is able to pay ordinary dividends
of up to $6.3 million to American Exchange during 2005, without prior approval. Pyramid Life is able to pay ordinary dividends of up to $2.5 million to Pennsylvania Life (its direct
parent) with prior notice to the Kansas Insurance Department and Marquette would be able to pay ordinary dividends of up to $0.3 million to Constitution (its direct parent) without the prior
approval from the Texas Insurance Department during 2005. American Exchange, American Pioneer, American Progressive, Constitution and Union Bankers had negative earned surplus at December 31,
2004 and are not able to pay dividends in 2005 without special approval.



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

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

44

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

Some
of our life insurance and annuity policies are interest-sensitive in nature. The amount of surrenders and withdrawals is affected by a variety of factors such as credited interest
rates for similar
products, general economic conditions and events in the industry that affect policyholders' confidence. Although the contractual terms of substantially all of our in force life insurance policies and
annuities give the holders the right to surrender the policies and annuities, we impose penalties for early surrenders. As of June 30, 2005 we held reserves that exceeded the underlying cash
surrender values of our net retained in force life insurance and annuities by $34.6 million. Our insurance subsidiaries, in our view, have not experienced any material changes in surrender and
withdrawal activity in recent years.

Changes
in interest rates may affect the incidence of policy surrenders and withdrawals. In addition to the potential impact on liquidity, unanticipated surrenders and withdrawals in a
changed interest rate environment could adversely affect earnings if we were required to sell investments at reduced values in order to meet liquidity demands. We manage our asset and liability
portfolios in order to minimize the adverse earnings impact of changing market rates. We have segregated a portion of our investment portfolio in order to match liabilities that are sensitive to
interest rate movements with fixed income securities containing similar characteristics to the related liabilities, most notably the expected duration and required interest spread. We believe that
this asset/liability management process adequately covers the expected payment of benefits related to these liabilities.

As
of June 30, 2005, our insurance company subsidiaries held cash and cash equivalents totaling $143.4 million, as well as fixed maturity securities that could readily be
converted to cash with carrying values (and fair values) of $1.2 billion.

The
net yields on our cash and invested assets decreased to 4.8% for the six months ended June 30, 2005, from 5.0% for the six months ended June 30, 2004. A portion of
these securities are held to support the liabilities for policyholder account balances, which liabilities are subject to periodic adjustments to their credited interest rates. The credited interest
rates of the interest-sensitive policyholder account balances are determined by us based upon factors such as portfolio rates of return and prevailing market rates and typically follow the pattern of
yields on the assets supporting these liabilities.

Our
insurance subsidiaries are required to maintain minimum amounts of statutory capital and surplus as required by regulatory authorities. However, substantially more than such minimum
amounts are needed to meet statutory and administrative requirements of adequate capital and surplus to support the current level of our insurance subsidiaries' operations. Each of the life insurance
subsidiaries' statutory capital and surplus exceeds its respective minimum statutory requirement at levels we believe are sufficient to support their current levels of operation. Additionally, the
National Association of Insurance Commissioners ("NAIC") imposes regulatory risk-based capital ("RBC") requirements on life insurance enterprises. At June 30, 2005, all of our life
insurance subsidiaries maintained ratios of total adjusted capital to RBC in excess of the "authorized control level". The combined statutory capital and surplus, including asset valuation reserve, of
the U.S. life insurance subsidiaries totaled $138.0 million at June 30, 2005 and $127.9 million at December 31, 2004. Statutory net income for the six months ended
June 30, 2005 was $0.3 million, and for the six months ended June 30, 2004 was $3.8 million, which included after-tax net realized gains of $0.1 million.

45

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SelectCare is also required to maintain minimum amounts of capital and surplus, as required by regulatory authorities and is also subject to RBC requirements. At June 30, 2005,
SelectCare's statutory capital and surplus exceeds its minimum requirement and its RBC is in excess of the "authorized control level". The statutory capital and surplus for SelectCare was
$14.5 million at June 30, 2005 and $9.6 million at December 31, 2004. Statutory net income for the six months ended June 30, 2005 was $5.0 million and for the
six months ended June 30, 2004 was $1.7 million.

Penncorp
Life (Canada) reports to Canadian regulatory authorities based upon Canadian statutory accounting principles that vary in some respects from U.S. statutory accounting
principles. Penncorp Life (Canada)'s net assets based upon Canadian statutory accounting principles were C$63.0 million (US$51.4 million) as of June 30, 2005 and were
C$57.4 million (US$47.8 million) as of December 31, 2004. Net income based on Canadian generally accepted accounting principles was C$5.6 million (US$4.5 million)
for the six months ended June 30, 2005, and C$4.4 million (US$3.3 million) for the six months ended June 30, 2004. Penncorp Life (Canada) maintained a Minimum Continuing
Capital and Surplus Requirement Ratio ("MCCSR") in excess of the minimum requirement at June 30, 2005.



Our investment policy is to balance the portfolio duration to achieve investment returns consistent with the preservation of capital and maintenance of liquidity
adequate to meet payment of policy benefits and claims. We invest in assets permitted under the insurance laws of the various states in which we operate. Such laws generally prescribe the nature,
quality of and limitations on various types of investments that may be made. We do not currently have investments in partnerships, special purpose entities, real estate, commodity contracts, or other
derivative securities. We currently engage the services of three investment advisors under the direction of the management of our insurance company subsidiaries and in accordance with guidelines
adopted by the Investment Committees of their respective boards of directors. Conning Asset Management Company manages the portfolio of all of our United States subsidiaries, except for the portfolio
of Pyramid Life, and certain floating rate portfolios, which are managed by Hyperion Capital. MFC Global Investment Management manages our Canadian portfolio. We invest primarily in fixed maturity
securities of the U.S. Government and its agencies and in corporate fixed maturity securities with investment grade ratings of "BBB-" (Standard & Poor's Corporation), "Baa3"
(Moody's Investor Service) or higher. Our current policy is not to invest in derivative programs or other hybrid securities, except for GNMA's, FNMA's and investment grade corporate collateralized
mortgage obligations.

As
of June 30, 2005, 98.6% of our fixed maturity investments had investment grade ratings from Standard & Poor's Corporation or Moody's Investor Service. There were no
non-income producing fixed maturities as of June 30, 2005. We did not write down the value of any fixed maturity securities during the six months ended June 30, 2005 or 2004.

Effects of Recently Issued and Pending Accounting Pronouncements

There was no material impact on our consolidated financial condition or results of operations as a result of our adoption of recently issued accounting
pronouncements. We do not anticipate any material impact from the future adoption of the pending accounting pronouncements, other than the adoption of Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R requires all companies to recognize compensation costs for share-based payments to employees based on the
grant-date fair value of the award for financial statements for annual periods beginning after June 15, 2005. Refer to Consolidated Financial Statements (Unaudited)
Note 2Recent and Pending Accounting Pronouncements.

46

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

In general, market risk relates to changes in the value of financial instruments that arise from adverse movements in interest rates, equity prices and foreign
exchange rates. We are exposed principally to changes in interest rates that affect the market prices of our fixed income securities as well as the cost of our variable rate debt. Additionally, we are
exposed to changes in the Canadian dollar that affects the translation of the financial position and the results of operations of our Canadian subsidiary from Canadian dollars to U.S. dollars.



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

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

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

The
sensitivity analysis of interest rate risk assumes an instantaneous shift in a parallel fashion across the yield curve, with scenarios of interest rates increasing and decreasing 100
and 200 basis points from their levels as of June 30, 2005, and with all other variables held constant. A 100 basis point increase in market interest rates would result in a pre-tax
decrease in the market value of our fixed income investments of $67.1 million and a 200 basis point increase in market interest rates would result in $132.4 million decrease. Similarly,
a 100 basis point decrease in market interest rates would result in a pre-tax increase in the market value of our fixed income investments of $72.2 million and a 200 basis point
decrease in market interest rates would result in a $149.7 million increase.



We pay interest on our term loan and a portion of our trust preferred securities based on the London Inter Bank Offering Rate ("LIBOR") for one, two or three
months. Due to the variable interest rate, the Company would be subject to higher interest costs if short-term interest rates rise. We have attempted to mitigate our exposure to adverse
interest rate movements by fixing the rate on $15.0 million of the trust preferred securities for a five year period through the contractual terms of the security at inception and an additional
$35.0 million through the use of interest rate swaps.

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

The
sensitivity analysis of interest rate risk assumes scenarios of increases or decreases in LIBOR of 100 and 200 basis points from their levels as of and for the six months ended
June 30, 2005, and

47

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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, 2005 |  
|-------------------- | ----- | ---- | - | - | ----- | ---------------------------------------------------------------------------------- | -
|
|
|
|Loan Payable         |       | 5.05 | % | $ | 100.4 |                                                                                    | $
|Other long term debt |       | 7.01 | % | $ | 25.0  |                                                                                    |  
|                     |       |      |   |   |       |                                                                                    |  
|                     | Total |      |   |   |       |                                                                                    |  
|                     |       |      |   |   |       |                                                                                    |  

As
noted above, we have fixed the interest rate on $50 million of our $175 million of total debt outstanding, leaving $125 million of the debt exposed to rising
interest rates. As of June 30, 2005 we had approximately $217 million of cash and cash equivalents and $60 million in short duration floating rate investment securities. We
anticipate that the net investment income on this $277 million will be positively impacted by rising interest rates and will mitigate the negative impact of rising interest rates on our debt.



Portions of our operations are transacted using the Canadian dollar as the functional currency. As of and for the six months ended June 30, 2005,
approximately 12% of our assets, 8% of our revenues, excluding realized gains, and 14% of our income before realized gains and taxes were derived from our Canadian operations. As of and for the six
months ended June 30, 2004, approximately 11% of our assets, 10% of our revenues, excluding realized gains, and 14% of our income before realized gains and taxes were derived from our Canadian
operations. Accordingly, our earnings and shareholder's equity are affected by fluctuations in the value of the U.S. dollar as compared to the Canadian dollar. Although this risk is somewhat mitigated
by the fact that both the assets and liabilities for our foreign operations are denominated in Canadian dollars, we are still subject to translation gains and losses.

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

A
10% strengthening of the U.S. dollar relative to the Canadian dollar, as compared to the actual average exchange rate for the six months ended June 30, 2005, would have resulted
in a decrease in our income before realized gains and taxes of approximately $0.6 million for the six months ended June 30, 2005 and a decrease in our shareholders' equity of
approximately $5.2 million at June 30, 2005. A 10% weakening of the U.S. dollar relative to the Canadian dollar would have resulted in an increase in our income before realized gains and
taxes of approximately $0.7 million for the six months ended June 30, 2005 and an increase in shareholders' equity of approximately $6.3 million at June 30, 2005. Our
sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in any potential change in sales levels, local prices or any other variables.

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

48

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Item 4.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered
by this report. Based on their evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules
and forms of the Securities and Exchange Commission.

Change in Internal Control over Financial Reporting

There has been no material change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) that occurred during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.

Inherent Limitations on Effectiveness of Controls

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

PART IIOTHER INFORMATION

Item 1.    Legal Proceedings.

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

49

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Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer purchases of Equity securities

|Period                         |       | Total Number
of Shares
Purchased(1) |     | Average
Price Paid
Per Share |       | Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs |     | Maximum Number
of Shares That
May Yet Be
Purchased Under
the Plans or
ProgramsUnder the Plans or
Programs
|------------------------------ | ----- | ----------------------------------- | --- | ---------------------------- | ----- | -------------------------------------------------------------------------------- | --- | ---------------------------------------------------------------------------------------------------------
|April 1, 2005  April 30, 2005 |       | 60                                  |     | $                            | 17.58 |                                                                                  | 60  |                                                                                                          
|May 1, 2005  May 31, 2005     |       | 225                                 |     | $                            | 17.58 |                                                                                  | 225 |                                                                                                          
|June 1, 2005  June 30, 2005   |       | 639                                 |     | $                            | 23.49 |                                                                                  | 639 |                                                                                                          
|                               |       |                                     |     |                              |       |                                                                                  |     |                                                                                                          
|                               | Total |                                     | 924 |                              |       |                                                                                  |     | 924                                                                                                      
|                               |       |                                     |     |                              |       |                                                                                  |     |                                                                                                          

---

During
2000, our Board of Directors approved a plan for us to repurchase up to 0.5 million shares of our common stock in the open market. The primary purpose of the plan is to
fund employee stock bonuses. Our Board approved an amendment to the plan to increase the total shares authorized for repurchase to 1.0 million in March 2002 and during
December 2003 approved a second amendment to increase the shares authorized for repurchase to 1.5 million. Additional repurchases may be made from time to time at prevailing prices,
subject to restrictions on volume and timing.

Item 3.    Defaults Upon Senior Securities.

Item 4.    Submission of Matters to a Vote of Security Holders.

On May 26, 2005, the Company held its Annual Meeting of Stockholders (the "Annual Meeting") to elect nine directors to the Board of Directors of the
Company, among other things. The directors elected at the Annual Meeting were Richard A. Barasch, Bradley E. Cooper, Mark M. Harmeling, Bertram Harnett, Linda H. Lamel, Eric W. Leathers, Patrick J.
McLaughlin, Robert A. Spass, and Robert F. Wright.

At
the Annual Meeting, the vote on the election of nine directors to hold office until the Company's 2006 annual meeting of stockholders, or until their successors are duly elected and
qualified, was as follows:

Number of VotesFor

AgainstRichard A. Barasch

51,624,324

1,011,397Bradley E. Cooper

51,793,564

842,157Mark M. Harmeling

51,198,711

1,437,010Bertram Harnett

51,572,007

1,063,714Linda H. Lamel

52,297,865

337,856Eric W. Leathers

51,863,330

772,391Patrick J. McLaughlin

52,293,346

342,375Robert A. Spass

51,642,430

993,291Robert F. Wright

52,068,544

567,177


50

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At
the Annual Meeting, the vote on a proposal to ratify the appointment of Ernst & Young LLP as the Company's independent auditors for the fiscal year ending December 31,
2005, was as follows:

Number of Votes
For

Number of Votes
Against

Number of
Abstentions

Number of
Broker Non-Votes52,559,191

68,156

10,527




Item 5.    Other Information.

None

51

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Item 6.    Exhibits.

2.1

Agreement and Plan of Merger, dated as of March 9, 2004, among Universal American Financial Corp., HHS Acquisition Corp., Heritage Health Systems, Inc. and Carlyle Venture Partners, L.P., as the stockholder representative,
 incorporated by reference to Form 8-K dated March 9, 2004.3.1

Restated Certificate of Incorporation of Universal American Financial Corp. incorporated by reference to Exhibit 3.1 to the registrant's Amendment No. 2 to the Registration Statement (No. 333-62036) on Form S-3 filed on July 11, 2001.3.2

Amendment No. 1 to the Restated Certificate of Incorporation of Universal American Financial Corp., incorporated by reference to Exhibit 3 to Form 10-Q (File No. 0-11321) for the quarter ended June 30, 2004, filed with the SEC on August 9,
2004.3.3

Amended and Restated By-Laws of Universal American Financial Corp., incorporated by reference to Exhibit A to Form 8-K (File No. 0-11321) dated August 13, 1999.4.1

Form of Indenture dated as of December 2004 between Universal American Financial Corp. and U.S. Bank National Association, as Trustee, incorporated by reference to Exhibit 4.01 to Amendment No. 1 to the Company's Registration Statement on Form S-3
(File No. 333-120190) filed with the Securities and Exchange Commission on December 10, 2004.4.2

Form of Indenture dated as of December 2004 between Universal American Financial Corp. and U.S. Bank National Association, as Trustee, incorporated by reference to Exhibit 4.02 to Amendment No. 1 to the Company's Registration Statement on Form S-3
(File No. 333-120190) filed with the Securities and Exchange Commission on December 10, 2004.4.3

Shareholders Agreement dated July 30, 1999, among the Company, Capital Z Financial Services Fund II, L.P., UAFC, L.P., AAM Capital Partners, L.P., Chase Equity Associates, L.P., Richard A. Barasch and others, incorporated by reference to Exhibit A of
Form 8-K dated August 13, 1999.4.4

Registration Rights Agreement, dated July 30, 1999, among the Company, Capital Z Financial Services Fund II, L.P., Wand/Universal American Investments L.P.I., Wand/Universal American Investments L.P. II, Chase Equity Associates, L.P., Richard A.
Barasch and others, incorporated by reference to Exhibit A to Form 8-K dated August 13, 1999.*11.1

Computation of Per Share Earnings Data required by Statement of Financial Accounting Standards No. 128, Earnings Per Share, is provided in Note 4 to the Consolidated Financial Statements in this report.*31.1

Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.*31.2

Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.*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, s adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.


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SIGNATURES

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

|                     |  | UNIVERSAL AMERICAN FINANCIAL CORP.
|-------------------- |  | ----------------------------------
|Date: August 9, 2005 |  | By:                               

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