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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-Q

(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2008ORo

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




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

New York

11-2580136(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)


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

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



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

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


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

As of October 31, 2008, 67,697,482 shares of the registrant's common stock were issued and outstanding.



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TABLE OF CONTENTS



Item

Description

PagePART I

Financial Information1

Financial Statements (unaudited):Consolidated Balance Sheets


4Consolidated Statements of OperationsThree Months


5Consolidated Statements of OperationsNine
Months


6Consolidated Statements of Stockholders' Equity and Comprehensive
Income


7Consolidated Statements of Cash Flows


8Notes to Consolidated Financial Statements


92

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


443

Quantitative and Qualitative Disclosures About Market
Risk


834

Controls and Procedures


84PART II

Other Information1

Legal Proceedings


861A

Risk Factors


862

Unregistered Sales of Equity Securities and Use of
Proceeds


883

Defaults Upon Senior Securities


884

Submission of Matters to a Vote of Security
Holders


885

Other Information


886

Exhibits


89Signatures


93


1

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Table of Contents

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

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

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



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



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

2

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Table of Contents

Important
factors may cause actual results to differ materially from forward-looking statements. We have included factors that may cause results to differ from forward-looking statements
in this report in Part I Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations", the current report on Form 8-K filed on
August 8, 2008, as supplemented by the risk factors set forth in Part II, Item 1A "Risk Factors" below, and Part I, Item 1 "Business", Part I, Item 1A
"Risk Factors" and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the
year ended December 31, 2007, as well as other reports that we file with the Securities and Exchange Commission. We assume no obligation to update or supplement any forward-looking statements
that may become untrue because of subsequent events, whether as a result of new information, future events or otherwise.

3

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PART I

ITEM 1FINANCIAL STATEMENTS (Unaudited)

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except number of shares)

September 30,
2008

December 31,
2007(Unaudited)ASSETSInvestments:Fixed maturities available for sale, at fair value (amortized cost: 2008, $1,088,882; 2007, $1,125,381)

$
1,046,761

$
1,124,849Policy loans


21,888


21,560Other invested assets


1,582


1,526Total investments


1,070,231


1,147,935Cash and cash equivalents


546,959


667,685Accrued investment income


11,999


13,364Deferred policy acquisition costs


240,855


245,511Amounts due from reinsurers


229,008


286,426Due and unpaid premiums


165,317


100,351Present value of future profits and other amortizing intangible assets


198,767


213,518Goodwill and other indefinite lived intangible assets


538,046


606,972Income taxes receivable


28,723


31,145CMS contract deposit receivables


589,660


394,225Other Part D receivables


159,487


181,696Advances to agents


63,896


61,076Other assets


142,255


139,859Total assets

$
3,985,203

$
4,089,763LIABILITIES AND STOCKHOLDERS' EQUITYLIABILITIESPolicyholder account balances

$
406,043

$
434,859Reserves for future policy benefits


623,759


616,450Policy and contract claimslife


10,378


12,213Policy and contract claimshealth


783,843


737,189Advance premiums


7,815


25,232Loan payable


321,500


349,125Other long term debt


110,000


110,000Amounts due to reinsurers


39,791


67,239Deferred income tax liability


6,299


28,687Other Part D liabilities


220,462


157,048Other liabilities


174,502


200,655Total liabilities


2,704,392


2,738,697Commitments and contingencies (Note 14)STOCKHOLDERS' EQUITYPreferred stock (Authorized: 3 million shares):Series A (Designated: 300,000 shares, issued and outstanding: 2008, 42,105 shares, liquidation value $84,210; 2007, 47,105 shares, liquidation value
$94,210)


42


47Series B (Designated: 300,000 shares, issued and outstanding: 2008, 132,895 shares, liquidation value $265,790; 2007, 127,895 shares, liquidation
value $255,790)


133


128Common stockvoting (Authorized: 200 million shares, issued and outstanding: 2008, 73.3 million shares; 2007, 75.0 million
shares)


733


750Common stocknon voting (Authorized: 30 million shares)





Additional paid-in capital


865,027


890,882Accumulated other comprehensive loss


(23,703
)

(66
)Retained earnings


494,763


463,583Less: treasury stock (2008, 4.9 million shares; 2007, 0.3 million shares)


(56,184
)

(4,258
)Total stockholders' equity


1,280,811


1,351,066Total liabilities and stockholders' equity

$
3,985,203

$
4,089,763


See notes to unaudited consolidated financial statements.

4

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended September 30, 2008 and 2007

(Unaudited)

(In thousands, per share amounts in dollars)

2008

2007Revenues:Direct premium and policyholder fees earned

$
1,160,165

$
870,781Reinsurance premiums assumed


12,055


8,296Reinsurance premiums ceded


(92,050
)

(174,866
)Net premiums and policyholder fees earned


1,080,170


704,211Net investment income


19,770


28,383Fee and other income


10,200


6,088Net realized losses on investments


(12,141
)

(519
)Total revenues


1,097,999


738,163Benefits, Claims and Expenses:Claims and other benefits


855,738


569,416Change in reserves for future policy benefits


(452
)

1,808Interest credited to policyholders


3,572


4,265Change in deferred acquisition costs


1,595


1,763Amortization of intangible assets


5,913


2,382Commissions


34,849


42,928Reinsurance commission and expense allowances


(15,778
)

(18,116
)Interest expense


5,698


4,869Early extinguishment of debt





913Other operating costs and expenses


150,172


97,803Total benefits, claims and other deductions


1,041,307


708,031Income before equity in earnings of unconsolidated subsidiary


56,692


30,132Equity in earnings of unconsolidated subsidiary


20,448


12,788Income before income taxes


77,140


42,920Provision for income taxes


28,328


15,775Net income

$
48,812

$
27,145Earnings per common share:Basic (Note 2)

$
0.57

$
0.40Diluted

$
0.56

$
0.40Weighted average shares outstanding:Weighted average common shares outstanding


73,340


61,717Less weighted average treasury shares


(4,693
)

(578
)Basic weighted shares outstanding (Note 2)


68,647


61,139Weighted average common equivalent of preferred shares outstanding


17,500


6,223Effect of dilutive securities


339


1,293Diluted weighted shares outstanding


86,486


68,655


See
notes to unaudited consolidated financial statements.

5

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        For the Nine Months Ended September 30, 2008 and 2007        (Unaudited)        (In thousands, per share amounts in dollars)

2008

2007Revenues:Direct premium and policyholder fees earned

$
4,009,700

$
2,524,652Reinsurance premiums assumed


35,888


24,942Reinsurance premiums ceded


(522,843
)

(587,202
)Net premiums and policyholder fees earned


3,522,745


1,962,392Net investment income


63,527


77,362Fee and other income


32,986


19,217Net realized (losses) gains on investments


(54,434
)

1,122Total revenues


3,564,824


2,060,093Benefits, Claims and Expenses:Claims and other benefits


3,014,419


1,622,082Change in reserves for future policy benefits


3,179


5,594Interest credited to policyholders


11,094


13,292Change in deferred acquisition costs


12,394


13,922Amortization of intangible assets


17,738


6,364Commissions


110,862


121,718Reinsurance commission and expense allowances


(50,404
)

(54,739
)Interest expense


17,794


13,232Early extinguishment of debt





913Other operating costs and expenses


429,141


272,465Total benefits, claims and other deductions


3,566,217


2,014,843(Loss) income before equity in earnings of unconsolidated subsidiary


(1,393
)

45,250Equity in earnings of unconsolidated subsidiary


51,781


39,111Income before income taxes


50,388


84,361Provision for income taxes


19,208


30,581Net income

$
31,180

$
53,780Earnings per common share:Basic (Note 2)

$
0.35

$
0.85Diluted

$
0.35

$
0.84Weighted average shares outstanding:Weighted average common shares outstanding


73,658


60,616Less weighted average treasury shares


(2,821
)

(621
)Basic weighted shares outstanding (Note 2)


70,837


59,995Weighted average common equivalent of preferred shares outstanding


17,500


2,939Effect of dilutive securities


470


1,313Diluted weighted shares outstanding


88,807


64,247


See
notes to unaudited consolidated financial statements.

6

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  AND COMPREHENSIVE INCOME        For the Nine Months Ended
September 30, 2008 and 2007        (Unaudited)        (In thousands)

Preferred
Stock
Series A

Preferred
Stock
Series B

Common
Stock

Additional
Paid-In
Capital

Accumulated
Other
Comprehensive
(Loss) Income

Retained
Earnings

Treasury
Stock

Total2007Balance, January 1, 2007

$


$


$
599

$
252,542

$
1,883

$
379,511

$
(10,626
)
$
623,909Net income

















53,780





53,780Other comprehensive loss














(14,375
)







(14,375
)Comprehensive income























39,405Issuance of common stock


47


128


5


339,066











339,246Equity transactions related to the acquisition of MemberHealth








142


283,358











283,500Stock-based compensation











3,356











3,356Treasury shares reissued











609








2,010


2,619Balance, September 30, 2007

$
47

$
128

$
746

$
878,931

$
(12,492
)
$
433,291

$
(8,616
)
$
1,292,0352008Balance, January 1, 2008

$
47

$
128

$
750

$
890,882

$
(66
)
$
463,583

$
(4,258
)
$
1,351,066Net income

















31,180





31,180Other comprehensive loss














(23,637
)







(23,637
)Comprehensive income























7,543Preferred stock conversion


(5
)

5

















Issuance of common stock








3


2,036











2,039Equity transactions related to the acquisition of MemberHealth








(20
)

(34,521
)










(34,541
)Stock-based compensation











6,783











6,783Treasury shares purchased, at cost




















(53,400
)

(53,400
)Treasury shares reissued











(153
)







1,474


1,321Balance, September 30, 2008

$
42

$
133

$
733

$
865,027

$
(23,703
)
$
494,763

$
(56,184
)
$
1,280,811


See notes to unaudited consolidated financial statements.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        For the Nine Months Ended September 30, 2008 and 2007        (Unaudited)        (In thousands)

2008

2007Cash flows from operating activities:Net income

$
31,180

$
53,780Adjustments to reconcile net income to net cash provided by operating activities, net of balances acquired:Equity in earnings of unconsolidated subsidiary


(51,781
)

(39,111
)Distribution from unconsolidated subsidiary


40,500


40,500Deferred income taxes


(4,833
)

(173
)Realized losses (gains) on investments


54,434


(1,122
)Amortization of intangible assets


17,738


6,364Net amortization of bond premium


1,575


1,132Changes in operating assets and liabilities:Deferred policy acquisition costs


12,394


13,922Reserves for future policy benefits


7,309


13,328Policy and contract claims payable


44,819


255,648Reinsurance balances


28,277


(16,305
)Due and unpaid advance premium, net


(82,079
)

(10,723
)Income taxes payable/receivable


2,234


18,601Other Part D receivables


22,209


1,366Other Part D liabilities


63,414


15,897Other, net


(14,101
)

(1,949
)Cash provided by operating activities


173,289


351,155Cash flows from investing activities:Proceeds from sale or redemption of fixed maturity investments


195,101


225,844Cost of fixed maturity investments purchased


(214,391
)

(295,686
)Proceeds from sale of subsidiary, net of cash sold





5,102Purchase of business and return of purchase price, net of cash acquired


40,990


(301,325
)Purchase of fixed assets


(15,836
)

(7,417
)Other investing activities


564


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


6,428


(372,544
)Cash used in investing activitiesdiscontinued operations





(19,836
)Cash provided by (used in) investing activities


6,428


(392,380
)Cash flows from financing activities:Net proceeds from issuance of common stock, net of tax effect


3,758


339,246Cost of treasury stock purchases


(53,400
)

Receipts from CMS contract deposits


2,375,977


571,210Withdrawals from CMS contract deposits


(2,571,412
)

(683,491
)Deposits and interest credited to policyholder account balances


12,262


14,745Surrenders and other withdrawals from policyholder account balances


(40,003
)

(52,622
)Issuance of new debt





444,105Principal repayment on loan payable and other long term debt


(27,625
)

(140,563
)Cash (used in) provided by financing activities


(300,443
)

492,630Net (decrease) increase in cash and cash equivalents


(120,726
)

451,405Cash and cash equivalents at beginning of period


667,685


542,130Cash and cash equivalents at end of period

$
546,959

$
993,535


See notes to unaudited consolidated financial statements.

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (Unaudited)

1. ORGANIZATION AND COMPANY BACKGROUND

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

In
2006, we began offering PDPs pursuant to Medicare Part D under the Prescription PathwaySM brand through our Pennsylvania Life Insurance Company, American
Progressive Life & Health Insurance Company of New York and Marquette National Life Insurance Company subsidiaries, in connection with a strategic alliance with Caremark Rx, Inc., known
as Caremark, formerly PharmaCare Management Services, Inc., a third party pharmacy benefits manager, or PBM, and a wholly-owned
subsidiary of CVS Caremark Corp. In February 2008, we announced that the parties are terminating this strategic alliance effective December 31, 2008. Upon termination of the strategic
alliance, Caremark and Universal American will each assume responsibility for the drug benefit of specified Prescription PathwaySM plan members to achieve an approximately equal
distribution of the value of business that has been generated by the strategic alliance. We will continue to operate PDPs derived from this business under the name PrescribaRxSM.

We
currently operate Medicare Advantage PFFS plans through American Progressive, The Pyramid Life Insurance Company and Marquette as well as Medicare Advantage HMOs in Houston and
Beaumont, Texas through SelectCare of Texas, L.L.C., in North Texas through SelectCare Health Plans, Inc., and in Oklahoma through SelectCare of Oklahoma, Inc. and
GlobalHealth, Inc. All of these companies are our subsidiaries. In addition, beginning in 2007, we expanded into new health plan markets in Wisconsin.

CHCS
Services, Inc., our administrative services company, provides administrative services for both affiliated and unaffiliated insurance companies for senior market insurance and
non-insurance programs.

On
September 21, 2007, we completed the acquisition of MemberHealth, Inc., a privately-held PBM and sponsor of Community CCRxSM, a national
Medicare Part D prescription drug benefit plan. Effective on the date of the acquisition, we transferred all of the PDP business of MemberHealth, Inc. except New York business into
Pennsylvania Life and we transferred the New York PDP business into American Progressive. In connection with this acquisition, we reconstituted MemberHealth, Inc. into a limited liability
company and named it MemberHealth, L.L.C. See Note 4Business Combinations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:We have prepared the accompanying consolidated financial statements in conformity with U.S. generally accepted accounting principles or
U.S.GAAP for interim reporting in

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

accordance
with Article 10 of the Securities and Exchange Commission's Regulation S-X, and consolidate the accounts of Universal American and its subsidiaries:



During
2005, we entered into a strategic alliance with Caremark and created Part D Management Services, L.L.C., known as PDMS. PDMS is 50% owned by Universal American and 50%
owned by Caremark. We do not control PDMS and therefore PDMS is not consolidated in our financial statements. We account for our investment in PDMS on the equity basis and include it in other assets.
PDMS principally performs marketing and risk management services on behalf of our Prescription PathwaySM PDP, for which it receives fees and other remuneration from our PDPs and
Caremark.

For
the insurance subsidiaries, U.S. GAAP differs from statutory accounting practices prescribed or permitted by regulatory authorities. We have eliminated all material
intercompany transactions and balances between Universal American and its subsidiaries. We have also eliminated all material intercompany transactions and balances between our subsidiaries.

The
interim financial information in this report is unaudited, but in the opinion of management, includes all adjustments, including normal, recurring adjustments necessary to present
fairly the financial position and results of operations for the periods reported. The results of operations for the nine months ended September 30, 2008 and 2007 are not necessarily indicative
of the results to be expected for the full year. You should read the accompanying consolidated financial statements and notes in conjunction with our annual report on Form 10-K for
the year ended December 31, 2007.

Earnings Per Common Share:We calculate earnings per common share using the two-class method. This method requires that we allocate net income between
net income attributable to participating preferred stock and net income attributable to common stock, based on the dividend and earnings participation provisions of the preferred stock. Basic earnings
per share excludes the dilutive
effects of stock options outstanding during the periods and is equal to net income attributable to common stock divided by the weighted average number of common shares outstanding for the periods.

10

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

At
September 30, 2008 and 2007, we allocated earnings between common and participating preferred stock as follows:

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007(In thousands)Net income attributable to common stock

$
38,896

$
24,637

$
25,003

$
51,268Undistributed income allocated to participating preferred stock


9,916


2,508


6,177


2,512Net income

$
48,812

$
27,145

$
31,180

$
53,780


Income Taxes:We establish valuation allowances based upon an analysis of projected taxable income and our ability to implement prudent and feasible tax planning
strategies. We carried valuation allowances on deferred tax assets of $3.1 million at both September 30, 2008 and December 31, 2007. At September 30, 2008, we assessed the
amount of the deferred tax asset that was more likely than not to be realized under SFAS No. 109,Accounting for Income Taxes, and concluded that
we can record tax benefits related to our realized losses relating to our investments for financial statement purposes.

Reserve Development:The PFFS medical loss ratio decreased to 81.6% for the third quarter of 2008 from 85.7% for the third quarter of 2007 primarily due to
$20.8 million favorable development of 2007 claim experience. The PFFS medical loss ratio decreased to 85.7% for the first nine months of 2008 from 86.0% for the first nine months of 2007
primarily due to $32.9 million favorable development of 2007 claim experience partially offset by higher medical cost levels. The per share impact of this favorable development was $0.15 per
diluted share for the quarter ended September 30, 2008 and $0.24 per diluted share for the nine months ended September 30, 2008.

Recognition of Prior Plan Year Settlements under Medicare Part D and Private Fee-For-Service Plans:The Medicare Part D
prescription drug benefit program sponsored by the federal government commenced in 2006. This business is detail-oriented and relatively complex. The amount due from CMS is impacted by membership,
prescription drug events, known as PDEs, for those members (including the covered plan paid amounts), deductibles, catastrophic reinsurance and the risk corridor adjustment. An extended period of time
after the close
of the annual coverage period (December 31st) is required for the government to reconcile each member's PDEs and provide back to each plan the information the plans need to
finalize the accounting for this coverage. The federal government has a stated time schedule for providing information back to the plans for, among other items, revenue adjustments based on risk
scores, member eligibility by plan to reconcile the plan to plan reimbursements and the calculation of the final settlement with the federal government for low-income cost subsidies,
reinsurance and risk corridor payments.

Reconciliation
and related settlement of CMS's prospective subsidies, including reinsurance payments and low-income cost subsidies, as well as the risk corridor is made after
the end of each plan year. In August 2008, we received Medicare Part D risk score adjustment settlement data from CMS for the 2007 plan year. Furthermore, in October 2008, we
received Medicare Part D reconciliation settlement data from CMS for the 2007 Plan year. The net impact of these final 2007 settlements for our Prescription Pathways and Community CCRx plans
combined, which were recorded in the third

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

quarter,
was a reduction of revenues of $4.7 million ($0.04 per diluted share for the three months ended September 30, 2008 and $0.03 per diluted share for the nine months ended
September 30, 2008) and a reduction of claims expense of $2.4 million ($0.02 per diluted share for both the three and nine month periods ended September 30, 2008 and $0.01 per
diluted share for the nine months then ended). The effect of these adjustments related to the portion of the 2007 plan year prior to our acquisition of MemberHealth was recorded as an adjustment to
goodwill as part of our final purchase GAAP accounting. These adjustments increased goodwill by $7.9 million, (See Note 4Business Combinations).

The
reconciliation and settlement process with CMS for the Part D coverage within Medicare Advantage PFFS plans is similar to Medicare Part D plans with the two exceptions:
(1) PFFS plans are ineligible for aggregate risk corridor payments; and (2) prospective monthly catastrophic reinsurance payments to PFFS plans are based on CMS estimated average
reinsurance payments to other Medicare AdvantagePrescription Drug (MA-PD) plans for their Part D coverage. In October 2008, we received notification from CMS of
an adjustment to our catastrophic reinsurance reimbursement for the Part D coverage within our PFFS plans for the 2007 Plan year. The impact of this adjustment, which was recorded in the third
quarter, was a reduction of revenues of $4.5 million ($0.03 per diluted share for both the three and nine month periods ended September 30, 2008).

In
addition, during August 2008 we received 2007 plan year risk score adjustment settlement data from CMS for our Medicare Advantage HMO plans. The impact of this adjustment,
which was recorded in the third quarter, was an increase net income before taxes of $4.1 million ($0.03 per diluted share for both the three and nine month periods ended September 30,
2008).

Reinsurance:We evaluate the financial condition of our reinsurers and monitor concentrations of credit
risk to minimize our exposure to significant losses from reinsurer insolvencies. We are obligated to pay claims in the event that a reinsurer to whom we have ceded an insured claim fails to meet its
obligations under the reinsurance agreement. As of September 30, 2008, all of our primary reinsurers were rated "A" or better by A.M. Best, except for PharmaCare Re, which is
unrated. We have secured a letter of credit from PharmaCare Re that we believe will adequately support the risks ceded. We do not know of any instances where any of our reinsurers have been
unable to pay any policy claims on any reinsured business.

Use of Estimates:The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the
amounts 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, we may revise the recorded estimates and reflect the revisions in operating results. Actual results could differ from
those estimates. In our business 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 investments and income taxes. There have been no changes in our
critical accounting policies during the current year.

Supplemental Cash Flow Information:Cash and cash equivalents include cash on deposit, money market funds, and short term investments that had an original maturity
of three months or less from

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

the
time of purchase. At September 30, 2008, cash equivalents included $361.0 million of agency discount notes, $140.7 million of government money market funds and
$63.6 million of A1/P1 rated commercial paper. Supplemental cash flow information for interest and income taxes paid for continuing and discontinued operations is as follows:

Nine months ended
September 30,2008

2007(In thousands)Supplemental cash flow information from continuing operations:Cash paid for interest

$
17,027

$
12,493Cash paid for income taxes

$
34,310

$
8,409Non-cash financing activities:(Return) issuance of common stock in connection with MemberHealth acquisition (See Note 4Business Combinations.)

$
(34,541
)
$
283,500Supplemental cash flow information from discontinued operations:Cash paid for income taxes

$


$
28,200


Cash
flows from investing activitiesdiscontinued operations for the nine months ended September 30, 2007 represents net cash outflows related to the
December 2006 sale of our subsidiary, PennCorp Life Canada. The net outflow includes U.S. income taxes paid of $28.2 million, partially offset by approximately $8.4 million of
additional proceeds received equal to the balance of net earnings generated by PennCorp Life Canada during the period from January 1, 2006 through the closing date, December 1, 2006.

Significant Accounting Policies:For a description of significant accounting policies, see Note 2Summary of Significant Accounting Policies in
the notes to the consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2007.

Reclassifications:We have made reclassifications to prior years' financial statements to conform to the current period presentation, in connection with our
resegmentation at December 31, 2007. These reclassifications had no effect on net income or earnings per share as previously stated.

3. RECENT AND PENDING ACCOUNTING PRONOUNCEMENTS

Business Combination:On December 4, 2007, the Financial Accounting Standards board, or FASB, issued Statement of Financial Accounting Standards
No. 141(R), Business Combinations, known as SFAS 141(R) and SFAS No. 160,Accounting and Reporting of Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51, known as SFAS 160. These standards will significantly change the financial accounting and reporting of business
combination transactions and noncontrolling or minority interests in business entities. SFAS 141(R) is required to be adopted

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. RECENT AND PENDING ACCOUNTING PRONOUNCEMENTS (Continued)

concurrently
with SFAS 160 and is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. Early adoption is prohibited. Companies will not be required to adjust assets and liabilities that arose from business combinations with acquisition dates prior to
the SFAS 141R effective date, with specified exceptions for acquired deferred tax assets and acquired income tax positions. We expect to adopt SFAS 141(R) and SFAS 160 on
January 1, 2009, and have not yet determined whether or to what extent they will affect our results of operations and financial condition.

Fair Value Measurements:On January 1, 2008, we adopted SFAS No. 157, "Fair Value Measurements," issued in September 2006. For financial
statement elements currently required to be measured at fair value, SFAS 157 redefines fair value, establishes a framework for measuring fair value under U.S. GAAP and enhances
disclosures about fair value measurements. The new definition of fair value focuses on the price, called an exit price that would be received to sell the asset or paid to transfer the liability
regardless of whether an observable liquid market price existed. An exit price valuation will include margins for risk even if they are not observable. As we obtain release from risk, the margins for
risk will also be released through net realized capital gains or losses in net income. SFAS 157 provides guidance on how to measure fair value, when required, under existing accounting
standards. SFAS 157
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, which we call Levels 1, 2, and 3.

We
applied the provisions of SFAS 157 prospectively to financial assets and financial liabilities that we are required to measure at fair value under existing U.S. GAAP. We
determined that there was no effect to our opening retained earnings or current period statement of operations from the implementation of SFAS 157. See Note 7 for additional information
regarding SFAS 157.

In
February 2008, the FASB issued FSP FAS No. 157-2, "Effective Date of FASB Statement No. 157" which delays the effective date of SFAS 157 to
fiscal years beginning after November 15, 2008 for specified nonfinancial assets and nonfinancial liabilities. FSP FAS 157-2 applies to the following nonfinancial assets and
liabilities, as well as other nonfinancial assets and liabilities:



As
a result of the issuance of FSP FAS 157-2, we did not apply the provisions of SFAS 157 to the nonfinancial assets and nonfinancial liabilities within the
scope of FSP FAS 157-2.

In
October 2008, the FASB issued FSP FAS No. 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active". This FSP
clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in the determination of the fair value of a financial asset when
the market for that asset is not active. The key considerations illustrated in the FSP FAS 157-3 example include the use of an entity's own assumptions about future cash flows and
appropriately risk-adjusted discount rates, appropriate risk adjustments for nonperformance and liquidity risks, and the reliance that an entity should place on quotes that do not

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. RECENT AND PENDING ACCOUNTING PRONOUNCEMENTS (Continued)

reflect
the results of market transactions. FSP FAS 157-3 was preceded by a press release that was jointly issued by the Office of the Chief Accountant of the SEC and the FASB staff
on September 30, 2008 which provided immediate clarification on fair value accounting based on the measurement guidance of SFAS 157. FSP FAS 157-3 was effective upon
issuance. FSP FAS 157-3 did not have an impact on our consolidated financial statements.

4. BUSINESS COMBINATIONS



On September 21, 2007, we completed the acquisition of MemberHealth, Inc., a privately-held PBM and sponsor
of Community CCRx, a national Medicare Part D prescription drug benefit plan. Prior to the acquisition, MemberHealth, Inc. was a leading national Medicare Part D sponsor, offering
Medicare prescription drug plans in 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands.

We
paid the original purchase price of $630 million, apportioned 55% in cash and 45% in our common stock valued at $20 per share. We paid transaction costs of approximately
$12 million in cash. In addition to the purchase price, the transaction contemplated an additional three year earn-out tied to target earnings from the MemberHealth business. The
maximum aggregate amount potentially payable under the performance-based earn-out was $150 million, payable in cash and our common stock.

Subsequent
to December 31, 2007, we determined that expected operating income for 2008 from the MemberHealth business, which we acquired in September 2007, would be less
than previously forecast. The reason for the decline in expected income was that premium payments to MemberHealth would be lower than anticipated based upon the bids submitted by MemberHealth in
June 2007 for its 2008 Part D plans, and later accepted by CMS. The premium payments were lower primarily as a result of incorrect information concerning the risk scores in the
MemberHealth bids. In accounting for the issue relating to the 2008 bids, we recorded an acquisition liability of $39.2 million for the below-market contract that we will amortize into income
over the contract period, January 1, 2008 to December 31, 2008. We amortized $9.8 million of this acquisition liability in the quarter ended September 30, 2008, and
$29.5 million for the nine months ended September 30, 2008. We reflected this amortization in direct premium and policyholder fees earned in the consolidated statements of operations.

We
also discovered after December 31, 2007 that MemberHealth incorrectly calculated its expected risk corridor receivable in its first quarter 2007 financial statements, resulting
in an overstatement of pre-tax income for the first quarter of 2007 of approximately $26 million. In our financial statements for the year ended December 31, 2007 included in
our filed annual report on Form 10-K, we adjusted the pro forma financial information to reflect the impact of this error, through an adjustment to purchase GAAP accounting, which
reduced receivables and increased goodwill by $23 million, the after-tax amount of the misstatement.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. BUSINESS COMBINATIONS (Continued)

In
connection with these issues, in March 2008, we concluded a settlement agreement and amendment of the merger agreement under which the sellers of MemberHealth delivered
approximately $98 million of value, consisting of $47 million in cash, forgiveness of $16 million of our payment obligations under the original merger agreement and 2,027,071
shares of our common stock, valued at $35 million. We have retired these shares. As a result of this settlement, in the first quarter of 2008, we reduced goodwill by the amount of the cash and
common shared received, $82 million in total, and we adjusted liabilities in relation to the $16 million forgiveness.

During
the quarter ended September 30, 2008, we performed the final purchase accounting for the MemberHealth acquisition, adjusting the purchase price allocation to reflect the
final values. The adjustments posted increased goodwill by $7.9 million, primarily as a result of two significant items, the final 2007 CMS risk score adjustment and the 2007 final CMS
prescription drug event reconciliation, as discussed below.

During
the third quarter of 2008, we received the final risk score adjustments for 2007 members in our Part D plans. The risk score reflects the relative health of the member and
impacts the level of reimbursement from CMS, with a higher reimbursement for members with higher risk scores. The total adjustment for our 2007 membership reduced CMS expected payments by
$5.2 million. The estimated risk corridor impact was approximately $3.6 million, resulting in a net reduction of receivables of $1.6 million. We allocated this amount to
pre-acquisition and post acquisition periods to capture the portion of the adjustment impacting the opening purchase GAAP balance sheet. Based on our analysis, we determined that
$1.2 million of the reduction related to periods preceding the acquisition and $0.4 million related to periods subsequent to the acquisition. We recorded the $1.2 million portion
as an increase in goodwill and reported the $0.4 million portion as a reduction to third quarter revenues.

The
final plan year reconciliation cannot be completed until CMS finalizes the membership eligibility data, the prescription drug event data, the plan to plan membership reconciliation
and the risk score adjustments. CMS finalized the risk score adjustment in July 2008, the prescription drug event data submission deadline was July 31, 2008, CMS completed the
Phase III or final plan to plan membership reconciliation in September 2008 and we received the final reconciliation for the 2007 Plan year in October 2008. After the receipt of
this finalized information, we reconciled the amount due to CMS. We performed the reconciliation for the pre-acquisition and post-acquisition periods to capture the portion of
the adjustment impacting the opening purchase GAAP balance sheet. Based on the reconciliation, we determined that the CMS receivable as of the date of acquisition was overstated by approximately
$10.3 million, and that the receivable relating to post-acquisition activity was understated by approximately $2.0 million. We recorded the pre-acquisition
amount, net of deferred taxes of $3.6 million, as an adjustment to goodwill and we reported the post-acquisition amount as a reduction of third quarter claims expense.

After
giving effect to the settlement and the final allocation adjustments discussed above, the excess of the purchase price over the fair value of net tangible assets acquired, adjusted
for deferred

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. BUSINESS COMBINATIONS (Continued)

income
taxes, was approximately $610.2 million, which we allocated to identifiable intangible assets and goodwill as follows:

Description

Amount
(In thousands)

Weighted
Average Life
At Acquisition

Amortization BasisMembership base acquired

$
135,426


10

Straight line over the estimated life of the membership baseTrademarks/trade names


20,433


9

Straight line over the estimated life of the trademarks/trade namesLicenses


3,500


15

Straight line over the estimated life of the licensesGoodwill


450,881




Non amortizingTotal excess of purchase price over tangible book value

$
610,240


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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. BUSINESS COMBINATIONS (Continued)

The following condensed balance sheet sets forth the amounts assigned to assets and liabilities for MemberHealth on the date of acquisition, as adjusted to reflect the settlement and the
final purchase price allocation discussed above:

September 21,
2007(In thousands)AssetsCash and cash equivalents

$
74,215Amortizing intangible assets:Membership base


135,426Trademarks/trade names


20,433Licenses


3,500Goodwill


450,881Due and unpaid premium


135,218CMS deposit contract receivable


91,347Other Part D receivables


92,120Deferred taxes


14,220Other


28,424Total Assets

$
1,045,784LiabilitiesPolicy related liabilities

$
297,437Due to reinsurers


72,243Other


115,161Total Liabilities


484,841Equity


560,943Total Liabilities and Equity

$
1,045,784


We
have not reflected operating results generated by MemberHealth prior to September 21, 2007, the date of acquisition, in our consolidated financial statements. The unaudited
consolidated pro forma results of operations, assuming that we purchased MemberHealth on January 1, 2007 are as follows:

Three months ended
September 30, 2007

Nine months ended
September 30, 2007(In thousands)Total revenue

$
1,078,812

$
3,292,816Income before taxes

$
87,184

$
121,909Net income

$
55,111

$
77,717Income per common share:Basic

$
0.63

$
0.92Diluted

$
0.62

$
0.91


The
pro forma information presented above includes an adjustment to reflect the impact of the risk corridor calculation error correction previously disclosed in Note 23 in the
notes to consolidated

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. BUSINESS COMBINATIONS (Continued)

financial
statements contained in our annual report on Form 10-K for the year ended December 31, 2007.

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 date assumed, nor is the pro forma information intended to be indicative of our future results of operations.



On March 1, 2007, the Company acquired Harmony Health, Inc. ("Harmony"), a provider-owned company that operates
GlobalHealth, a Medicare Advantage and commercial managed care plan in Oklahoma City, Oklahoma for $18.2 million in cash, including direct costs of acquisition of $0.2 million. Harmony
was a majority-owned subsidiary of the Oklahoma City Clinic. Under the terms of the agreement, the Oklahoma City Clinic has entered into a long-term agreement with Universal American to
provide healthcare services to GlobalHealth members. In addition, Oklahoma City Clinic has retained the risk for commercial business under a global capitation arrangement.

The
tangible book value at the date of acquisition was $3.8 million. The excess of purchase price over the tangible book value, adjusted for deferred income taxes, was
$17.1 million, which we allocated to identifiable intangible assets and goodwill as follows:

Description

Amount
(In thousands)

Weighted
Average Life
At Acquisition

Amortization BasisMembership base acquired

$
6,072


10

Straight line over the estimated life of the membership baseNon-compete agreement


1,018


7

Straight line over the length of the agreementGoodwill


9,962




Non amortizingTotal excess of purchase price over tangible book value

$
17,052




On January 19, 2007, we completed the sale of Peninsular Life Insurance Company, an inactive subsidiary, for approximately
$7.9 million, resulting in a pre-tax gain of $2.0 million, which we reflected in net realized gains. We received the entire amount in cash: $7.7 million in 2007, and
$0.2 million on January 23, 2008.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. INTANGIBLE ASSETS

The following table shows our acquired intangible assets that continue to be subject to amortization and accumulated amortization expense:

September 30, 2008

December 31, 2007Weighted
Average
Life (Years)

Value
Assigned

Accumulated
Amortization

Value
Assigned

Accumulated
Amortization(In thousands)Traditional Insurance:Policies in forceHealth


9

$
18,473

$
12,814

$
18,473

$
12,252Distribution channel


30


26,684


5,200


22,055


3,492Policies in forceLife/Annuity


7


4,127


2,380


4,127


2,241Medicare Part D:Membership base


10


135,426


13,881


138,000


3,795Trademarks/trade names


9


20,433


2,327


18,000


550Licenses


15


3,500


239


5,000


92Senior Managed CareMedicare Advantage:Membership base


7


23,988


9,224


23,988


7,542Provider contracts


10


15,539


5,060


15,539


3,853Non-compete


7


1,425


274


1,425


121Senior Administrative Services:Administrative service contracts


6


7,671


7,602


7,671


7,526Hospital network contracts


10


1,797


1,295


1,797


1,093Total


17

$
259,063

$
60,296

$
256,075

$
42,557


The
following table shows the changes in the amortizing intangible assets:

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007(In thousands)Balance, beginning of period

$
204,680

$
57,845

$
213,518

$
54,738Additions and adjustments





161,000


2,987


168,089Amortization


(5,913
)

(2,382
)

(17,738
)

(6,364
)Balance, end of period

$
198,767

$
216,463

$
198,767

$
216,463


Amortization,
net of interest increased in 2008 over 2007 as a result of amortization of intangible assets recognized in connection with the September 2007 acquisition of
MemberHealth.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. INTANGIBLE ASSETS (Continued)

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

2008 remainder of year

$
6,3092009


23,6322010


23,1842011


21,3342012


21,1712013


21,040Thereafter


82,097$
198,767


Changes
in the carrying amounts of goodwill and intangible assets with indefinite lives are shown below:

December 31,
2007

Additions

Adjustments

September 30,
2008(In thousands)Traditional Insurance:Goodwill

$
3,893

$
1,646

$


$
5,539Other


4,867








4,867SubtotalTraditional Insurance


8,760


1,646





10,406Medicare Part DGoodwill


520,764





(69,883
)

450,881Senior Managed CareMedicare Advantage:Goodwill


67,928





(689
)

67,239Other


5,163








5,163SubtotalSenior Managed CareMedicare Advantage


73,091





(689
)

72,402Senior Administrative ServicesGoodwill


4,357








4,357Total

$
606,972

$
1,646

$
(70,572
)
$
538,046


Other
non-amortizing intangible assets consist primarily of trademarks and licenses. The addition of goodwill for Traditional Insurance was a result of an acquisition, the
decrease in goodwill in Senior Managed CareMedicare Advantage was the result of the settlement of pre-acquisition adjustments in connection with the Harmony Health acquisition
and the decrease in goodwill for Medicare Part D was the result of $12.0 million in post-closing adjustments on MemberHealth and the $81.9 million MemberHealth
purchase price adjustment in 2008. For a full discussion of the MemberHealth purchase price adjustment see Note 4Business Combinations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

6. INVESTMENTS

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

September 30, 2008Classification

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

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

$
34,561

$
631

$


$
35,192Government sponsored agencies


99,496


2,048


(87
)

101,457Other political subdivisions


9,993


39


(169
)

9,863Corporate debt securities


437,060


2,197


(29,290
)

409,967Foreign debt securities


32,925


216


(1,321
)

31,820Mortgage-backed and asset-backed securities


474,847


4,206


(20,591
)

458,462$
1,088,882

$
9,337

$
(51,458
)
$
1,046,761




December 31, 2007Classification

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

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

$
34,510

$
378

$
(2
)
$
34,886Government sponsored agencies


95,975


2,750





98,725Other political subdivisions


5,558


34


(57
)

5,535Corporate debt securities


431,002


7,772


(6,633
)

432,141Foreign debt securities


29,363


472


(194
)

29,641Mortgage-backed and asset-backed securities


528,973


4,494


(9,546
)

523,921$
1,125,381

$
15,900

$
(16,432
)
$
1,124,849


At
September 30, 2008, gross unrealized losses of $20,591million on mortgage-backed and asset-backed securities reflect unrealized losses of $8,757 on subprime residential
mortgage loans, as discussed below, and $11,834 related to obligations of commercial mortgage-backed securities and other asset-backed securities. The value of a majority of these securities is
depressed due to the deterioration of value in the mortgage-backed securities market and related businesses. Corporate debt securities have gross unrealized losses of $29,290 at September 30,
2008. These unrealized losses relate to corporate securities across all sectors, and reflect the general depressed market conditions that existed at September 30, 2008. Management and the
Investment Committee have evaluated these holdings, with input from our investment managers, and do not believe them to be other-than-temporarily impaired.

The
amortized cost and fair value of fixed maturity investments at September 30, 2008 by contractual maturity are shown below. Expected maturities will differ from contractual
maturities

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

6. INVESTMENTS (Continued)

because
borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized
Cost

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

$
70,766

$
70,653Due after 1 year through 5 years


388,125


378,413Due after 5 years through 10 years


96,367


91,404Due after 10 years


58,777


47,828Mortgage and asset-backed securities


474,847


458,463$
1,088,882

$
1,046,761


Subprime Residential Mortgage Loans

We hold securities with exposure to subprime residential mortgages. Subprime mortgage lending is the origination of residential
mortgage loans to customers with weak credit profiles. The slowing U.S. housing market, greater use of mortgage products with low introductory interest rates, generally referred to as "teaser rates,"
and relaxed underwriting standards for some originators of subprime loans have led to higher delinquency and loss rates, especially with regard to securities issued in 2006 and 2007 that are
collateralized by interests in mortgages originated in 2006 and 2007. These factors have caused a significant reduction in market liquidity and repricing of risk, which has led to a decrease in the
market valuation of these securities sector wide.

As
of September 30, 2008, we held subprime securities with par values of $141.0 million, an amortized cost of $56.4 million and a market value of
$49.0 million representing approximately 3.0% of our cash and invested assets, with collateral comprised substantially of first lien mortgages. The majority of these securities are in senior or
senior-mezzanine level tranches, which have preferential liquidation characteristics, and have an average rating of A+ by Standard & Poors, a division of the McGraw Hill Companies, Inc.,
known as S&P, or equivalent.

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

Vintage Year

Amortized
Cost

Fair
Value

Unrealized
Gain (Loss)(In thousands)2003

$
6,510

$
5,215

$
(1,295
)2004


3,496


3,052


(444
)2005


25,460


18,676


(6,784
)2006


15,355


16,226


8712007


5,592


5,881


289Totals

$
56,413

$
49,050

$
(7,363
)


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

6. INVESTMENTS (Continued)

We continuously review our subprime holdings stressing multiple variables, such as cash flows, prepayment speeds, default rates and loss severity, and comparing current base case loss
expectations to the loss required to incur a principal loss, or breakpoint. This breakpoint currently exceeds the base case loss expectation for all but one holding to varying degrees. We expect
delinquency and loss rates in the subprime mortgage sector to continue to increase in the near term but at a decreasing rate. Those securities with a greater variance between the breakpoint and base
case can withstand this further deterioration. However, holdings where the base case is closer to the breakpoint, principally holdings from the 2006 and 2007 vintage years, are more likely to incur a
principal loss. We utilize third party pricing services to provide or estimate market prices. The major inputs used by third party pricing services include, but are not limited to, reported trades,
benchmark yields, issuer spreads, bids, offers, and estimated cash flows and prepayment speeds. If there are no recent reported trades, the third party pricing services may use matrix or model
processes to develop a security price, as has recently been the case with many of our subprime holdings.

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

2008 Quarter Ended2007

March 31

June 30

September 30

2008

Cumulative(In thousands)Subprime

$
40,997

$
29,800

$
11,771

$
2,329

$
43,900

$
84,897Other structured








1,384


2,432


3,816


3,816Corporate











7,177


7,177


7,177$
40,997

$
29,800

$
13,155

$
11,938

$
54,893

$
95,890


At
December 31, 2007, we recognized an other-than-temporary impairment on fourteen 2006 and 2007 vintage year subprime holdings. As of September 30,
2008, we recognized an additional other-than-temporary impairment on the same fourteen securities impaired at December 31, 2007 plus four additional subprime holdings
that were initially impaired during the first quarter of 2008. In addition, during 2008, we have recognized an other-than-temporary impairment on four other structured
securities and two corporate securities. The corporate other-than-temporary impairment includes $6.1 million on Lehman Brothers holdings.

7. FAIR VALUE MEASUREMENTS

We carry fixed maturity investments, equity securities and interest rate swaps at fair value in our consolidated financial statements. These fair value disclosures consist of information
regarding the valuation of these financial instruments, followed by the fair value measurement disclosure requirements of SFAS 157.

We
applied the provisions of SFAS 157 prospectively to financial instruments that we record at fair value. Our adoption of SFAS 157 did not have an impact on opening
retained earnings.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. FAIR VALUE MEASUREMENTS (Continued)



The following section applies the SFAS 157 fair value hierarchy and disclosure requirements to our financial instruments that we
carry at fair value. SFAS 157 establishes a fair value hierarchy that prioritizes the inputs in the valuation techniques used to measure fair value into three broad Levels, numbered 1, 2, and
3.

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

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

Level 3
valuations are derived from techniques in which one or more of the significant inputs, such as assumptions about risk, are unobservable. Generally, Level 3
securities are less liquid securities such as highly structured and/or lower quality asset-backed securities, known as ABS, and private placement equity securities. Because Level 3 fair values,
by their nature, contain unobservable market inputs, as there is no observable market for these assets and liabilities, we must use considerable judgment to determine the SFAS 157
Level 3 fair values. Level 3 fair values represent our best estimate of an amount that could be realized in a current market exchange absent actual market exchanges.

The
following table presents our assets and liabilities that are carried at fair value by SFAS 157 hierarchy levels, as of September 30, 2008 (in thousands):

Total

Level 1

Level 2

Level 3Assets:Fixed maturities, available-for-sale

$
1,046,761

$


$
1,041,992

$
4,769Equity securities


490








490Total assets

$
1,047,251

$


$
1,041,992

$
5,259Liabilities:Interest rate swaps

$
2,724

$


$
2,724

$



In
many situations, inputs used to measure the fair value of an asset or liability position may fall into different levels of the fair value hierarchy. In these situations, we will
determine the level in which the fair value falls based upon the lowest level input that is significant to the determination of the fair value.



The valuation methodologies used to determine the fair values of assets and liabilities under the "exit price" notion of
SFAS 157 reflect market participant objectives and are based on the application of the fair value hierarchy that prioritizes observable market inputs over unobservable inputs. We determine the
fair value of our financial assets and liabilities based upon quoted market prices where

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. FAIR VALUE MEASUREMENTS (Continued)

available.
Fair values of our interest rate swap liabilities reflect adjustments for counterparty credit quality, our credit standing, liquidity and, where appropriate, risk margins on unobservable
parameters. The following is a discussion of the methodologies used to determine fair values for the financial instruments listed in the above table.



We determine the fair value of the majority of our fixed maturity and equity securities using third party pricing service market
prices. The following are examples of typical inputs used by third party pricing services:



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

We
have analyzed the third party pricing services' valuation methodologies and related inputs, and have also evaluated the various types of securities in our investment portfolio to
determine an appropriate SFAS 157 fair value hierarchy level based upon trading activity and the observability of market inputs. Based on the results of this evaluation and investment class
analysis, we classified each price into Level 1, 2, or 3. We classified most prices provided by third party pricing services into Level 2 because the inputs used in pricing the
securities are market observable.

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

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. FAIR VALUE MEASUREMENTS (Continued)

The
following table presents the fair value of the significant asset sectors within the SFAS 157 Level 3 securities as of September 30, 2008:

Fair
Value

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

$
2,947


56.0
%Corporate


1,822


34.7
%Equity securities


490


9.3
%Total Level 3 securities

$
5,259


100
%


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



We report interest rate swaps in other assets and other liabilities on our consolidated balance sheets at fair value. Their fair value
is based on the present value of cash flows as determined by the LIBOR forward rate curve and credit spreads, including our own credit.

We
have classified interest rate swaps as Level 2. We have determined their valuations using pricing models with inputs that are observable in the market or can be derived
principally from or corroborated by observable market data.



We classify the fair values of financial instruments within Level 3 if there are no observable markets for the instruments or,
in the absence of active markets, the majority of the inputs used to determine the fair value of the instruments are based on assumptions about market participant assumptions. Rollforward tables for
each quarter from January 1, 2008 to September 30, 2008 for the

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. FAIR VALUE MEASUREMENTS (Continued)

Level 3
financial instruments for which we have used significant unobservable inputs in the fair value measurement on a recurring basis are presented below:

Fixed
Maturities

Equity
Securities

Total(thousands)Fair value as of January 1, 2008

$
7,757

$
490

$
8,247Net purchases and sales


(379
)




(379
)Unrealized losses included in AOCI(1),(2)


(289
)




(289
)Fair value as of March 31, 2008


7,089


490


7,579Net purchases and sales


(20
)




(20
)Net transfers out


(2,372
)




(2,372
)Unrealized losses included in AOCI(1),(2)


(121
)




(121
)Fair value as of June 30, 2008


4,576


490


5,066Net purchases and sales


(40
)




(40
)Net transfers in


168





168Unrealized losses included in AOCI(1),(2)


65





65Fair value as of September 30, 2008

$
4,769

$
490

$
5,259


---

8. STOCKHOLDERS' EQUITY



We have 3.0 million authorized shares of preferred stock, of which we have designated 300,000 shares as Series A
preferred stock and 300,000 shares as Series B preferred stock. The holders of both Series A preferred stock and Series B preferred stock possess specified rights whereby they
may, in specified circumstances, convert the shares directly or indirectly into shares of common stock. In addition, we have the right to convert the shares of our Series B preferred stock to
common stock, in the ratio of 100 share of common stock for each share of Series B preferred stock, from and after the first anniversary of the issuance of the shares of Series B
preferred stock. We have issued notices to the holders of our Series B preferred stock informing them that we intend to convert the shares, and if not rescinded the conversion will become
effective on November 24, 2008. As of November 5, 2008, there were 132,895 shares of Series B preferred stock outstanding, and these shares will be converted into 13,289,500
shares of our common stock. For a description of our Series A preferred stock and Series B preferred stock, see Note 6Stockholders' Equity in the notes to
consolidated financial statements contained in our annual report on Form 10-K for the year ended December 31, 2007.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. STOCKHOLDERS' EQUITY (Continued)

At
September 30, 2008, there were 42,105 shares of Series A preferred stock outstanding and 132,895 shares of Series B preferred stock outstanding. At
December 31, 2007, there were 47,105 shares of Series A preferred stock outstanding and 127,895 shares of Series B preferred stock outstanding, all of
which were issued in connection with raising cash to fund the MemberHealth acquisition and to provide us with capital to support our organic growth.

On
April 23, 2008, upon the request of Welsh, Carson, Anderson & Stowe X, L.P., which we call "WCAS X," and pursuant to the securities purchase
agreement dated May 7, 2007 between us, WCAS X and other parties, a copy of which was included as Exhibit 10.1 to our current report on Form 8-K, dated
May 11, 2007, we issued to WCAS X 5,000 shares of our Series B participating convertible preferred stock, par value $1.00 per share, in exchange for a like number of shares of our
Series A participating convertible preferred stock. The shares of Series A preferred stock exchanged by WCAS X had been issued and sold to WCAS X in connection with the
previously announced private placement of Series A preferred stock and Series B preferred stock to WCAS X and other investors that closed on May 15, 2007.



We currently have authorized for issuance 200 million shares of voting common stock, par value $0.01 per share. Changes in the
number of shares of common stock issued were as follows:

Nine months ended September 30,

2008

2007Common stock outstanding, beginning of period


74,952,177


59,890,500Return of stock issued and stock issued in connection with MemberHealth acquisition (See Note 4Business Combinations)


(2,027,071
)

14,175,000Stock options exercised


372,237


528,930Agent stock award





2,543Stock purchases pursuant to agents' stock purchase and deferred compensation plans


47,657


22,243Common stock outstanding, end of period


73,345,000


74,619,216




We currently have authorized for issuance 30 million shares of non-voting common stock, par value $0.01 per share.
None of this class of stock is, or has been, issued.



We have approved share repurchase plans with an estimated aggregate 3.8 million shares of our common stock available for
repurchase. In February 2008, our board of directors approved the repurchase of up to $50 million of our common shares during an 18-month period beginning on
February 18, 2008. In June 2008, Universal American Corp. announced that our Board of Directors has approved the repurchase of up to an additional $50 million of the Company's
common shares. Through September 30, 2008, we have repurchased 4.7 million shares of our common stock for an aggregate amount of $53.4 million, under these programs. We are not
obligated to repurchase any specific number of shares under the programs or to make repurchases at any specific time or price.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. STOCKHOLDERS' EQUITY (Continued)

Changes in treasury stock were as follows:

For the nine months ended September 30,2008

2007Shares

Amount

Weighted
Average
Cost Per
Share

Shares

Amount

Weighted
Average
Cost Per
Share(In thousands)

(In thousands)Treasury stock beginning of year


285,545

$
4,258

$
14.91


712,868

$
10,626

$
14.91Shares repurchased


4,715,885


53,400


11.32








Shares distributed in the form of employee bonuses


(119,312
)

(1,474
)

12.36


(134,823
)

(2,010
)

14.91Treasury stock, end of period


4,882,118

$
56,184

$
11.51


578,045

$
8,616

$
14.91




The components of accumulated other comprehensive loss are as follows:

September 30,
2008

December 31,
2007(In thousands)Net unrealized losses on investments

$
(42,121
)
$
(532
)Deferred acquisition cost adjustment


7,963


224Foreign currency translation gains


416


485Fair value of cash flow swap on debt


(2,724
)

(279
)Deferred tax


12,763


36Total accumulated other comprehensive loss

$
(23,703
)
$
(66
)


9. STOCK-BASED COMPENSATION

We have various stock-based incentive plans for our employees, non-employee directors
and agents. We issue new shares upon the exercise of options granted under these stock-based incentive plans. Detailed information for activity in our stock-based incentive plans can be found in
Note 7Stock-Based Compensation to the financial statements in our annual report on Form 10-K for the year ended December 31, 2007.



Beginning January 1, 2006, we adopted FASB Statement of Financial Accounting Standards No. 123-Revised,
"Share-Based Payment," known as FAS 123-R, using the modified prospective method, and began recognizing compensation cost for share-based payments to employees and
non-employee directors based on the grant date fair value of the award, which we amortize over the grantees' service period. We elected to use the Black-Scholes valuation model to value
employee stock options, as we had done for our previous pro forma stock compensation disclosures. The adoption of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. STOCK-BASED COMPENSATION (Continued)

FAS 123-R
did not have a material effect on our method of computing compensation costs for options as compared to that used to prepare the pro forma disclosures in prior periods.

We
estimated the fair value for these options at the date of grant using a Black-Scholes option pricing model with the following range of assumptions:

For options granted in:2008

Prior yearsRisk free interest rates

1.97%  2.86%

4.01%  5.16%Dividend yields

0.0%

0.0%Expected volatility

35.60%  43.57%

35.39%  42.53%Expected lives of options (in years)

3.5  5.0

3.0  6.0


The
weighted-average grant-date fair value was $2.82 for options granted during the first nine months of 2008 and was $7.26 for options granted during the first nine months
of 2007.

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

A
summary of option activity for the nine months ended September 30, 2008 and September 30, 2007 is set forth below:

Options
(In thousands)

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term
(In years)

Aggregate
Intrinsic
Value
(In thousands)Outstanding, January 1, 2007


4,325

$
7.73


4.0Granted


1,332


19.13Exercised


(529
)

10.66Forfeited or expired


(119
)

16.11Outstanding, September 30, 2007


5,009

$
10.25


3.5

$
62,938Exercisable, September 30, 2007


3,714

$
7.37


3.2

$
57,331Outstanding, January 1, 2008


5,676

$
12.71


4.0Granted


1,172


13.94Exercised


(372
)

3.73Forfeited or expired


(43
)

17.14Outstanding, September 30, 2008


6,433

$
13.42


3.6

$
17,306Exercisable, September 30, 2008


3,710

$
9.33


2.7

$
17,118


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. STOCK-BASED COMPENSATION (Continued)

The
total intrinsic value of options exercised during the first nine months of 2008 was $3.5 million and the total intrinsic value of options exercised during the first nine
months of 2007 was $5.2 million.

As
of September 30, 2008, the total compensation cost related to non-vested awards not yet recognized was $14.3 million, which we expect to recognize over a
weighted average period of 1.4 years.

We
received cash of $1.4 million from the exercise of stock options during the first nine months of 2008 and cash of $5.6 million from the exercise of stock options during
first nine months of 2007. FAS 123-R also requires us to report the benefits of tax deductions in excess of recognized compensation cost as a financing cash flow, rather than as an
operating cash flow as required under the prior statement. We recognized $1.7 million of financing cash flows for these excess tax deductions for the nine months ended September 30, 2008
and $1.2 million for the nine months ended September 30, 2007.



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

Nine months ended September 30,2008

2007Non-vested Restricted Stock

Shares
(In thousands)

Weighted
Average
Grant-Date
Fair Value

Shares
(In thousands)

Weighted
Average
Grant-Date
Fair ValueNon-vested at beginning of period


518

$
21.06


148

$
13.60Granted


119


11.04


135


19.43Vested


(81
)

16.03


(58
)

12.12Forfeited











Non-vested at end of period


556

$
19.65


225

$
17.46


The
total fair value of shares of restricted stock vested during the nine months ended September 30, 2008 was $1.0 million and the total fair value of shares of restricted
stock vested during the nine months ended September 30, 2007 was $1.1 million.

10. STATUTORY FINANCIAL DATA

Regulatory authorities require our insurance subsidiaries to maintain minimum amounts of statutory capital and surplus. However, our insurance subsidiaries need substantially more than
these minimum amounts to meet statutory and administrative requirements of adequate capital and surplus to support the current level of their operations. Each of the insurance subsidiaries' statutory
capital and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. STATUTORY FINANCIAL DATA (Continued)

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, known as NAIC, imposes regulatory risk-based capital or RBC requirements on life insurance enterprises. At September 30, 2008, all of our insurance subsidiaries
maintained ratios of total adjusted capital to RBC in excess of the "authorized control level." The combined statutory capital and surplus, including asset valuation reserve, of our insurance
subsidiaries totaled $473.0 million at September 30, 2008 and $486.1 million at December 31, 2007. For the nine months ended September 30, 2008, the insurance
subsidiaries generated a combined statutory net loss of $2.8 million. For the nine months ended September 30, 2007, the insurance subsidiaries generated combined statutory net income of
$69.6 million.

Regulatory
authorities also require our health plan subsidiaries to maintain minimum amounts of capital and surplus, and these subsidiaries are also subject to RBC requirements. At
September 30, 2008, the statutory capital and surplus of each of our health plan affiliates exceeds its minimum requirement and its RBC is in excess of the "authorized control level." The
combined statutory capital and surplus for our health plan affiliates was $83.4 million at September 30, 2008 and $64.3 million at December 31, 2007. Combined statutory net
income for our health plan affiliates was $22.4 million for the nine months ended September 30, 2008 and $10.1 million for the nine months ended September 30, 2007.

11. LOAN PAYABLE



In connection with the MemberHealth transaction, we refinanced our amended credit facility and revolving credit facility with a new
credit facility consisting of a $350 million term loan and a $150 million revolver. For a description of the MemberHealth transaction, see Note 4Business Combinations
above. We used a portion of the proceeds from the refinancing to repay in full the amounts outstanding on our previous credit facilities. Interest under the new credit facility is currently based on
LIBOR plus a spread of 62.5 basis points. In addition, we currently pay a commitment fee on the unutilized revolving loan facility at an annualized rate of 10 basis points. In accordance with the
credit agreement for the new credit facility, the spread and fee are determined based on our consolidated leverage ratio. Effective September 30, 2008, the interest rate on the term loan
portion of the new credit facility was 3.42%. We had not drawn on the revolving loan facility as of the date of this report. As a result of the value received pursuant to the settlement agreement
discussed in Note 4, on April 23, we prepaid $25 million of principal under the new facility, under an approved waiver.

Under
the terms of the new credit facility, we must make principal repayments quarterly at the rate of $3.5 million per year over a five-year period with a final
payment of $308.4 million due upon

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

11. LOAN PAYABLE (Continued)

maturity
in September, 2012. The following table shows the schedule of principal payments remaining on the new credit facility as of September 30, 2008:

2007 Credit
Facility(In thousands)2008 (remainder of the year)

$
8752009


3,5002010


3,5002011


3,5002012


310,125$
321,500




On January 18, 2007, we requested and received, from the administrative agent for the lenders under our old credit facility, an
additional short-term revolving credit facility of $50.0 million. On March 13, 2007, we drew down all $50.0 million of the new short-term revolving credit
facility. This new short-term revolving credit facility had a maturity date of September 30, 2007 and bore interest at a spread of 75 basis points over the three month LIBOR rate.
The initial rate was 6.1%. On July 18, 2007, we fully repaid the $50.0 million balance on this revolving credit facility, including accrued interest of $0.3 million.



We made regularly scheduled principal payments of $2.6 million plus the $25.0 million prepayment discussed above during
the nine months ended September 30, 2008 and regularly scheduled principal payments of $2.6 million during the nine months ended September 30, 2007, in connection with our credit
facilities. During 2007, we repaid the $87.9 million balance outstanding on our old credit facility in connection with the refinancing described above.

We
paid interest of $10.7 million during the nine months ended September 30, 2008 and $6.2 million during the nine months ended September 30, 2007, in
connection with our credit facilities.

12. OTHER LONG TERM DEBT

We have formed separate statutory business trusts, each of which exists 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 issued by us and engaging in only those activities necessary
or incidental to the issuance and payment of these securities. In accordance with the adoption of FASB Interpretation No. 46(R), "Consolidation of Variable Interest Entities," we do not
consolidate the trusts. In March, 2007 we issued $50 million of trust preferred securities at a fixed interest rate of 7.7%. As of September 30, 2008, the trusts have a combined
outstanding balance of $110.0 million in thirty year trust preferred securities.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

12. OTHER LONG TERM DEBT (Continued)

We
paid $6.3 million in interest in connection with the junior subordinated debentures issued in connection with the trust preferred securities during the nine months ended
September 30, 2008, and $6.3 million during the nine months ended September 30, 2007.

13. DERIVATIVE INSTRUMENTSCASH FLOW HEDGE

On December 4, 2007, we entered into two separate interest rate swap agreements, one with Citibank, and one with Calyon Corporate and Investment Bank to hedge the variability of
cash flows to be paid under the new credit facility described in Note 11Loan Payable above. In entering into the swap with Citibank, we agreed to swap our floating rate interest
payment based on the floating three-month LIBOR base rate on a notional amount of $125 million in exchange for a fixed interest rate payment based on a 4.14% locked-in fixed rate.
In entering into the swap with Calyon, we agreed to swap our floating rate interest payment based on the floating three-month LIBOR base rate on a notional amount of $125 million in exchange
for a fixed interest rate payment based on a 4.13% locked-in fixed rate. The objective of the hedges is to eliminate the variability of cash flows in the interest payments on the a
combined $250 million amount of the variable rate term loan portion of our new credit facility, which is due to changes in the LIBOR base rate, through September 2012. We expect changes
in the cash flows of the interest rate swap to exactly offset the changes in cash flows from interest rate payments attributable to fluctuations in the LIBOR base rate on the $250 million
portion of the variable rate term loan portion of our new credit facility. The combined fair value of these swaps was $2.7 million liability at September 30, 2008. We have reflected this
fair value in other liabilities. Based on the fact that, at inception, the critical terms of the hedging instrument and the hedged forecasted transaction were the same, we have concluded that we
expect changes in cash flows attributable to the risk being hedged to be completely offset by the hedging derivative, and have designated these swaps as cash flow hedges. As a result, we reflected the
unrealized loss on these hedges in accumulated other comprehensive loss. We will perform subsequent assessments of hedge effectiveness by verifying and documenting whether the critical terms of the
hedging instrument and the forecasted transaction have changed during the period, rather than by quantifying the relevant changes in cash flows.

Effective
September 4, 2003, we entered into a swap agreement whereby we pay a fixed rate of 6.7% on a $15.0 million notional amount relating to the December 2002
trust preferred securities issuance, in exchange for a floating rate of LIBOR plus 400 basis points, capped at 12.5%. This swap contract expired in December 2007. Effective April 29,
2004, we entered into a second swap agreement whereby we pay a fixed rate of 6.98% on a $20.0 million notional amount relating to the October 2003 trust preferred securities issuance, in
exchange for a floating rate of LIBOR plus 395 basis points, capped at 12.45%. This swap contract expired in October 2008. The fair value of this swap was $0 at September 30, 2008 and
$0.3 million at December 31, 2007 and is reflected in other assets. During the nine months ended September 30, 2008, we reported a net $0.3 million in realized gains
relating to the increase in the fair value of the cash flow swap agreement. During the nine months ended September 30, 2007, we
reported a realized loss of $0.6 million relating to the reduction in the fair value of the cash flow swap agreement.

35

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14. COMMITMENTS AND CONTINGENCIES



Plaintiff Arthur Tsutsui filed a derivative action on December 30, 2005, index no. 05-22523, in the Supreme
Court for New York State, Westchester County. The defendants in the Tsutsui Action were our officers Richard A. Barasch, Robert A. Waegelein and Gary W. Bryant, as well as all of
the directors sitting on our board of directors as of the time the complaint was filed. The Tsutsui action alleged that the same alleged misstatements that were the subject of a prior action, and that
had been dismissed after the commencement of the Tsutsui action, constituted a breach of fiduciary duty by the officer defendants and the directors that caused us to sustain damages. The Tsutsui
action also sought recovery of any proceeds derived by the officer defendants from the sale of our stock that was in breach of their fiduciary duties. On August 17, 2006, the Court issued an
order staying the case until such time, among others, as the prior action was fully and finally resolved or settled.

Despite
the dismissal of the prior action with prejudice, the plaintiff in the Tsutsui action declined to dismiss the complaint in that case. Accordingly, the defendants filed a motion
to dismiss the complaint
for failure to state a claim, as well as on other grounds. The Court has granted this motion. The plaintiff has filed, but has not yet perfected, a notice of appeal; the deadline for perfecting this
notice of appeal, which is necessary to permit the appeal to proceed, is December 26, 2008.



On July 25, 2007, plaintiffs filed a purported class action entitledElizabeth A. Conolly, Thomas
McCormack, Shelly Z. Zhang, Green Meadows Partners, James Stellato and Rocco Sorrentino vs. Universal American Financial Corporation, Richard A. Barasch, Lee Equity Partners LLC,
Perry Capital LLC, Union Square Partners Management LLC, Welsh, Carson, Anderson & Stowe, Barry Averill, Bradley E. Cooper, Mark M. Harmeling, Bertram Harnett,
Linda H. Lamel, Eric W. Leathers, Patrick J. McLaughlin, Robert A. Spass, and Robert F. Wright, index no. 07-13422, in the
Supreme Court for New York State, Westchester County. The complaint alleged that



The
plaintiffs sought, among other things, an injunction against the consummation of the transactions and damages in an amount to be determined.

On
May 6, 2008, the parties entered into a stipulation of settlement dated as of May 1, 2008, pursuant to which they have agreed to settle this action. The settlement
stipulation provides for the amendment of our by-laws to require specified procedures in the event of related party transactions described in the amendment, and to require that we maintain
a committee that includes at least one independent member of our board of directors to oversee the process of preparing bids for the MemberHealth Part D plans. The stipulation also provides for
the payment of the plaintiffs' legal fees in an amount not to exceed $800,000. Our directors and officers insurance carrier has provisionally

36

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14. COMMITMENTS AND CONTINGENCIES (Continued)

agreed
to pay 75% of this amount. The payment of the plaintiffs' legal fees and other terms of the settlement were subject to the approval of the Court, which it granted in an order dated
October 8, 2008. However, the Court reserved granting the portion of the motion awarding plaintiffs' legal fees, which it plans to take up in a hearing on December 5, 2008. Shareholders
who are members of the class proposed to be certified in the settlement have received notice describing the full terms of the settlement.



We have litigation in the ordinary course of our business asserting claims for medical, disability and life insurance benefits and
other matters. In some cases, plaintiffs seek punitive damages. We believe that after liability insurance recoveries, none of these actions will have a material adverse effect on our results of
operations or financial condition.

37

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

15. OTHER COMPREHENSIVE LOSS

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

Three months ended September 30,2008

2007Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount

Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount(In thousands)Net unrealized losses arising during the year (net of SFAS 115 reserve adjustment for deferred acquisition costs)

$
(35,865
)
$
(12,552
)
$
(23,313
)
$
(9,249
)
$
(3,238
)
$
(6,011
)Reclassification adjustment for losses included in net income


12,141


4,249


7,892


519


182


337Net unrealized losses


(23,724
)

(8,303
)

(15,421
)

(8,730
)

(3,056
)

(5,674
)Cash flow hedge


(2,271
)

(795
)

(1,476
)







Foreign currency translation adjustment


(39
)

(14
)

(25
)

116


41


75Other comprehensive loss

$
(26,034
)
$
(9,112
)
$
(16,922
)
$
(8,614
)
$
(3,015
)
$
(5,599
)




Nine months ended September 30,2008

2007Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount

Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount(In thousands)Net unrealized losses arising during the year (net of SFAS 115 reserve adjustment for deferred acquisition costs)

$
(88,284
)
$
(30,899
)
$
(57,385
)
$
(21,241
)
$
(7,434
)
$
(13,807
)Reclassification adjustment for losses (gains) included in net income


54,434


19,052


35,382


(1,122
)

(393
)

(729
)Net unrealized losses


(33,850
)

(11,847
)

(22,003
)

(22,363
)

(7,827
)

(14,536
)Cash flow hedge


(2,445
)

(856
)

(1,589
)







Foreign currency translation adjustment


(69
)

(24
)

(45
)

247


86


161Other comprehensive loss

$
(36,364
)
$
(12,727
)
$
(23,637
)
$
(22,116
)
$
(7,741
)
$
(14,375
)


16. UNCONSOLIDATED SUBSIDIARY

During 2005, we entered into a strategic alliance with Caremark and created PDMS, which is 50% owned by us and 50% owned by Caremark. PDMS principally performs marketing and risk
management services on behalf of our Prescription PathwaySM PDPs and Caremark, for which it receives fees and other remuneration from our Prescription PathwaySM PDPs and
Caremark. We do not control PDMS and therefore we have not consolidated PDMS in our financial statements. We account for our investment in PDMS on an equity basis and reflect it in other assets. Our
investment in PDMS was

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

16. UNCONSOLIDATED SUBSIDIARY (Continued)

$12.9 million
at September 30, 2008 and $1.6 million at December 31, 2007. We reflect our share in the income or loss of PDMS in equity in earnings of unconsolidated
subsidiary. Our share in the net income of PDMS was $20.4 million and $12.8 million for the three months ended September 30, 2008 and 2007, respectively. Our share in the net
income of PDMS was $51.8 million and $39.1 million for the nine months ended September 30, 2008 and 2007, respectively. PDMS made distributions to its owners aggregating
$81.0 million during the nine months ended September 30, 2008. Our share of those distributions was $40.5 million.

The
condensed financial information for 100% of PDMS is as follows:

September 30,
2008

December 31,
2007Unaudited
(In thousands)AssetsCash and investments

$
685

$
701Other


26,041


6,071Total assets

$
26,726

$
6,772Liabilities and EquityAccrued expenses and other

$
922

$
3,530Equity


25,804


3,242Total liabilities and equity

$
26,726

$
6,772




Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007(Unaudited)Total revenue

$
41,458

$
26,944

$
105,901

$
81,211Total expenses


562


1,368


2,339


2,989Net income

$
40,896

$
25,576

$
103,562

$
78,222


17. BUSINESS SEGMENT INFORMATION

Our business segments are based on product and consist of



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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

17. BUSINESS SEGMENT INFORMATION (Continued)



We
also report the activities of our holding company in a separate segment. We have made reclassifications to conform prior year amounts to the current year presentation. A description
of these segments follows:

Senior Managed CareMedicare AdvantageThe Senior Managed
CareMedicare Advantage segment contains the operations of our initiatives in managed care for seniors.



Medicare Part DThis segment consists of



The
growth in our Medicare Part D business has resulted in an increase in the level of seasonality in our reported results during a given calendar year. This is due to the uneven
nature of the standard benefit design under Medicare Part D. As a result, this business generally sees higher claims experience in the first two quarters of the year while beneficiaries are in
the deductible and initial coverage phases of the benefit design. As the beneficiary reaches the coverage gap and catastrophic phases of the benefit design, the plan experiences lower claims liability
which is generally in the last two quarters of the year, resulting in a pattern of increasing reported net income attributable to the Part D business.

40

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

17. BUSINESS SEGMENT INFORMATION (Continued)

Traditional InsuranceThis segment consists of



Senior Administrative ServicesOur senior administrative services subsidiary acts as a third party administrator and service provider of
senior market insurance products and geriatric care management for both affiliated and unaffiliated insurance companies. This business provides the following services:



CorporateThis segment reflects the activities of our parent holding company, such as debt service, senior executive compensation, and
compliance with requirements resulting from our status as a public company.

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

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

17. BUSINESS SEGMENT INFORMATION (Continued)

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

Three months ended September 30,2008

2007Revenue

Income
(Loss)
Before
Income
Taxes

Revenue

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

$
615,544

$
44,077

$
529,694

$
16,476Medicare Part D


397,952


49,196


87,999


23,595Traditional Insurance


111,175


3,099


126,642


5,052Senior Administrative Services


20,823


5,034


27,289


6,388Corporate


560


(12,125
)

1,057


(8,072
)Intersegment revenues


(15,466
)




(21,211
)

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


(12,141
)

(12,141
)

(519
)

(519
)Equity in earnings of unconsolidated subsidiary(2)


(20,448
)




(12,788
)

Total

$
1,097,999

$
77,140

$
738,163

$
42,920




Nine months ended September 30,2008

2007Revenue

Income
(Loss)
Before
Income
Taxes

Revenue

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

$
1,805,412

$
77,813

$
1,405,885

$
42,816Medicare Part D


1,498,128


30,210


280,260


37,782Traditional Insurance


346,751


6,268


390,808


8,395Senior Administrative Services


65,537


17,442


79,149


17,715Corporate


2,664


(26,911
)

2,965


(23,469
)Intersegment revenues


(47,453
)




(60,985
)

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


(54,434
)

(54,434
)

1,122


1,122Equity in earnings of unconsolidated subsidiary(2)


(51,781
)




(39,111
)

Total

$
3,564,824

$
50,388

$
2,060,093

$
84,361


---

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

17. BUSINESS SEGMENT INFORMATION (Continued)

Identifiable assets by segment are as follows:

September 30, 2008

December 31, 2007(In thousands)Traditional Insurance

$
1,452,487

$
1,475,299Medicare Part D


1,221,008


1,313,538Senior Managed CareMedicare Advantage


1,102,775


1,050,336Senior Administrative Services


21,847


30,903Corporate


1,641,713


1,753,467Intersegment assets(1)


(1,454,627
)

(1,533,780
)Total Assets

$
3,985,203

$
4,089,763






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Table of Contents

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

Introduction

The following discussion and analysis presents a review of our Company as of September 30, 2008 and our results of operations
for the three and nine months ended September 30, 2008 and 2007. You should read the following analysis of our consolidated results of operations and financial condition in conjunction with the
consolidated financial statements and related consolidated footnotes included elsewhere in this quarterly report on Form 10-Q as well as the consolidated financial statements and
related consolidated footnotes and the Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year
ended December 31, 2007. You should also read the following analysis in conjunction with the Risk Factors contained in the current report on
Form 8-K that we filed with the Securities and Exchange Commission on August 8, 2008, as supplemented by the risk factors set forth in Part II, Item 1A "Risk
Factors" below.

Overview

As a result of the MemberHealth acquisition and Medicare Advantage expansion discussed in the notes to our financial statements set
forth above, we have modified the way we manage and report our business compared to that reported in the prior year. Our Senior Managed CareMedicare Advantage segment remains unchanged
and we continue to provide separate information on the results of our PFFS and HMO businesses contained in this segment. In addition, we are now including separate information regarding development of
our preferred provider organization, or PPO, within this segment. We have split Part D from our Senior Market Health segment and formed a new segment to include both our Prescription
PathwaySM product and our Community CCRxSM product. We have combined the remaining former Senior Market Health segment, primarily Medicare supplement, with the former
Specialty Health and Life & Annuity segments to form a new combined segment, Traditional Insurance. The Senior Administrative Services segment remains unchanged and we continue to report the
corporate activities of our holding company in a separate segment. We have made reclassifications to conform prior year amounts to the current year presentation. We began to use this segment reporting
structure with our annual report on Form 10-K for the year ended December 31, 2007. See "Note 17Business Segment Information" in our consolidated
financial statements included in this quarterly report on Form 10-Q for a description of our segments.

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



Critical Accounting Policies

We have prepared our consolidated financial statements in accordance with U.S. generally accepted accounting principles, known as
U.S. GAAP. The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts of

44

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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, we may revise the recorded estimates and reflect them in operating results. Actual results could differ from those
estimates. The accounts that, in our judgment, are most critical to the preparation of our financial statements are:



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 actuarial assumptions that are
consistent with actuarial assumptions we use in the pricing of our products. For our accident and health insurance business, we establish an active life reserve for expected future policy benefits,
plus a liability for due and unpaid claims and incurred but not reported claims. Our net income depends upon the extent to which our actual claims experience is consistent with the assumptions we used
in setting our reserves and pricing our policies. If our assumptions with respect to future claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would
need to increase our liabilities, resulting in reduced net income and shareholders' equity.

A
summary of our liabilities by category is presented in the following table:

Liability Type

September 30, 2008

December 31, 2007Amount

% of
Total
Policy
Liabilities

Amount

% of
Total
Policy
Liabilities($ in thousands)Policyholder account balances

$
406,043


22
%
$
434,859


24
%Future policy benefit reserves:Traditional life insurance


209,680


11
%

202,258


11
%Accident and health


414,079


23
%

414,192


23
%Total future policy benefit reserves


623,759


34
%

616,450


34
%Policy and contract claimsaccident and health:Due and unpaid claims


510,944


28
%

435,073


24
%Incurred but not reported claims ("IBNR")


272,899


15
%

302,116


17
%Total accident and health claim liabilities


783,843


43
%

737,189


41
%Policy and contract claimslife


10,378


1
%

12,213


1
%Total policy liabilities

$
1,824,023


100
%
$
1,800,711


100
%


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Policyholder account balances represent the balance that accrues to the benefit of the policyholder, otherwise known as the account
value, as of the financial statement date. Account values increase to reflect additional deposits received and interest credited based on the account value. Account values decline to reflect
surrenders and other withdrawals, including withdrawals relating to the cost of insurance and expense charges. We review the interest crediting rates periodically and adjust them with certain minimum
levels below which the crediting rate cannot fall as deemed necessary.



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



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

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

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



The policy and contract claims liability for our accident and health policies reflect a liability for unpaid claims, such as claims in
the course of settlement, as well as a liability for incurred but not yet

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reported
claims, known as IBNR. Our accident & health claims liability by major product grouping is as follows:

Accident & Health Claims Liability

Direct and Assumed

Net of Reserves Ceded to
ReinsurersSeptember 30,
2008

% of
Total
Policy
Liabilities

December 31,
2007

% of
Total
Policy
Liabilities

September 30,
2008

December 31,
2007($ In thousands)Due & unpaid claims:Medicare Part D

$
426,930


23
%
$
352,688


20
%
$
410,610

$
336,218Medicare AdvantageHMO


74,403


4
%

59,058


3
%

70,779


53,563Otherspecialty


9,611


1
%

23,327


1
%

8,803


9,106Total due & unpaid claims


510,944


28
%

435,073


24
%

490,192


398,887IBNR:Medicare supplement


46,314


2
%

46,834


3
%

33,088


33,653Medicare AdvantagePFFS


217,247


12
%

246,048


13
%

215,976


240,832Otherspecialty


9,338


1
%

9,234


1
%

7,424


7,240Total IBNR


272,899


15
%

302,116


17
%

256,488


281,725Total accident and health claim liabilities

$
783,843


43
%
$
737,189


41
%
$
746,680

$
680,612


The
following factors can affect these reserves and liabilities:



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

We
develop our estimate for IBNR using actuarial methodologies and assumptions, primarily based upon historical claim payment and claim receipt patterns, as well as historical medical
cost trends. Depending on the period for which we are estimating incurred claims, we apply a different method in determining our estimate. For periods prior to the most recent three months, the key
assumption used in estimating our IBNR is that the completion factor pattern, adjusted for known changes in claim inventory levels and claim payment processes, remains consistent over a specified
rolling period. This period, ranging from 3 to 12 months, is dependent on the type of business valued. Completion factors

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result
from the calculation of the percentage of claims incurred during a given period that have historically been adjudicated as of the reporting period. For the most recent three months, we estimate
the incurred claims primarily from a trend analysis based upon per member per month, known as PMPM, claims trends developed from our historical experience in the preceding months, adjusted for known
changes in estimates of recent hospital and drug utilization data, provider contracting changes, changes in benefit levels, product mix, and seasonality.

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

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



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



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



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

Our
historical assumptions have not varied significantly during the nine months ended September 30, 2008 from the actual amounts experienced to the extent that the variance
resulted in a material adverse impact on reserves and net income, other than $32.9 million favorable development of 2007 claims experience on our PFFS business during the nine months ended
September 30, 2008, which we discuss in connection with Segment ResultsSenior Managed CareMedicare Advantage, later in

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this
section. We have included a summary of the activity in our accident & health policy and contract claim liability in Note 9Accident & Health Policy and Contract
Claim Liabilities in the notes to the consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2007.



The following table illustrates the sensitivity of our accident and health IBNR payable at September 30, 2008 to identified
reasonably possible changes to the estimated weighted average completion factors and health care cost trend rates. However, it is possible that the actual completion factors and health care cost trend
rates will develop differently from our historical patterns and therefore could be outside of the ranges illustrated below.

Completion Factor(1):

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

Increase
(Decrease) in
Net Accident
& Health
IBNR

(Decrease)
Increase
in Factor

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

$
2,144


(3
)%
$
(11,513
)(2)%

$
1,429


(2
)%
$
(7,675
)(1)%

$
714


(1
)%
$
(3,838
)1%

$
(714
)

1
%
$
3,8502%

$
(1,427
)

2
%
$
7,6993%

$
(2,130
)

3
%
$
11,549






The liability for unpaid claims, including IBNR, reflects estimates of amounts to fully settle known reported claims as well as claims
related to insured events that we estimate have been incurred, but have not yet been reported to us.



We defer the following costs of acquiring new business:



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We
refer to these costs as deferred acquisition costs or DAC. For interest-sensitive life and annuity products, we amortize these costs in relation to the present value of expected gross
profits on the policies arising principally from investment, mortality and expense margins in accordance with FAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments." The determination of expected gross profits for interest-sensitive products is an inherently
uncertain process that relies on assumptions regarding:



It
is possible that the actual profits from the business may vary materially from the assumptions used in the determination and amortization of DAC.

For
other life and health products, we amortize DAC in proportion to premium revenue using the same assumptions used in estimating the liabilities for future policy benefits in
accordance with FAS No. 60, "Accounting and Reporting by Insurance Enterprises." Under FAS No. 60, when a policy lapses, we must amortize the remaining balance of DAC relating to that
policy as of the date of the lapse. During 2007, we experienced an increase in the amount of lapses on our Medicare supplement business, resulting in an increased level of DAC amortization. During
2008, we have seen improved persistency on this business, requiring less amortization of DAC.

We
write off deferred policy acquisition costs to the extent that we determine that the present value of future policy premiums and investment income or the net present value of expected
gross profits would not be adequate to recover the unamortized costs.



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 we select depends upon the general market conditions at the time of
the acquisition and the inherent risk in the transaction. We allocate purchase consideration in excess of the fair value of net assets acquired, including the present value of future profits and other
identified intangibles, for a specific acquisition, to goodwill. We perform the allocation of purchase price in the period in which we consummate the purchase. Adjustments, if any, in subsequent
periods relate to resolution of pre-acquisition contingencies, tax matters and refinements made to estimates of fair value in connection with the preliminary allocation.

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Set
forth below are our annual amortization policies for each of the main categories of amortizing intangible assets:

Description

Weighted Average Life At Acquisition

Amortization BasisInsurance policies acquired


7-9

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


30

Straight line over the estimated life of the asset.Membership base acquired


7-10

Straight line over the estimated weighed average life of the membership base.Trademarks/trade names


9

Straight line over the estimated weighted average life of the trademarks/trade names.Licenses


15

Straight line over the estimated weighed average life of the licenses.Provider contracts


10

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


7

Straight line over the length of the agreement.Administrative service contracts


6

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


10

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


At
least annually, we review 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 these assets is not recoverable, in which case we would recognize an impairment charge. We believe that no impairment of the present value of future profits, goodwill or other
identified intangibles existed as of September 30, 2008.



The fair value for the majority of our fixed maturity and equity securities is determined by third party pricing service market prices.
Third party pricing services typically use the following principal inputs:



Based
on the typical trading volumes and the lack of quoted market prices for fixed maturities, third party pricing services will normally derive the security prices through recent reported trades for

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

We
have analyzed the third party pricing services' valuation methodologies and related inputs, and have also evaluated the various types of securities in our investment portfolio to
determine an appropriate SFAS 157 fair value hierarchy level based upon trading activity and the observability of market inputs. Based on the results of this evaluation and investment class
analysis, we classified each price into Level 1, 2, or 3. We classified most prices provided by third party pricing services into Level 2 because the inputs used in pricing the
securities are market observable.

The
following table presents the fair value of fixed maturity and equity securities that we carried at fair value by SFAS 157 hierarchy levels, as of September 30, 2008 (in
thousands):

Fair
Value

% of Total
Fair ValueLevel 1

$



Level 2


1,041,992


99.5
%Level 3


5,259


0.5
%$
1,047,251


100.0
%


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

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

The
following table presents the fair value of the asset sectors within the SFAS 157 Level 3 securities as of September 30, 2008 (in thousands):

Fair
Value

% of Total
Fair ValueMortgage and asset-backed securities

$
2,947


56.0
%Corporate


1,822


34.7
%Equity securities


490


9.3
%Total Level 3 securities

$
5,259


100
%


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

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We regularly evaluate the amortized cost of our investments compared to the fair value of those investments. We generally recognize
impairments of securities when we consider a decline in fair value below the amortized cost basis to be other-than-temporary. The evaluation includes the intent and ability to
hold the security to recovery, and is considered on an individual security basis. We recognize impairment losses when we determine declines in fair values based on quoted prices to be
other-than-temporary.

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



Our
accounting policy requires that we assess a decline in the value of a security below its cost or amortized cost basis to determine if the decline is other-than-temporary.
If we deem the security to be other-than-temporarily impaired, we record a charge in net realized capital losses equal to the difference between the fair value and cost or
amortized cost basis of the security. The fair value of the other-than-temporarily impaired investment becomes its new cost basis. We have a security monitoring process
overseen by our Investment Committee, consisting of investment and accounting professionals that identify securities that, due to specified characteristics, as described below, we subject to an
enhanced analysis on a quarterly basis.

We
review our fixed maturity securities at least quarterly to determine if an other-than-temporary impairment is present based on quantitative and qualitative
factors. The primary factors we consider in evaluating whether a decline in value is other-than-temporary are:



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



We hold securities with exposure to subprime residential mortgages. Subprime mortgage lending is the origination of residential
mortgage loans to customers with weak credit profiles. The slowing U.S. housing market, greater use of mortgage products with low introductory interest rates, generally referred to as "teaser rates,"
and relaxed underwriting standards for some originators of subprime loans have recently led to higher delinquency and loss rates, especially with regards to securities issued in

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2006
and 2007 that are collateralized by interests in mortgages originated in those years; the year of issuance is known as the vintage year. These factors have caused a significant reduction in
market liquidity and repricing of risk, which has led to a decrease in the market valuation of these securities sector wide.

As
of September 30, 2008, we held subprime securities with par values of $141 million, an amortized cost of $56 million and a market value of $49 million
representing approximately 3.0% of our cash and invested assets, with collateral comprised substantially of first lien mortgages. The majority of these securities are in senior or senior-mezzanine
level tranches, which have preferential liquidation characteristics, and have an average rating of A+ by Standard & Poors, a division of the McGraw Hill Companies, Inc., known as S&P, or
equivalent. The following table presents our exposure to subprime residential mortgages by vintage year.

Vintage Year

Amortized
Cost

Fair
Value

Unrealized Gain
(Loss)(In thousands)2003

$
6,510

$
5,215

$
(1,295
)2004


3,496


3,052


(444
)2005


25,4601


18,676


(6,784
)2006


15,355


16,226


8712007


5,592


5,881


289Totals

$
56,413

$
49,050

$
(7,363
)


We
continuously review our subprime holdings stressing multiple variables, such as cash flows, prepayment speeds, default rates and loss severity, and comparing current base case loss
expectations to the loss required to incur a principal loss, or breakpoint. This breakpoint currently exceeds the base case loss expectation for all but one holding to varying degrees. We expect
delinquency and loss rates in the subprime mortgage sector to continue to increase in the near term but at a decreasing rate. Those securities with a greater variance between the breakpoint and base
case can withstand this further deterioration. However, holdings where the base case is closer to the breakpoint, principally holdings from the 2006 and 2007 vintage years, are more likely to incur a
principal loss. We utilize third party pricing services to provide or estimate market prices. Third party pricing services typically use the following principal inputs:



If
there are no recent reported trades, the third party pricing services may use matrix or model processes to develop a security price, as has recently been the case with many of our subprime
holdings.

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The
following table summarizes our other-than-temporary impairments recorded since the subprime deterioration began last year:

2008 Quarter Ended2007

March 31

June 30

September 30

2008

Cumulative(In thousands)Subprime

$
40,997

$
29,800

$
11,771

$
2,329

$
43,900

$
84,897Other structured








1,384


2,432


3,816


3,816Corporate











7,177


7,177


7,177$
40,997

$
29,800

$
13,155

$
11,938

$
54,893

$
95,890


At
December 31, 2007, we recognized an other-than-temporary impairment on fourteen 2006 and 2007 vintage year subprime holdings. As of September 30, 2008, we recognized an
additional other-than-temporary impairment on the same fourteen securities impaired at December 31, 2007 plus four additional subprime holdings. In addition, during 2008, we have recognized an
other-than-temporary impairment on four other structured securities and two corporate securities. The corporate other-than-temporary impairment includes $6.1 million on Lehman Brothers
holdings.

We
continue to review the estimated fair values indicated by pricing provided by the third party pricing services however, we cannot give assurance that there will be no further
impairments on these securities, until the market as a whole stabilizes. However, we believe that we will recover principal and interest greater than the market prices currently indicate on the
subprime and other structured securities.



We use the liability method to account for deferred income taxes. Under the liability method, we recognize deferred tax assets and
liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure
deferred tax assets and liabilities using enacted tax rates that we expect to apply to taxable income in the years in which we expect to recover or settle those temporary differences. We recognize in
income the effect on deferred tax assets and liabilities of a change in tax rates in the period that 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. We recognize increases in these valuation allowances as deferred tax expense. We reflect portions of the valuation allowances subsequently
determined to be no longer necessary as deferred tax benefits. To the extent that we established valuation allowances in conjunction with acquisitions, we first apply changes in those allowances to
increasing or decreasing the goodwill, but not below zero, or other intangibles related to the acquisition and then apply those changes as an increase or decrease in income tax expense.

We
carried valuation allowances on deferred tax assets of $3.1 million at September 30, 2008 and December 31, 2007 primarily related to the tax benefits associated
with a New York state net operating loss carryforward. At September 30, 2008, we recorded our deferred tax assets based on the amount that was more likely than not to be realized under SFAS
No. 109,Accounting for Income Taxes.

Significant Transactions and Initiatives



We entered the Medicare Advantage business in 2004 with the acquisition of Heritage Health Systems, Inc. which operates Medicare
Advantage coordinated care plans in Texas, Oklahoma and

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Wisconsin.
We have continued to increase our marketing of Medicare Advantage plans for Medicare HMOs and PFFS.

As
of September 30, 2008, our HMO enrollment has increased to approximately 54,700 members from 46,000 members at December 31, 2007. We elected not to renew our Medicare
Advantage HMO contract in Florida for 2008, and, as of January 1, 2008, we had no HMO membership in Florida.

Through
our insurance subsidiaries American Progressive, Pyramid Life and Marquette we currently offer our PFFS products in 47 states in 2008, up from 35 states at December 31,
2007. As of September 30, 2008, our enrollment in PFFS plans has decreased to approximately 188,000 members, compared with 190,000 members at December 31, 2007.

In
late 2007, we began efforts to cultivate provider relationships to establish Medicare Advantage preferred provider organizations, known as PPOs. In December 2007, we advised
CMS of our intent to market PPO products and as September 30, 2008, we have received approval from CMS to launch PPO plans in 9 states, across 15 markets. Marketing for these PPO plans began on
October 1, 2008.



Effective January 1, 2006, private insurers were permitted to sponsor insured stand-alone PDPs pursuant to Part D, which
was established by the Medicare Modernization Act. The federal government pays a portion of the premium for this insurance, and the individuals who enroll pay the balance, if any. The federal
government will also provide additional subsidies in the form of premium support and coverage of the cost-sharing elements of the plan to specified low income Medicare beneficiaries. For
the 2008 plan year, we offered, through our insurance subsidiaries, our Community CCRxSM and Prescription PathwaySM prescription drug plans in all 34 regions designated by
CMS in which we bid. In addition, since we had a national plan bid below the benchmark in 29 and 30 regions, for Community CCRxSM and Prescription PathwaySM, respectively,
we
received auto assignment of "dual eligible" and "low income subsidy" beneficiaries who are dually eligible for Medicare and Medicaid in the regions where our bids were below the benchmark.

Through
our strategic alliance with Caremark, we retain 50% of the Medicare Part D business of our Prescription PathwaySM PDPs. PharmaCare Re reinsures the remainder
on a 50% quota share basis. Additionally, as part of the strategic alliance, we created PDMS, which is 50% owned by us and 50% owned by Caremark. PDMS principally performs marketing and risk
management services on behalf of our Prescription PathwaySM PDPs. In February 2008, we announced that the parties are terminating this strategic alliance effective
December 31, 2008. Upon termination of the strategic alliance, Caremark and Universal American will each assume responsibility for the drug benefit of specified Prescription
PathwaySM plan members to achieve an approximately equal distribution of the value of business that has been generated by the strategic alliance. We will continue to operate PDPs derived
from this business under the name PrescribaRxSM.

We
participate, on a 33.3% basis, in an unaffiliated plan with Arkansas Blue Cross and Blue Shield and PharmaCare Re. The contract for this participation terminated as of
January 1, 2008. Under the termination provisions of the contract, we received $0.8 million, an amount equal to two years of the estimated future profits generated by the block of
business, which we recorded in the first quarter 2008.



On September 21, 2007, we completed the acquisition of MemberHealth, Inc., a privately-held pharmacy benefits
manager, or PBM, and sponsor of Community CCRxSM, a national Medicare Part D plan with 1.2 million members. Prior to the acquisition, MemberHealth was a leading national
Medicare Part D sponsor, offering Medicare prescription drug plans in 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. MemberHealth, Inc. had more than
60,000

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pharmacies
in its pharmacy network and covered 98 of the top 100 medications taken by Medicare beneficiaries.

We
paid the initial purchase price of $630 million, 55% in cash and 45% in our common stock valued at $20 per share. We paid transaction costs of approximately $12 million
in cash. In addition to the purchase price, the transaction includes an additional three year earn-out tied to target earnings from the MemberHealth business. The maximum aggregate amount
potentially payable under the performance-based earn-out is $150 million, payable in cash and our common stock.

Subsequent
to December 31, 2007, we determined that expected operating income for 2008 from the MemberHealth business, which we acquired in September 2007, will be less
than previously forecast. The reason for the decline in expected income is that premium payments to MemberHealth will be lower than anticipated based upon the bids submitted to, and later accepted by
CMS from MemberHealth in June 2007 for its 2008 Part D plans. The premium payments are lower primarily as a result of incorrect information concerning the risk scores in the MemberHealth
bids. In accounting for the issue relating to the 2008 bids, we recorded an acquisition liability of $39.2 million for the below-market contract that we are amortizing into income over the
contract period, January 1, 2008 to December 31, 2008. We amortized $9.8 million of this acquisition liability in the quarter ended September 30, 2008, and
$29.5 million for the nine months ended September 30, 2008. We reflected this amortization in direct premium and policyholder fees earned in the consolidated statements of operations.

We
also discovered after December 31, 2007 that MemberHealth incorrectly calculated its expected risk corridor receivable in its first quarter 2007 financial statements, resulting
in an overstatement of pre-tax income for the first quarter of 2007 of approximately $26 million. In our financial statements for the year ended December 31, 2007 included in
our filed Annual report on Form 10-K, we adjusted the pro forma financial information to reflect the impact of this error, through an adjustment to purchase GAAP accounting, which
reduced receivables and increased goodwill by $23 million, the after-tax amount of the misstatement.

In
connection with these issues, in March 2008, we concluded a settlement agreement under which the sellers of MemberHealth delivered approximately $98 million of value,
consisting of $47 million in cash, 2,027,071 shares of our common stock and $16 million in future amounts due to the sellers, which have been forgiven. We have retired the shares.

During
the quarter ended September 30, 2008, we performed the final purchase accounting for the MemberHealth acquisition, adjusting the purchase price allocation to reflect the
final values. The adjustments posted increased goodwill by $7.9 million, primarily as a result of two significant items, the final 2007 CMS risk score adjustment and the 2007 final CMS
prescription drug event reconciliation, as discussed below.

During
the third quarter of 2008, we received the final risk score adjustments for 2007 members in our Part D plans. The risk score reflects the relative health of the member and
impacts the level of reimbursement from CMS, with a higher reimbursement for members with higher risk scores. The total adjustment for our 2007 membership reduced CMS expected payments by
$5.2 million. The estimated risk corridor impact, which reduced the receivable from CMS, was approximately $3.6 million, resulting in a net reduction of receivables of
$1.6 million. We allocated this amount to pre-acquisition and post acquisition periods to capture the portion of the adjustment impacting the opening purchase GAAP balance sheet.
Based on our analysis, we determined that $1.2 million of the reduction related to periods preceding the acquisition and $0.4 million related to periods subsequent to the acquisition. We
recorded the $1.2 million portion as an increase in goodwill and reported the $0.4 million portion as a reduction to third quarter revenues.

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The
final plan year reconciliation cannot be completed until CMS finalizes the membership eligibility data, the prescription drug event data, the plan to plan membership reconciliation
and the risk score adjustments. CMS finalized the risk score adjustment in July 2008, the prescription drug event data submission deadline was July 31, 2008, CMS completed the
Phase III or final plan to plan membership reconciliation in September 2008 and we received the final reconciliation for the 2007 Plan year in October 2008. After the receipt of
this finalized information, we reconciled the amount due to CMS. We performed the reconciliation for the pre-acquisition and post-acquisition periods to capture the portion of
the adjustment impacting the opening purchase GAAP balance sheet. Based on the reconciliation, we determined that the CMS receivable as of the date of acquisition was overstated by approximately
$10.3 million, and that the receivable relating to post-acquisition activity was understated by approximately $2.0 million. We recorded the pre-acquisition
amount, net of deferred taxes of $3.6 million, as an adjustment to goodwill and we reported the post-acquisition amount as a reduction of third quarter claims expense.

After
giving effect to the settlement and the final allocation adjustments discussed above, the excess of the purchase price over the fair value of net tangible assets acquired, adjusted
for deferred income taxes, was approximately $610.2 million.

We
expect the MemberHealth transaction to create significant strategic benefits, including the opportunity for us to build upon MemberHealth's successful pharmacy-centric business model
through its ongoing alliance with the National Community Pharmacists Association, known as the NCPA, and to introduce additional value-oriented health products and services into the market.

To
fund the cash required to close the transaction and to provide us with capital to support our organic growth, investment funds operated by Lee Equity Partners, LLC, Perry
Capital, LLC, Union Square Partners Management, LLC, the successor to Capital Z Management, LLC, and Welsh, Carson, Anderson & Stowe X, L.P., acquired
shares of our Series A and Series B preferred stock valued at $20 per equivalent share of our common stock. The preferred stock is convertible into shares of our common stock. We have
the right to convert the shares of our Series B preferred stock to common stock, in the ratio of 100 share of common stock for each share of Series B preferred stock, from and after the
first anniversary of the issuance of the shares of Series B preferred stock. We have issued notices to the holders of our Series B preferred stock informing them that we intend to
convert the shares, and if not rescinded the conversion will become effective on November 24, 2008. As of November 5, 2008, there were 132,895 shares of Series B preferred stock
outstanding, and these shares will be converted into 13,289,500 shares of our common stock. The preferred stock does not bear a dividend. See Note 8Stockholders' Equity to the
consolidated financial statements included elsewhere in this quarterly report on Form 10-Q, for additional information regarding the preferred stock. These funds invested a total of
approximately $350 million, of which they funded $100 million in the second quarter of 2007, and the remainder effective September 21, 2007. We did not register the
preferred stock under the Securities Act of 1933, as amended, and it may not be subsequently offered or sold by investors in the United States absent registration or an applicable exemption from the
registration requirement.

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Results of OperationsConsolidated Overview

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

Three months ended
September 30,

Nine Months ended
September 30,2008

2007

2008

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

$
44,077

$
16,476

$
77,813

$
42,816Medicare Part D(1)


49,196


23,595


30,210


37,782Traditional Insurance(1)


3,099


5,052


6,268


8,395Senior Administrative Services(1)


5,034


6,388


17,442


17,715Corporate(1)


(12,125
)

(8,072
)

(26,911
)

(23,469
)Net realized gains (losses) on investments


(12,141
)

(519
)

(54,434
)

1,122Income before provision for income taxes(1)


77,140


42,920


50,388


84,361Provision for income taxes


28,328


15,775


19,208


30,581Net income

$
48,812

$
27,145

$
31,180

$
53,780Earnings per common share (diluted)

$
0.56

$
0.40

$
0.35

$
0.84


---



Net income for the three months ended September 30, 2008 was $48.8 million, or $0.56 per diluted share, compared to net
income of $27.1 million, or $0.40 per diluted share for the three months ended September 30, 2007. We acquired MemberHealth on September 21, 2007 and our results for the three
months ended September 30, 2008 reflect income of $42.0 million on MemberHealth's business, which is an increase of $36.0 million over the prior year quarter. The net income for
the third quarter of 2008 includes realized investment losses of $12.1 million, relating primarily to the recognition of other-than-temporary impairments on investments,
and income taxes of $28.3 million. Net income for the third quarter of 2007 includes realized investment losses, of $0.5 million, and income taxes of $15.8 million. Our effective
tax rate was 36.7% for the third quarter of 2008, and 36.7% for the third quarter of 2007.

During
the third quarter of 2008, our PFFS, HMO and Part D plans each had performed various reconciliations with CMS for 2007 Plan year activity. During the three months ended
September 30, 2008, CMS provided an updated 2007 risk score revenue adjustment for our PFFS, HMO and Part D plans. In addition, CMS performed a PDE reconciliation with our HMO and
Part D plans. Finally, CMS performed a true up of federal reinsurance related to the 2007 Part D payment reconciliation for

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PFFS.
In the aggregate, the CMS 2007 reconciliations resulted in a net decrease to pre-tax income of $1.8 million for the period, as shown below (in millions):

2007 risk score revenue adjustment:Medicare AdvantagePFFS


0.7Medicare AdvantageHMO


4.1Part D


(1.2
)2007 PDE reconciliation:Medicare AdvantageHMO


0.2Part D


(1.1
)2007 Part D federal reinsurance true up:Medicare AdvantagePFFS


(4.5
)(1.8
)


Our
Senior Managed CareMedicare Advantage segment generated segment income before taxes of $44.1 million in the three months ended September 30, 2008, an
increase of $27.6 million compared to the three months ended September 30, 2007, primarily due to $16.3 million of net positive 2007 developments in our PFFS business, a
$4.1 million favorable variance related to the 2007 risk score adjustment recognized during the quarter as well as favorable 2008 PFFS and HMO results, partially offset by $3.5 million
of start-up costs associated with the establishment of our PPO networks.

Our
Medicare Part D income increased by $25.6 million, compared to the third quarter of 2007. We acquired MemberHealth on September 21, 2007 and our results for the
three months ended September 30, 2008 reflect income of $42.0 million on MemberHealth's business, which is an increase of $36.0 million over the prior year quarter. This is due to
the prior year quarter only reflecting the results of MemberHealth subsequent to the acquisition on September 21, 2007. This increase was partially offset by an $18.1 million decline in
the earnings generated by the Prescription PathwaySM business compared with the third quarter of 2007, primarily as a result of increases in prescription drug costs and changes in the
calculation of the government risk corridor that changes the seasonality of reported amounts

Our
Traditional Insurance segment income before taxes decreased by $2.0 million, compared to the third quarter of 2007, due primarily to decreased earnings on the specialty health
and life insurance and annuity businesses, as compared to the third quarter of 2007, partially offset by slightly increased earnings on the Medicare supplement business. The declines were primarily
due to lower investment income. The overall loss ratio for the segment was 76.8% for the quarter ended September 30, 2008, compared with 75.5% for the same period last year. Individual loss
ratios for the quarter ended September 30, 2008 were 76.9% for Medicare supplement, compared with 73.3% for the same period last year. The increase was due to higher skilled nursing facility
claims; 87.4% for specialty health, compared with 91.1% for the same period last year and 63.4% for life and annuity, compared with 67.4% for the same period last year.

Segment
income before taxes for our Senior Administrative Services segment declined by $1.4 million, or 21%, to $5.0 million for the third quarter of 2008, as compared to
the same period of 2007. This decrease is primarily the result of reduced levels of unaffiliated service fee revenues.

The
loss from our Corporate segment increased by $4.1 million, or 50%, for the third quarter of 2008 compared to the third quarter of 2007. This was due primarily to increases in
other parent company expenses, net of revenues, interest costs, and the cost of stock based compensation.

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Net income for the nine months ended September 30, 2008 was $31.2 million, or $0.35 per diluted share, compared to net
income of $53.8 million, or $0.84 per diluted share for the nine months ended September 30, 2007. The net income for the first nine months of 2008 includes realized investment losses of
$54.4 million, relating primarily to the recognition of other-than-temporary impairment of investments, and income taxes of $19.2 million. Net income for the
first nine months of 2007 includes realized investment gains, of $1.1 million, relating primarily to the gain on the sale of Peninsular, and income taxes of $30.6 million. Our effective
tax rate was 38.1% for the first nine months of 2008, and 36.2% for the first nine months of 2007. Excluding realized losses, the effective tax rate for the first nine months of 2008 was 36.5%,
compared to 36.3% for the same period in 2007.

Our
Senior Managed CareMedicare Advantage segment generated segment income before taxes of $77.8 million in the nine months ended September 30, 2008, an
increase of $35.0 million compared to the same period in 2007, primarily due to growth in PFFS member months, $28.4 million
of net positive 2007 developments in our PFFS business, a $4.1 million favorable variance related to the 2007 risk score adjustment recognized during the year as well as favorable 2008 PFFS and
HMO results, partially offset by $6.3 million of start-up costs associated with the establishment of our PPO networks.

Our
Medicare Part D income decreased by $7.6 million, compared to the first nine months of 2007. We acquired MemberHealth on September 21, 2007 and our results for
the nine months ended September 30, 2008 reflect income of $13.8 million on MemberHealth's business, which is an increase of $7.9 million over the prior year period. In addition,
the year to date earnings on Prescription PathwaySM business decreased by $15.4 million compared with the first nine months of 2007, primarily as a result of increases in
prescription drug costs and changes in the calculation of the government risk corridor that changes the seasonality of reported amounts.

Our
Traditional Insurance segment income before taxes decreased by $2.1 million, compared to the first nine months of 2007, due to lower earnings on specialty health and life
insurance and annuity businesses, partially offset by increased earnings on Medicare supplement business. The declines were primarily due to lower investment income. The overall loss ratio for the
segment was 77.2% for the nine months ended September 30, 2008, compared with 75.6% for the same period last year. Individual loss ratios for the nine months ended September 30, 2008
were 76.6% for Medicare supplement, compared with 74.4% for the same period last year, due to higher skilled nursing facility claims; 89.4% for specialty health, compared with 88.8% for the same
period last year and 64.8% for life and annuity, compared with 65.6% for the same period last year.

Segment
income before taxes for our Senior Administrative Services segment decreased by $0.3 million, or 2%, to $17.4 million for the first nine months of 2008, as compared
to the same period of 2007. This decrease is primarily the result of reduced levels of unaffiliated service fee revenues.

The
loss from our Corporate segment increased by $3.4 million, or 15%, for the first nine months of 2008 compared to the first nine months of 2007. The increase was due primarily
to an increase in interest costs, and the cost of stock based compensation, partially offset by lower other parent-company expenses, net of revenues.

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Segment ResultsSenior Managed CareMedicare Advantage

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007(In thousands)Net premiums

$
610,734

$
522,276

$
1,791,862

$
1,389,224Net investment and other income


4,810


7,418


13,550


16,661Total revenue


615,544


529,694


1,805,412


1,405,885Medical expenses


488,136


438,603


1,493,222


1,163,604Amortization of intangible assets


1,014


992


3,042


2,852Commissions and general expenses


82,317


73,623


231,335


196,613Total benefits, claims and other deductions


571,467


513,218


1,727,599


1,363,069Segment income before taxes

$
44,077

$
16,476

$
77,813

$
42,816


Our
Senior Managed CareMedicare Advantage segment includes the operations of our private fee-for-service business, known as PFFS, and our coordinated
care plans, which we refer to as HMO's, which offer coverage to Medicare beneficiaries in southeastern Texas, north Texas, Oklahoma and Wisconsin. These businesses provide managed care for seniors
under a contract with CMS. Our career and independent agents currently sell PFFS through American Progressive, Pyramid Life and Marquette in approximately 3,100 counties across 47 states. Our HMO
products are sold by our career and independent agents and directly by employee representatives. In addition, beginning in 2008, this segment includes start up costs associated with the establishment
of affiliated PPO organizations.



Our Senior Managed CareMedicare Advantage segment generated segment income before taxes of $44.1 million in the
three months ended September 30, 2008, an increase of $27.6 million compared to the three months ended September 30, 2007, primarily due to $16.3 million of net positive
2007 developments in our PFFS business, a $4.1 million favorable variance related to the 2007 risk score adjustment recognized during the quarter as well as favorable 2008 PFFS and HMO results,
partially offset by $3.5 million of start-up costs associated with the establishment of our PPO networks.



Our Senior Managed CareMedicare Advantage segment generated segment income before taxes of $77.8 million in the
nine months ended September 30, 2008, an increase of $35.0 million compared to the same period in 2007, primarily due to growth in PFFS member months, $28.4 million of net
positive 2007 developments in our PFFS business, a $4.1 million favorable variance related to the 2007 risk score adjustment recognized during the year as well as favorable 2008 PFFS and HMO
results, partially offset by $6.3 million of start-up costs associated with the establishment of our PPO networks.

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PFFS

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007(In thousands)Net premiums

$
436,913

$
394,596

$
1,302,779

$
1,016,071Net investment and other income


2,713


5,339


8,407


11,005Total revenue


439,626


399,935


1,311,186


1,027,076Medical expenses


356,582


338,094


1,116,223


873,925Commissions and general expenses


53,552


52,186


152,325


133,073Total benefits, claims and other deductions


410,134


390,280


1,268,548


1,006,998Income before taxes

$
29,492

$
9,655

$
42,638

$
20,078


Membership.For a discussion of the accounting for Medicare Advantage policies, including PFFS, see
Note 2 of the notes to the consolidated financial statements in our annual report on Form 10-K There are timing differences between the addition of members to our
administrative system and the approval, or accretion, of the member by CMS before we are paid for the member by CMS. We analyze the membership in our administrative system and the enrollment provided
by CMS. Due to the significant growth of the business and limited historical experience, we recognize these timing delays and that CMS may not approve the Medicare Beneficiary for enrollment in our
plans. Although we are unable to precisely quantify the impact of any potential member change from that used in our consolidated financial results, we do not believe that any change from the amounts
reported as of September 30, 2008 is likely to be material.



Revenues.Net premiums for the PFFS business increased by $42.3 million compared to the three months ended September 30, 2007,

primarily due to an increase in the amount of premium earned per member partially offset by a reduction of revenues related to a slight decline in the number of member months and $4.5 million
revenue decline due to a CMS true up of federal reinsurance related to final 2007 Part D payment reconciliation. The member months for the three months ended September 30, 2008 decreased
to approximately 560,000 from approximately 580,000 for the three months ended September 30, 2007. Net investment and other income decreased by $2.6 million, due primarily to lower
yields of invested assets as a result of a decline in short term interest rates.

Benefits, Claims and Expenses.Medical expenses increased by $18.5 million compared to the third quarter of 2007, primarily due to the increase in the
amount of benefits incurred per member, partially offset by $20.8 million of positive 2007 reserve development. The PFFS medical loss ratio decreased to 81.6% for the third quarter of 2008 from
85.7% for the third quarter of 2007 primarily as a result of the positive development mentioned above. Backing out the impact of 2007 positive development, the medical loss ratio for the third quarter
of 2008 was 87.5%. Commissions and general expenses increased by $1.4 million compared to the third quarter of 2007 as the result of an increase in general expenses and the
write-off of uncollectible agents balances.



Revenues.Net premiums for the PFFS business increased by $286.7 million compared to the nine months ended September 30, 2007,

primarily due to growth in member months partially offset by a $4.5 million revenue decline due to a CMS true up of federal reinsurance related to final 2007 Part D payment
reconciliation. Membership decreased to approximately 188,000 as of September 30, 2008 from

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approximately
190,000 as of September 30, 2007. However, the member months for the nine months ended September 30, 2008 increased to approximately 1,686,000 from approximately 1,460,000
for the nine months ended September 30, 2007 as a result of the timing of the effective date of membership for each period. Net investment and other income decreased by $2.6 million, due
primarily to lower yields of invested assets as a result of a decline in short term interest rates.

Benefits, Claims and Expenses.Medical expenses increased by $242.3 million compared to the nine months ended September 30, 2007, primarily due to
growth in member months. Year to date 2008 results include $32.9 million of positive prior period reserve development. The PFFS medical loss ratio decreased to 85.7% for the nine months ended
September 30, 2008 from 86.0% for the nine months ended September 30, 2007. Backing out the the impact of 2007 positive development, the medical loss ratio for the first nine months of
2008 was 87.1%. Commissions and general expenses increased by $19.3 million compared to the nine months ended September 30, 2007, due primarily to the growth in business.

HMOs

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007(In thousands)Net premiums

$
173,821

$
127,680

$
489,083

$
373,153Net investment and other income


2,097


2,079


5,143


5,656Total revenue


175,918


129,759


494,226


378,809Medical expenses


131,554


100,509


377,000


289,679Amortization of intangible assets


1,014


992


3,042


2,852Commissions and general expenses


25,230


21,437


72,693


63,540Total benefits, claims and other deductions


157,798


122,938


452,735


356,071Income before taxes

$
18,120

$
6,821

$
41,491

$
22,738




Revenues.Net premiums for our HMOs increased by $46.1 million, or 36%, compared to the third quarter of 2007, primarily due to
growth in
membership combined with higher member risk scores, an increase in Part D corridor revenue and additional 2007 risk score revenue received during the quarter. Medicare membership increased to
approximately 54,700 members at September 30, 2008 from approximately 47,400 at September 30, 2007.

Benefits, Claims and Expenses.Medical expenses increased by $31.0 million, or 31%, compared to the third quarter of 2007 driven primarily by growth in
membership combined with higher claims costs associated with higher member risk scores. The member benefit ratio for the HMOs decreased to 75.7% for the third quarter of 2008, from 78.7% for the third
quarter of 2007, due to improved revenue yields and a $4.1 million 2007 risk score adjustment recognized during the quarter. Commissions and general expenses, while increasing by
$3.8 million compared to 2007, decreased as a percent of net premiums by 2.3% from 16.8% in the third quarter of 2007 to 14.5% in the third quarter of 2008.



Revenues.Net premiums for our HMOs increased by $115.9 million, or 31%, compared to the first nine months of 2007. Approximately
$104.4 million of the increase was due to the growth in

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Medicare
membership along with higher member risk scores and additional 2007 risk score revenue received during the year . Medicare membership increased to approximately 54,700 members at
September 30, 2008 from approximately 47,400 at September 30, 2007. Revenue from the commercial business in Oklahoma increased $11.5 million due to growth in membership and
because the nine months ended September 30, 2007 included seven months of commercial operations whereas the nine months ended September 30, 2008 included a full nine months of
operations.

Benefits, Claims and Expenses.Medical expenses increased by $87.3 million, or 30%, compared to the first nine months of 2007. Growth in Medicare membership
added approximately $74.9 million and growth in commercial business added $10.0 million. The remaining $2.4 million was due to an increase in member risk scores offset by a
decrease in utilization of member benefits. The member benefit ratio for the HMOs decreased to 77.1% for the first nine months of 2008, from 77.6% for the first nine months of 2007, as a result of a
$4.1 million 2007 risk score adjustment recorded during the year and a decrease in utilization of member benefits. Commissions and general expenses, while increasing $9.2 million
compared to 2007, decreased as a percent of net premiums by 2.1% from 17.0% in the first nine months of 2007 to 14.9% in the first nine months of 2008. The nine months ended September 30, 2007
also included start-up costs associated with the acquisition of members in new markets.

PPOs

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007(In thousands)Net premiums

$


$


$


$
Net investment and other income











Total revenue











Medical expenses











Amortization of intangible assets











Commissions and general expenses


3,535





6,316


Total benefits, claims and other deductions


3,535





6,316


Loss before taxes

$
(3,535
)
$


$
(6,316
)
$





Expenses.Commissions and general expenses increased by $3.5 million compared to the third quarter of 2007 due to the costs of
establishing
the Local PPO networks.



Expenses.Commissions and general expenses increased by $6.3 million compared to the nine months ended September 30, 2007 due
to the
costs of establishing the Local PPO networks.

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Segment ResultsMedicare Part D

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007(In thousands)Direct and assumed premium

$
516,453

$
178,283

$
1,570,611

$
450,025Risk corridor adjustment/government reinsurance


(91,784
)

(62,917
)

91,140


(12,533
)Direct and assumed premium after risk corridor adjustment


424,669


115,366


1,661,751


437,492Ceded premiums


(51,869
)

(41,558
)

(231,283
)

(200,088
)Net premiums


372,800


73,808


1,430,468


237,404Other Part D incomePDMS


20,448


12,788


51,781


39,111Total Part D revenue


393,248


86,596


1,482,249


276,515Net investment and other income


4,704


1,403


15,879


3,745Total revenue


397,952


87,999


1,498,128


280,260Pharmacy benefits


292,887


50,969


1,292,481


210,140Amortization of intangibles


4,012


403


12,011


403Commissions and general expenses


51,857


13,032


163,426


31,935Total benefits, claims and other deductions


348,756


64,404


1,467,918


242,478Segment income before taxes

$
49,196

$
23,595

$
30,210

$
37,782


The
growth in our Medicare Part D business has resulted in an increase in the level of seasonality in our reported results during a given calendar year. This is due to the uneven
nature of the standard benefit design under Medicare Part D. As a result, this business generally sees higher claims experience in the first two quarters of the year while beneficiaries are in
the deductible and initial coverage phases of the benefit design. As the beneficiary reaches the coverage gap and catastrophic phases of the benefit design, the plan experiences lower claims liability
which is generally in the last two quarters of the year, resulting in a pattern of increasing reported net income attributable to the Part D business.

On
January 1, 2006, we began providing prescription drug benefits in accordance with Medicare Part D as a stand-alone benefit to Medicare eligible beneficiaries under our
Prescription PathwaySM PDPs. We reinsure 50% of the business of our Prescription PathwaySM PDPs to PharmaCare Re.

Our
participation, on a 33.3% basis, in an unaffiliated plan with Arkansas Blue Cross and Blue Shield and PharmaCare Re terminated as of January 1, 2008. Under the termination
provisions of the contract, we received $0.8 million, an amount equal to two years of the estimated future profits generated by the block of business, which was recorded in the first quarter of
2008.

For
a discussion of the accounting for Part D see Notes 2 and 15 of the notes to the consolidated financial statements in our annual report on Form 10-K.
Our revenues and claims expense are based on earned premium and incurred pharmacy benefits for the reported enrolled membership. The membership information is subject to reconciliation and refinement
with CMS with respect to the allocation among all plans participating in the Part D program and is an on-going process. As a result of the on-going reconciliation
process, it is likely that the membership data upon which we based our results will change, with a corresponding change in the financial results for the segment. We are unable to precisely quantify
the impact of any potential change until the membership data for specific time periods is fully reconciled with CMS, however, based upon our past experience, we do not believe that the effect of any
change from the amounts reported as of September 30, 2008 is likely to be material.

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Other
Part D incomePDMS represents our equity in the earnings of PDMS. We report this as revenue for segment reporting purposes in analyzing the ratio of net pharmacy
benefits incurred because the amount is incorporated in the calculation of the risk corridor adjustment. For consolidated reporting, we reflect this amount as a separate line following income from
continuing operations. See the reconciliation of segment revenues in Note 17 of the notes to the consolidated financial statements in this quarterly report on Form 10-Q.



Our Medicare Part D income increased by $25.6 million, compared to the third quarter of 2007. We acquired MemberHealth on
September 21, 2007 and our results for the three months ended September 30, 2008 reflect income of $42.0 million on MemberHealth's business, which is an increase of
$36.0 million over the prior year quarter. This is due to the prior year quarter only including the results of MemberHealth subsequent to the acquisition on September 21, 2007. This
increase was partially offset by a decline in the earnings generated by the Prescription PathwaySM business compared with the third quarter of 2007, primarily as a result of increases in
prescription drug costs and changes in the calculation of the government risk corridor that changes the seasonality of reported amounts

Membership.At September 30, 2008, our total membership for Medicare Part D was 1,836,000 members compared to 1,638,000 members at
September 30, 2007, an increase of 198,000 members or 12% over September 30, 2007. The increase is principally attributable to growth from open enrollment, and dual eligible members auto
assigned to our plans in 2008. For Medicare Part D,. we based our membership on enrollment information provided by CMS which indicated that, as of September 30, 2008,
approximately 1,836,000 members were enrolled for which we were paid by CMS. At September 30, 2008, our Part D membership reflects approximately 1,309,000 members enrolled in our
Community CCRxSM PDP and 527,000 members enrolled in our Prescription PathwaySM business, which we participate in on a 50% basis. Prior to January 1, 2008, we
participated, on a 33.3% basis, in Arkansas BCBS which had approximately 24,000 members at September 30, 2007.

Revenues.Direct and assumed premium after risk corridor adjustment increased by $309.3 million, or 268%, compared to the third quarter of 2007. This growth
resulted primarily from the acquisition of MemberHealth which generated $329.0 million of direct and assumed premium in the third quarter of 2008, which was an increase of $298.0 million
over the same period of 2007. The MemberHealth premium includes $9.8 million of amortization of the below market contract liability recorded in connection with the MemberHealth acquisition. The
change in the government risk corridor adjustment decreased revenue by an additional $28.9 million compared to the third quarter of 2007. The government risk corridor adjustment from
MemberHealth for the third quarter of 2008 was a decrease in revenues of $50.1 million, compared with a decrease of $5.4 million for the same period of 2007. The government risk corridor
adjustment from our Prescription PathwaySM business decreased revenue
$41.7 million for the three months ended September 30, 2008 compared to a decrease of $57.5 million for the same period in 2007. The 2008 amount reflects a $3.5 million
risk corridor adjustment to reduce revenue related to the final 2007 CMS PDE reconciliation as well as a $0.9 million mid year revenue adjustment related to the 2007 plan year for Prescription
PathwaySM business.

Other
Part D incomePDMS increased by $7.7 million compared to the third quarter of 2007 as a result of growth in business at Prescription
PathwaySM and increased revenue rates. Net investment and other income increased by $3.3 million principally as a result of the inclusion of revenue earned by MemberHealth for
third party services, partially offset by lower rates of return on investments.

Benefits, Claims and Expenses.Pharmacy benefits increased by $241.9 million compared to the third quarter of 2007. The MemberHealth business generated
$242.9 million of benefits in the quarter, which was an increase of $221.8 million over the prior year quarter. 2008 benefits reflect a $2.0 million

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reduction
related to the final 2007 CMS PDE reconciliation for MemberHealth. Pharmacy benefits for our Prescription PathwaySM business increased by $20.1 million or 67.6% over the
third quarter of 2007. The ratio of incurred prescription drug benefits to net premium in 2008 for Prescription PathwaySM was 73.2% compared to 53.3% for 2007 primarily as a result of
the impact in 2008 of the negative 2007 revenue adjustments discussed above as well as increased benefits. Amortization of intangibles increased $3.6 million as the result of amortization of
intangible assets recorded in connection with the acquisition of MemberHealth. Commissions and general expenses increased by $38.8 million compared to the third quarter of 2007. MemberHealth
added $41.0 million during the quarter, which was an increase of $37.4 million over the prior year quarter. The balance of the increase of $1.4 million relates to the growth in
our Prescription PathwaySM business.



Our Medicare Part D income decreased by $7.6 million, compared to the first nine months of 2007. We acquired MemberHealth
on September 21, 2007 and our results for the nine months ended September 30, 2008 reflect income of $13.8 million on MemberHealth's business, which is an increase of
$7.9 million over the prior year period. In addition, the year to date earnings on Prescription PathwaySM business decreased by $15.4 million compared with the first nine
months of 2007, primarily as a result of increases in prescription drug costs and changes in the calculation of the government risk corridor that changes the seasonality of reported amounts.

Membership.At September 30, 2008, our total membership for Medicare Part D was 1,836,000 members compared to 1,638,000 members at
September 30, 2007, an increase of 198,000 members or 12% over September 30, 2007. The increase is principally attributable to growth from open enrollment, and dual eligible members auto
assigned to our plans in 2008. For Medicare Part D, we based our membership on enrollment information provided by CMS which indicated that, as of September 30, 2008, approximately
1,836,000 members were enrolled. for which we were paid by CMS. At September 30, 2008, our Part D membership reflects approximately 1,309,000 members enrolled in our Community
CCRxSM PDP and 527,000 members enrolled in our Prescription PathwaySM business, which we participate in on a 50% basis. Prior to January 1, 2008, we participated, on
a 33.3% basis, in Arkansas BCBS which had approximately 24,000 members at September 30, 2007.

Revenues.Direct and assumed premium after risk corridor adjustment increased by $1,224.3 million, or 280%, compared to the first nine months of 2007. This
growth resulted primarily from the acquisition of MemberHealth which generated $1,223.7 million of direct and assumed premium for the nine months ended September 30, 2008. The
MemberHealth premium includes $29.5 million of amortization of the below market contract liability recorded in connection with the MemberHealth acquisition. The change in the government risk
corridor adjustment increased revenue by an additional $103.7 million compared to the nine months ended September 30, 2007. The government risk corridor adjustment from MemberHealth for
the nine months ended September 30, 2008 was an increase in revenues of $74.7 million, which was an increase of $80.1 million over the prior year as we acquired MemberHealth on
September 21, 2007. The government risk corridor adjustment from our Prescription PathwaySM business increased revenue $16.5 million for the nine months ended
September 30, 2008 compared to a decrease of $7.1 million for the same period in 2007. 2008 revenues reflect a $3.9 million reduction related to the final 2007 CMS PDE
reconciliation for Prescription PathwaySM business.

Other
Part D incomePDMS increased by $12.7 million compared to the first nine months of 2007 as a result of growth in business at Prescription
PathwaySM and increased revenue rates. Net investment and other income increased by $12.1 million principally as a result of the inclusion of revenue earned by MemberHealth for
third party services, partially offset by lower rates of return on investments.

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Benefits, Claims and Expenses.Pharmacy benefits increased by $1,082.3 million compared to the first nine months of 2007. The MemberHealth business
generated $1,069.0 million of benefits for the nine months ended September 30, 2008, which was an increase of $1,047.8 million over the prior year period due to the acquisition of
MemberHealth on September 21, 2007. 2008 benefits reflect a $2.0 million reduction related to the final 2007 CMS PDE reconciliation for MemberHealth. Pharmacy benefits for our
Prescription PathwaySM business increased by $34.5 million or 18% over the first nine months of 2007. The ratio of incurred prescription drug benefits to net premium for
Prescription PathwaySM was 82.5% compared to 76.9% for 2007 primarily as a result of the impact in 2008 of the negative 2007 revenue adjustments discussed above as well as increased
benefits. Amortization of intangibles increased $11.6 million as the result of amortization of intangible assets recorded in connection with the acquisition of MemberHealth. Commissions and
general expenses increased by $131.5 million, compared to the first nine months of 2007. MemberHealth added $132.4 million during 2008 which was an increase of $128.9 over the prior
year. The balance of the increase of $2.6 million relates to the growth in our Prescription PathwaySM business.

Segment ResultsTraditional Insurance

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007(In thousands)Premiums:Direct and assumed

$
130,197

$
231,320

$
575,939

$
692,528Ceded


(33,562
)

(123,196
)

(275,516
)

(356,584
)Net premiums


96,635


108,124


300,423


335,944Net investment income


14,232


18,351


45,421


53,714Other income


308


167


907


1,150Total revenue


111,175


126,642


346,751


390,808Policyholder benefits


74,262


81,651


231,903


254,111Interest credited to policyholders


3,572


4,265


11,094


13,292Change in deferred acquisition costs


1,595


1,562


12,394


13,549Amortization of intangible assets


796


876


2,411


2,778Commissions and general expenses, net of allowances


27,851


33,236


82,681


98,683Total benefits, claims and other deductions


108,076


121,590


340,483


382,413Segment income before taxes

$
3,099

$
5,052

$
6,268

$
8,395




Our Traditional Insurance segment income before taxes decreased by $2.0 million compared to the third quarter of 2007, due
primarily to decreased earnings on the specialty health and life insurance and annuity businesses, partially offset by slightly increased earnings on the Medicare supplement business. The declines
were primarily due to lower investment income. The overall loss ratio for the segment was 76.8% for the quarter ended September 30, 2008, compared with 75.5% for the same period last year, due
to higher skilled nursing facility claims. Individual loss ratios for the quarter ended September 30, 2008 were 76.9% for Medicare supplement, compared with 73.3% for the same period last year;
87.4% for specialty health, compared with 91.1% for the same period last year and 63.4% for life and annuity, compared with 67.4% for the same period last year.

Revenues.Net premium declined by $11.5 million, or 11%, primarily caused by the continued effect of lapsation of our Medicare supplement in force products.
Gross premium for Specialty health

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declined
in the third quarter of 2008 compared to the same period of 2007 as the result of the termination of a reinsurance arrangement with PharmaCare Re. Below is a summary of premium for the
segment by major lines of business:

Premium

Three months ended September 30,2008

2007Gross

Ceded

Net

Gross

Ceded

Net(In thousands)Medicare supplement

$
91,007

$
(24,116
)
$
66,891

$
104,492

$
(28,734
)
$
75,758Specialty health


19,740


(3,199
)

16,541


107,451


(89,286
)

18,165Life insurance and annuity


19,450


(6,247
)

13,203


19,377


(5,176
)

14,201Total premium

$
130,197

$
(33,562
)
$
96,635

$
231,320

$
(123,196
)
$
108,124


Net
investment income decreased by $4.1 million as a result of lower invested assets caused by less business in force as well as lower interest rates.

Benefits, Claims and Expenses.Policyholder benefits incurred declined by $7.4 million, or 9%, compared
to the third quarter of 2007. This decline was principally caused by a net reduction in Medicare supplement benefits of $4.1 million as a result of a decline in the business partially offset by
an increase in the loss ratio to 76.9% for the third quarter of 2008 from 73.3% for the same period last year, driven by an increase in skilled nursing facility claims.

Change
in deferred acquisition costs was flat with the third quarter of 2007.

Commissions
and general expenses, net of allowances, decreased by $5.4 million, or 16%, compared to the third quarter of 2007. The following table details the components of
commission and general expenses, net of allowances:

Three months ended
September 30,2008

2007(In thousands)Commissions

$
15,313

$
21,708Other operating costs


20,030


21,480Reinsurance allowances


(7,492
)

(9,952
)Commissions and general expenses, net of allowances

$
27,851

$
33,236


The
lower level of commissions is associated with the continued aging of our in force renewal premium and less new business production that has higher commission rates. Other operating
costs declined $1.5 million for the quarter ended September 30, 2008, compared to the third quarter of 2007. Allowances received from reinsurers decreased $2.5 million for the
third quarter of 2008 from the third quarter of 2007, 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 and the termination of a reinsurance arrangement with PharmaCare Re.



Our Traditional Insurance segment income before taxes decreased by $2.1 million compared to the first nine months of 2007, due
to lower earnings on specialty health and life insurance and annuity businesses, partially offset by increased earnings on Medicare supplement business. The declines were primarily due to lower
investment income. The overall loss ratio for the segment was 77.2% for the

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nine
months ended September 30, 2008, compared with 75.6% for the same period last year. Individual loss ratios for the nine months ended September 30, 2008 were 76.6% for Medicare
supplement, compared with 74.4% for the same period last year, due to higher skilled nursing facility claims; 89.4% for specialty health, compared with 88.8% for the same period last year and 64.8%
for life and annuity, compared with 65.6% for the same period last year.

Revenues.Net premium declined by $35.5 million or 11% and was primarily caused by the continued effect of lapsation of our Medicare supplement in force
products. Below is a summary of premium for the segment by major lines of business:

Nine months ended September 30,2008

2007Gross

Ceded

Net

Gross

Ceded

Net(In thousands)Medicare supplement

$
285,016

$
(76,460
)
$
208,556

$
326,790

$
(90,352
)
$
236,438Specialty health


232,611


(181,433
)

51,178


307,211


(251,322
)

55,889Life insurance and annuity


58,312


(17,623
)

40,689


58,527


(14,910
)

43,617Total premium

$
575,939

$
(275,516
)
$
300,423

$
692,528

$
(356,584
)
$
335,944


Net
investment income decreased by $8.3 million as a result of less invested assets caused by less business in force as well as lower interest rates.

Benefits, Claims and Expenses.Policyholder benefits incurred declined by $22.2 million, or 9%, compared
to the first nine months of 2007. This decline was principally caused by a net reduction in Medicare supplement benefits of $16.4 million as well as declines in the levels of Specialty Health
and Life and Annuity benefits as a result of a decline in the business partially offset by an increase in the Medicare Supplement loss ratio to 76.6% for the first nine months of 2008 from 74.4% for
the same period last year.

Change
in deferred acquisition costs decreased $1.2 million compared to the first nine months of 2007, primarily as a result of a lower level of lapsation of our Medicare
supplement in force business principally occurring during the first three months of each year.

Commissions
and general expenses, net of reinsurance allowances, decreased by $16.0 million, or 16%, compared to the first nine months of 2007. The following table details the
components of commission and other operating expenses, net of allowances:

Nine months ended
September 30,2008

2007(In thousands)Commissions

$
48,045

$
65,863Other operating costs


59,559


63,575Reinsurance allowances


(24,923
)

(30,755
)Commissions and general expenses, net of allowances

$
82,681

$
98,683


The
lower level of commissions is associated with the continued aging of our in force renewal premium and less new business production, which has higher commission rates. Other operating
costs were $4.0 million lower for the first nine months of 2008 compared to the first nine months of 2007 as a result of lower acquisition expenses due to less new business production and lower
fixed costs. Reinsurance allowances received from reinsurers decreased $5.8 million for the first nine months of 2008 from the first nine months of 2007, primarily due to the
non-renewal of the State of Connecticut agreement with PharmaCare Re on July 1, 2008 as well as a reduction in new business ceded and the

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effects
of normal lower commission allowances on our aging base of ceded renewal business and the termination of a reinsurance arrangement with PharmaCare Re.

Segment ResultsSenior Administrative Services

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007(In thousands)Affiliated fee revenueMedicare supplement

$
4,541

$
5,698

$
14,919

$
17,925Part D


6,909


6,249


20,930


18,584PFFS





5,293





13,004Long term care


756


538


1,883


1,737Life insurance


1,340


561


3,081


1,511Other


1,571


2,313


5,170


6,392Total affiliated revenue


15,117


20,652


45,983


59,153Unaffiliated fee revenueMedicare Advantage


2,721


2,813


9,935


7,879Medicare supplement


1,299


1,419


4,176


4,435Long term care


1,448


1,776


4,445


5,368Non-insurance products


198


272


676


1,079Part D





324


200


1,120Other


40


33


122


115Total unaffiliated revenue


5,706


6,637


19,554


19,996Total revenue


20,823


27,289


65,537


79,149Amortization of present value of future profits


92


110


275


330General expenses


15,697


20,791


47,820


61,104Total expenses


15,789


20,901


48,095


61,434Segment income before taxes

$
5,034

$
6,388

$
17,442

$
17,715


Unaffiliated
revenue reflects fees received to administer certain business of our insurance subsidiaries that is 100% reinsured to an unaffiliated reinsurer. These fees amounted to
$0.6 million and $0.8 million for the three months ended September 30, 2008 and 2007, respectively and $1.8 million and $2.2 million for the nine months ended
September 30, 2008 and 2007, respectively. In 2007 we performed administrative functions for the affiliated PFFS line that the affiliated entities perform directly in 2008. We eliminated these
fees, together with the affiliated revenue, in consolidation.



Segment income before taxes for our Senior Administrative Services segment declined by $1.4 million, or 21%, to
$5.0 million for the third quarter of 2008, as compared to the same period of 2007. This decrease is primarily the result of reduced levels of unaffiliated service fee revenues.

Revenue
declined by $6.4 million, or 24%, during the third quarter of 2008 compared to the third quarter of 2007. Affiliated service fee revenue decreased by $5.5 million
primarily as a result of the loss of fee income associated with the administration of our PFFS business that is performed directly by the affiliated entities in 2008. Unaffiliated service fee revenue
decreased by $0.9 million, due primarily to a decrease in services performed for unaffiliated Medicare Advantage, Part D and long term care

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business.
General expenses for the segment decreased by $5.1 million, or 25%, primarily due to the decline of the affiliated PFFS business.



Segment income before taxes for our Senior Administrative Services segment decreased by $0.3 million, or 2%, to
$17.4 million for the first nine months of 2008, as compared to the same period of 2007. This decrease is primarily the result of reduced levels of unaffiliated service fee revenues.

Revenue
declined by $13.6 million, or 17%, during the first nine months of 2008 compared to the first nine months of 2007. Affiliated service fee revenue decreased by
$13.2 million primarily as a result of the loss of fee income associated with the administration of our PFFS business that our affiliated entities performed directly in 2008 and a decline in
Medicare supplement revenues on a smaller book of business partially offset by an increase in Part D revenues on a growing block of business. Unaffiliated service fee revenue decreased by
$0.4 million, due primarily to a decrease in services performed for unaffiliated Medicare Advantage, Part D and long term care business. General expenses for the segment decreased by
$13.3 million, or 22%, primarily due to the decline of the affiliated PFFS business.

Segment ResultsCorporate

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

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007(In thousands)Interest expense

$
5,699

$
4,869

$
17,794

$
13,232Amortization of capitalized loan origination fees


262


327


786


895Early extinguishment of debt





913





913Stock-based compensation expense


1,541


1,038


4,778


3,145Other parent company expenses, net of revenues


4,623


925


3,553


5,284Segment loss before taxes

$
12,125

$
8,072

$
26,911

$
23,469




The loss from our Corporate segment increased by $4.1 million, or 50%, for the third quarter of 2008 compared to the third
quarter of 2007. This was due primarily to increases in other parent company expenses, net of revenues, interest costs, and the cost of stock based compensation.

The
increase in interest cost of $0.8 million is due primarily to the increase in our debt outstanding, offset in part by a reduction in the interest rates charged on the debt, as
compared to the third quarter of 2007. While our combined outstanding debt decreased by $43.5 million to $431.5 million at September 30, 2008 from $475.0 million at
September 30, 2007, the balance at September 30, 2007 had increased significantly from $262.9 million at June 30, 2007, due primarily to the refinancing of our credit
facility in connection with the acquisition of MemberHealth in September 2007. The weighted average interest rate on our loan payable was 4.6% for the third quarter of 2008 compared to 7.3% for
the third quarter of 2007. The weighted average interest rate on our other long term debt was 7.3% for the third quarter of 2008 compared to 7.9% for the third quarter of 2007. See "Liquidity and
Capital Resources" for additional information regarding our loan payable and other long term debt.

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

The
increase in other parent company expenses, net of revenues was primarily due to a decrease in net investment income, an increase in the costs of restricted stock awards, legal fees
associated with the defense and settlement of a shareholder's lawsuit and other, individually insignificant, unfavorable expense variances.



The loss from our Corporate segment increased by $3.4 million, or 15%, for the first nine months of 2008 compared to the first
nine months of 2007. The improvement was due primarily to an increase in interest costs, and the cost of stock based compensation, partially offset by lower other parent-company expenses, net of
revenues.

The
increase in interest cost of $4.6 million is due primarily to the increase in the average balance of our debt outstanding, offset in part by a reduction in the interest rates
charged on the debt, as compared to the first six months of 2007. While our combined outstanding debt decreased by $43.5 million to $431.5 million at September 30, 2008 from
$475.0 million at September 30, 2007, the balance at September 30, 2007 had increased significantly from $262.9 million at June 30, 2007, due primarily to the
refinancing of our credit facility in connection with the acquisition of MemberHealth in September 2007. The weighted average interest rate on our loan payable was 4.6% for the first nine
months of 2008 compared to 7.3% for the first nine months of 2007. The weighted average interest rate on our other long term debt was 7.5% for the first nine months of 2008 compared to 7.8% for the
first nine months of 2007. See "Liquidity and Capital Resources" for additional information regarding our loan payable and other long term debt.

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

The
decrease in other parent company expenses, net of revenues was primarily due to the reversal of a 2007 bonus accrual that was $5.6 million in excess of the final amounts
approved by the compensation committee and paid in 2008 and an increase of $0.3 million in net investment income, partially offset by an increase in the costs of restricted stock awards, legal
fees associated with the defense and settlement of a shareholder's lawsuit and other, individually insignificant, unfavorable expense variances.



We use our capital primarily to support the retained risks and growth of our insurance company subsidiaries and HMOs 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. We also require cash to pay the operating expenses necessary to function as a holding company, as
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 expected cash flows of our administrative service company and our senior managed care company, our PBM business in MemberHealth and the
surplus note interest and principal payments from our American Exchange subsidiary can support our current

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parent
company obligations. 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.

To
provide the cash and capital for our insurance company subsidiaries to support our growth and expansion initiatives in Medicare Advantage, we have used the proceeds from the sale of
our Canadian operations and proceeds from the issuance of debt, equity and trust preferred securities. There can be no assurance as to our continued ability to access funds though the capital markets
to support our growth and expansion initiatives.

2007 Credit Facility

In connection with the MemberHealth transaction, as described in Note 4Business Combinations to our consolidated
financial statements set forth above, we refinanced our credit facility with a new credit facility consisting of a $350 million term loan and a $150 million revolver. We used a portion
of the proceeds from the refinancing to repay in full the amounts outstanding on the previous credit facility. Interest under the new credit facility is currently based on LIBOR plus a spread of 62.5
basis points. In addition, we currently pay a commitment fee on the unutilized revolving loan facility at an annualized rate of 10.0 basis points. In accordance with the credit agreement for the new
credit facility, the spread and fee are determined based on our consolidated leverage ratio. Effective September 30, 2008, the interest rate on the term loan portion of the new credit facility
was 3.42%. We had not drawn on the revolving loan facility as of the date of this report. As a result of the value to be received pursuant to the settlement agreement discussed in Significant
Transactions and Initiatives, on April 23, 2008 we prepaid $25 million of principal under the new facility, under an approved waiver.

Our
Heritage Health Systems and MemberHealth subsidiaries have guaranteed our obligations under the new credit facility. In addition, when a "rating condition" exists whereby we are
either no longer rated by S&P or our rating falls below BBB-, this facility is secured by a pledge of
substantially all of the equity interests of each of our Heritage Health Systems, American Exchange and MemberHealth subsidiaries. In March 2008, S&P reduced our rating to BB+, which
constituted a rating condition that triggered this added security requirement.

Our
new credit facility requires us and our subsidiaries to meet specified financial tests requiring that we maintain a minimum consolidated leverage ratio and a minimum risk based
capital. Our new credit facility also contains covenants, which among other things, under specified conditions, limit



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Our new credit facility contains customary events of default, such as, among other things,



We
incurred additional loan origination fees of approximately $4.7 million, which we capitalized and are amortizing on a straight-line basis, which does not differ
significantly from the effective yield basis, over the life of the new credit facility. The early extinguishment of our old credit facility triggered the immediate amortization of the related
capitalized loan origination fees, resulting in a pre-tax expense of approximately $0.9 million during the third quarter of 2007.

Under
the terms of the new credit facility, we must make principal repayments quarterly at the rate of $3.5 million per year over a five-year period and a final
payment of $308.4 million due upon maturity in September, 2012. The following table shows the schedule of principal payments remaining on the new credit facility as of June 30, 2008,
including the $25 million prepayment, discussed above.

2007 Credit
Facility(in thousands)2008

$
8752009


3,5002010


3,5002011


3,5002012


310,125$
321,500


Interest Rate Swap

On December 4, 2007, we entered into two separate interest rate swap agreements, one with Citibank, N.A. and one with Calyon
Corporate and Investment Bank to hedge the variability of cash flows for interest payments on a total notional amount of $250 million of our new credit facility. In entering the swap with
Citibank, we agreed to swap our floating rate interest payment based on the floating LIBOR base rate on a notional amount of $125 million in exchange for a fixed interest rate payment based on
a 4.14% locked in fixed rate. In entering the swap with Calyon, we agreed to swap our floating rate interest payment based on the floating LIBOR base rate on a notional amount of $125 million
in exchange for a fixed interest rate payment based on a 4.13% locked in fixed rate.

Short Term Facility

On January 18, 2007, we requested and received from the administrative agent for the lenders under our old credit facility and
revolving credit facility, an additional short-term revolving credit facility of $50.0 million. On March 13, 2007, we drew all $50.0 million of the new
short-term revolving credit facility. This new short-term revolving credit facility had a maturity date of September 30, 2007 and bore interest at a spread of 75 basis
points over the LIBOR rate. The initial rate was 6.1%. On July 18, 2007, we repaid the $50.0 million balance on this revolving credit facility, including accrued interest of
$0.3 million.

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Principal and Interest Payments

We made regularly scheduled principal payments of $2.6 million during the nine months ended September 30, 2008. In
addition, we made a $25 million prepayment on April 23, 2008 in connection with an approved waiver as discussed above. During the nine months ended September 30, 2007, we made
regularly scheduled principal payments of $2.6 million and fully repaid the balance of $87.9 million on our old Credit Facility in connection with the refinancing described above.

We
paid interest of $10.8 million during the nine months ended September 30, 2008 and $6.2 million during the nine months ended September 30, 2007 in
connection with our credit facilities. Due to the variable interest rate on the new credit facility, the portion not covered by the interest rate swaps would be subject to higher interest costs to us
if short term interest rates rise.

Other Long Term Debt

We have 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 our parent holding
company and engaging in only those activities necessary or incidental thereto. In accordance with the adoption of FASB Interpretation No. 46(R), "Consolidation of Variable Interest Entities,"
we do not consolidate the trusts.

In
late March, 2007, we issued $50.0 million of trust preferred securities at a fixed interest rate of 7.7% pursuant to terms similar to our other trust preferred securities. On
December 4, 2007, we exercised our option to redeem all $15.0 million of the trust preferred securities scheduled to mature December 2032.

Separate
subsidiary trusts of our parent holding company have issued a combined $125.0 million in thirty year trust preferred securities, with $110 million currently
outstanding as detailed in the following table:

Maturity Date

Amount
Issued

Term

Spread Over
LIBOR

Rate as of
September 30,
2008(In thousands)



(Basis points)April 2033

$
10,000

Floating


400


6.8
%May 2033


15,000

Floating


420


7.0
%May 2033


15,000

Fixed/Floating


410
(1)

6.9
%October 2033


20,000

Fixed/Floating


395
(2)

7.0
%March 2037


50,000

Fixed/Floating


275
(3)

7.7
%$
110,000


---

We
paid $6.3 million in interest in connection with the junior subordinated debt during the nine months ended September 30, 2008 and $6.3 million during the nine
months ended September 30, 2007.

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Sources of Liquidity to the Parent Company

We anticipate funding the obligations of our parent company and the capital required to grow our business from the following distinct
and uncorrelated sources of cash flow within the organization:



As
of September 30, 2008, the parent company had readily available cash of $141 million. In addition, we have access to funds under existing credit facilities. We have
$150.0 million available under the revolving portion of our new credit facility.

We
also have the ability, from time to time, to access the capital markets for additional capital. In March 2007, we issued $50 million of trust preferred securities. In
addition, in connection with the May 8, 2007 announcement of the signing of definitive agreements to acquire MemberHealth as described in Note 4Business Combinations of the
notes to the consolidated financial statements included in this quarterly report on Form 10-Q, we issued preferred stock for aggregate proceeds of $350 million, at $20 per
common equivalent share, to four private equity investment fund groups. We also issued $100 million of preferred stock during the second quarter of 2007 and the balance in
September 2007. There can be no assurance as to our actual future cash flows from the continued availability of dividends from our insurance company subsidiaries or from access to the capital
markets to support our growth and expansion initiatives. In addition, we are reviewing other sources of liquidity that may be available to us at equivalent or lower interest rates.

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 will result in amounts being available to pay dividends to our parent holding company.

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 our health plan affiliates and services provided to the IPA's. Dividend payments by our HMO affiliates to our Heritage
subsidiary are subject to the approval of the insurance regulatory authorities of our HMO affiliates' respective states of domicile. Our SCOT subsidiary is not able to pay dividends during 2008
without prior approval.

MemberHealth.Liquidity for our MemberHealth 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 MemberHealth subsidiary exceed scheduled uses of cash and results in amounts available to dividend to
our parent holding company.

Insurance SubsidiariesSurplus Note, Dividends and Capital Contributions.Cash generated by our insurance company subsidiaries will 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 American Exchange subsidiary. As of September 30,
2008, the principal amount of the surplus note was $8.6 million. The note bears interest to our parent holding company at 25 basis points over the interest rate on the new credit facility. We
anticipate that the surplus note will be primarily serviced by dividends from Pennsylvania Life, a wholly owned subsidiary of American Exchange and by distributions from PDMS, and by
tax-sharing payments among the insurance companies that are wholly owned by American Exchange and are included in the consolidated federal income tax return filed by

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American
Exchange. American Exchange made principal payments totaling $9.0 million during the nine months ended September 30, 2008 and $7.0 million during the nine months ended
September 30, 2007. American Exchange paid interest on the surplus note of $0.5 million during the nine months ended September 30, 2008 and $1.6 million during the nine
months ended September 30, 2007.

On
June 29, 2007 and December 31, 2007, our Pyramid subsidiary issued two $30.0 million surplus notes payable to our parent holding company. The notes are repayable
through annual principal payments beginning March 29, 2009, based on a schedule, provided that capital and surplus are sufficient to maintain risk based capital levels of 450% or greater. The
surplus notes can be pre-paid, with prior approval by the State of Kansas to the extent that Pyramid's risk based capital levels exceed 450%. The notes bear interest to our parent holding
company at fixed rates of 7.7% and 7.3%, respectively, for the term of the notes.

Dividend
payments by our insurance companies to our parent holding company or to intermediate subsidiaries are limited by, or subject to the approval of the insurance regulatory
authorities of each insurance company's state of domicile. These dividend requirements and approval processes vary significantly from state to state. Pennsylvania Life is able to pay ordinary
dividends of up to $51.1 million to its direct parent American Exchange and American Exchange is able to pay ordinary dividends of up to $26.1 million to Universal American in 2008
without the prior approval from the insurance department for either of their respective states of domicile.

Our
parent holding company made capital contributions to American Exchange amounting to $81.0 million during 2007. American Exchange made capital contributions of
$44.0 million to American Progressive, $32.0 million to Pyramid and $5 million to Marquette during 2007. In December 2007, Pennsylvania Life declared and paid a dividend in
the amount of $21.0 million to American Exchange. From these proceeds, American Exchange made an additional capital contribution of $20.0 million to Pyramid. American Exchange made a
capital contribution of $7.0 million to Pyramid in the second quarter of 2008

Insurance SubsidiariesLiquidity

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 are



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 such as



Our
accident and health insurance policies generally provide for fixed-benefit amounts and, in the case of Medicare supplement policies, for supplemental co-payments in
accordance with approved 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. Prescription drug benefits

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under
Part D plans may vary in terms of coverage levels and out-of-pocket costs for beneficiary premiums, deductibles and co-insurance. However, all
Part D plans must offer either "standard coverage" or its actuarial equivalent, with out-of-pocket threshold and deductible amounts that do not exceed those of standard
coverage. These defined "standard" benefits represent the minimum level of benefits mandated by Congress. We also offer other PDPs containing benefits in excess of standard coverage limits for an
additional beneficiary-paid premium. Our PDPs receive monthly payments from CMS which generally represent our bid amount for providing insurance coverage. Due to the nature of the benefit
design, where the PDP is covering the initial deductibles, Part D benefit costs will exceed these monthly CMS payments resulting in negative cash flows in the early part of the year. As
beneficiaries reach deductibles and we share benefit costs with the plan members, the resulting cash flows match more evenly and eventually turn positive, so that monthly plan receipts exceed the
benefit costs in the latter part of the year. The Part D benefit costs are subject to risk corridor adjustment, which permits our PDPs and CMS to share the risk associated with the ultimate
costs of the Part D benefit. However, the cash settlement for the risk corridor adjustment does not occur until well into the following year. Our Medicare Advantage policies provide benefits to
Medicare enrollees as specified in our contracts with CMS, with premiums received from CMS and, depending on the individual product, from the enrollee. Our health insurance business is widely
dispersed in the United States, 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 can vary as a result of a variety of factors such as



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 September 30, 2008 we held reserves that exceeded the underlying cash surrender values of our net retained in force life insurance and annuities by $34 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.

At
September 30, 2008, our insurance companies held cash and cash equivalents totaling $314 million and fixed maturity securities that we could readily convert to cash with
carrying values and fair values of $1.0 billion.

Our
domestic insurance subsidiaries must maintain minimum amounts of statutory capital and surplus as required by regulatory authorities. However, these subsidiaries need substantially
more than the statutory minimum amounts to meet statutory and administrative requirements of adequate capital and surplus to support the current level of our insurance subsidiaries' operations. Each
of our

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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, or the NAIC, imposes regulatory risk-based capital or RBC requirements on life insurance enterprises. At
December 31, 2007, all of our insurance subsidiaries maintained ratios of total adjusted capital to RBC in excess of the "authorized control level." The combined statutory capital and surplus,
including asset valuation reserve, of our U.S. insurance subsidiaries totaled $473.0 million at September 30, 2008 and $486.1 million at December 31, 2007. Our U.S.
insurance subsidiaries generated statutory net loss of $2.8 million for the nine months ended September 30, 2008 and statutory net income of $69.6 million for the nine months
ended September 30, 2007.

Our
HMO subsidiaries are also required by regulatory authorities to maintain minimum amounts of capital and surplus and are also subject to RBC requirements. At September 30,
2008, the statutory capital and surplus of each of our HMO subsidiaries exceeded its minimum requirement and its RBC is in excess of the "authorized control level." The statutory capital and surplus
for our HMO subsidiaries was $83.4 million at September 30, 2008 and $64.3 million at December 31, 2007. Statutory net income for our HMO subsidiaries was
$22.4 million for the nine months ended September 30, 2008 and $10.1 million for the nine months ended September 30, 2007.

Reinsurance

We evaluate the financial condition of our reinsurers and monitor concentrations of credit risk to minimize our exposure to significant
losses from reinsurer insolvencies. We are obligated to pay claims in the event that a reinsurer to whom we have ceded an insured claim fails to meet its obligations under the reinsurance agreement.
As of September 30, 2008, all of our primary reinsurers were rated "A" or better by A.M. Best, except for PharmaCare Re, which is unrated. We have secured a letter of credit from
PharmaCare Re that we believe will adequately support the risks ceded. We do not know of any instances where any of our reinsurers have been unable to pay any policy claims on any reinsured
business.

Investments

Our investment policy is to balance the portfolio duration to achieve investment returns consistent with the preservation of capital
and maintenance of liquidity adequate to meet payment of policy benefits and claims. We invest in assets permitted under the insurance laws of the various states in which we operate. These 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 the following:



We
currently engage the services of two 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 subsidiaries, except for the portfolios of Pyramid Life, SelectCare of Texas,
L.L.C. and some floating rate portfolios, which are managed by Hyperion Capital.

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- or
higher by S&P or Baa3 or

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higher
by Moody's Investor Service. As of September 30, 2008, approximately 98% of our fixed maturity investments had investment grade ratings from S&P or Moody's. As of September 30,
2008, we held $7.0 million par value of Lehman Brothers holdings that were non-income producing. These were the only non-income producing securities in our investment
portfolio. As of September 30, 2008, we held securities with par values of approximately $141 million with exposure to subprime mortgages. The market value of these securities was
$49 million at September 30, 2008, representing approximately 3% of our cash and invested assets. The collateral for these securities is substantially all first lien mortgages. These
securities have an average S&P equivalent rating of A+. During the nine months ended September 30, 2008, we recognized other than temporary impairment totaling $43.9 million in the value
of our securities with exposure to subprime mortgages. In addition, we have recognized an other than temporary impairment of $6.1 million on Lehman Brothers holdings and $3.5 million on
other corporate bond and mortgage backed securities for a total year-to-date impairment of $11.0 million at September 30, 2008 in addition to the impairment on
subprime holdings. We did not write down the value of any fixed maturity securities during the nine months ended September 30, 2007.

The
net yields on our cash and invested assets decreased to 4.9% for the nine months ended September 30, 2008, from 5.4% for the nine months ended September 30, 2007. We
held a portion of these securities to support the liabilities for policyholder account balances, which liabilities are subject to periodic adjustments to their credited interest rates. We determine
the credited interest rates of the interest-sensitive policyholder account balances 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.

We
have recently adopted a more conservative approach to our investment portfolio, which focuses more on capital preservation than on generation of investment yield. As a result, as of
September 30, 2008, approximately 34% of our portfolio is in cash equivalents, largely in government money funds, and, in the aggregate, around 58% of our portfolio are securities backed by the
US government or its agencies.

Federal Income Taxation of the Company

We establish valuation allowances based upon an analysis of projected taxable income and its ability to implement prudent and feasible
tax planning strategies. We carried valuation allowances on deferred tax assets of $3.1 million at both September 30, 2008 and December 31, 2007, primarily related to the tax
benefits associated with a New York state net operating loss
carryforward. At September 30, 2008, we assessed the amount of the deferred tax asset that was more likely than not to be realized under SFAS No. 109, Accounting for Income Taxes, and
concluded that we can record tax benefits related to our realized losses relating to our investments for financial statement purposes. During the second quarter we released a deferred tax valuation
allowance of $10.4 million that had been recorded in the first quarter of 2008 in connection with other-than-temporary impairments taken in that period.

Effects of Recently Issued and Pending Accounting Pronouncements

A summary of other recent and pending accounting pronouncements is provided in Note 3 of the consolidated financial statements
in the quarterly report on Form 10-Q under the caption "Recent and Pending Accounting Pronouncements." We do not anticipate any material impact from the future adoption of the
pending accounting pronouncements discussed in that note.

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ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Investment Interest Rate Sensitivity

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

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

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 September 30, 2008, and with all other variables held constant. The following table summarizes the impact of the assumed changes in market interest
rates.

Effect of Change in Market Interest Rates on Market Value
of Fixed Income Portfolio as of September 30, 2008September 30, 2008200 Basis
Point Decrease

100 Basis
Point Decrease

100 Basis
Point Increase

200 Basis
Point IncreaseMarket Value of
Fixed Income Portfolio(in millions)$1,046.8

$64.5

$34.1

$(34.1)

$(69.9)


Debt

We pay interest on our term loan and a portion of our trust preferred securities based on the London Inter Bank Offering Rate, known as
LIBOR, over one, two, three or six month interest periods. Due to the variable interest rate, we would be subject to higher interest costs if short-term interest rates rise. We have
attempted to mitigate our exposure to adverse interest rate movements by fixing the rate on $65.0 million of our 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. In December 2007, we exercised our option to redeem all $15.0 million of the
trust preferred securities scheduled to mature December 2032, which was covered by an interest rate swap.

Also
in December 2007, we entered into two separate interest rate swap agreements to mitigate our exposure to increasing interest rate movements by fixing the rate on a combined
$250.0 million portion of our new credit facility.

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

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accompanying
analyses should not be construed as a prediction of future economic events, but rather, be treated as a simple illustration of the potential impact of such events on our financial
results.

The
sensitivity analysis of interest rate risk assumes scenarios involving increases or decreases in LIBOR of 100 and 200 basis points from their levels as of and for the nine months
ended September 30, 2008, and with all other variables held constant. The following table summarizes the impact of changes in LIBOR.

Effect of Change in LIBOR on Pre-tax Income
for the nine months ended September 30, 2008Weighted
Average
Balance
OutstandingDescription of Floating Rate Debt

Weighted
Average
Interest Rate

200 Basis
Point
Decrease

100 Basis
Point
Decrease

100 Basis
Point
Increase

200 Basis
Point
Increase(in millions)Loan Payable


4.08
%
$
83.6

$
1.3

$
0.6

$
(0.6
)
$
(1.3
)Other long term debt


7.40
%
$
40.0


0.6


0.3


(0.3
)

(0.6
)Total







$
1.9

$
0.9

$
(0.9
)
$
(1.9
)


As
noted above, we have fixed the interest rate on $320 million of our $432 million of total debt outstanding, leaving $112 million of the debt exposed to rising
interest rates, as of September 30, 2008. We had approximately $547 million of cash and cash equivalents as of September 30, 2008. We anticipate that any increase or decrease in
the interest cost of our debt as a result of an increase in interest rates
will be mitigated by an increase or decrease in the net investment income from our cash and cash equivalents.

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

As
a result of the value to be received pursuant to the settlement agreement discussed in Significant Transactions and Initiatives, we prepaid $25 million of principal under the
new facility in April 2008 pursuant to a waiver. See Note 4Business Combinations and Note 11Loan Payable included in the Notes to consolidated financial
statements in Part I, Item 1 of this quarterly report on Form 10-Q for additional information on this transaction.

ITEM 4Controls and Procedures



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



Our disclosure controls and procedures and our internal controls over financial reporting may not prevent or detect all errors and all
fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control
system must reflect the fact that there are resource constraints, and we must consider the benefits of controls relative to their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that we have detected all control issues and instances of fraud, if any,

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within
Universal American. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The
individual acts of some persons or collusion of two or more people can also circumvent controls. The design of any system of controls is based in part on certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of
controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.



We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2008. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2008, at a reasonable assurance level, to timely alert management to
material information required to be included in our periodic filings with the Securities and Exchange Commission.



There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2008 that have
materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II

ITEM 1LEGAL PROCEEDINGS

For information relating to litigation affecting us, please see Note 14Commitments and Contingencies of the notes
to the consolidated financial statements in Part IItem 1 of this report, which is incorporated into this Part IIItem 1Legal
Proceedings by reference.

ITEM 1ARISK FACTORS

In addition to the other information set forth in this report, you should consider carefully the risks and uncertainties described
under the caption Item 8.01 of our current report on Form 8-K filed on August 8, 2008, as supplemented by the additional risk factors set forth below, and under the
caption "Part IItem 1A. Risk Factors" in our annual report on Form 10-K for the year ended December 31, 2007, all three of which are incorporated
by reference into this Part IIItem 1ARisk Factors. The occurrence of any of these risks and uncertainties could materially adversely affect our business,
prospects, financial condition or results of operations. Additional risks and uncertainties of which we are not currently aware, or which we currently consider to be immaterial, could also materially
adversely affect our business, prospects, financial condition or results of operations.

The
following risk factors supplement the risk factors set forth in Item 8.01 of our current report on Form 8-K filed on August 8, 2008:

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

As has been widely reported, financial markets around the world have been experiencing extreme disruption in recent months, including,
among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades and declining or indeterminate valuations of many investments and
declines in real estate values. Governments have taken unprecedented actions intended to address these market conditions. While currently these conditions have not impaired our ability to access
credit markets and finance our operations, largely because our financing has generally come from internal cash generation since September 2007, there can be no assurance that there will not be
a further deterioration in financial markets and confidence in major economies or that any deterioration in markets or confidence will not impair our ability to access credit markets and finance our
operations. These economic developments affect businesses such as ours in a number of ways, many of which we cannot predict. Among the potential effects could be further writedowns in the value of
securities we hold, an inability or refusal by lenders under our credit agreement to fund a draw by us, and an inability to access credit markets should we require external financing in excess of or
in addition to the current revolving commitment under our credit agreement. In addition, it is possible that economic conditions, and resulting budgetary concerns, could prompt the federal government
to make changes in the Medicare program, which could adversely affect our results of operations. We are unable to predict the likely duration and severity of the current disruptions in financial
markets and adverse economic conditions, or the effects on us of these disruptions and conditions.

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

We have available borrowing capacity under the revolving portion of our credit facility of $150 million. Our credit agreement
significantly restricts our ability to borrow from other sources. Therefore, if we are required to fund the growth of our business, or to fund capital requirements at our insurance company and health
plan subsidiaries, in excess of the aggregate of our cash, revolver borrowing capacity and other borrowing capacity permitted under the credit facility, we could be

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restricted
in our ability to generate new premium or other revenue, to construct the preferred provider organizations that we are in the process of contracting, or to otherwise fund or expand our
business. Moreover, if we determine to enter into a transaction or effect another corporate event that requires a waiver or consent under a debt agreement, or if we experience an event of default
under a debt agreement, lenders could refuse to grant a required waiver or consent, or could charge a material amount for it. As a consequence, we could be unable to complete the desired transaction
or other corporate event, or the required waiver or consent could cost more than it otherwise would, or we could experience a default under the relevant debt instrument, or our results of operations
and financial condition could be adversely affected.

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

As we noted in our August 8, 2008 Form 8-K, a significant portion of our investment portfolio consists of
fixed income securities and other investment securities. Our portfolio can be viewed on our web site,www.universalamerican.com, in the Investors
section. Our reference to the web site in this quarterly report on Form 10-Q is not intended to incorporate the information contained in the web site into this report. The fair
market value of these assets and the investment income from these assets generally fluctuate depending on general economic and market conditions, and these variations have been exacerbated by the
recent economic conditions. The fair market value of our investments in fixed income securities generally increases or decreases in an inverse relationship with fluctuations in interest rates, while
net investment income realized by us from future investments in fixed income securities will generally increase or decrease with interest rates; in addition, these values and prospective income have
recently been adversely affected by general economic conditions. Moreover, actual net investment income or cash flows from investments that carry prepayment risk, such as mortgage-backed and other
asset-backed securities, may differ from those anticipated at the time of investment or at various financial statement dates as a result of interest rate fluctuations, general economic conditions and
other factors. Because significant amounts of our investment securities are classified as available for sale, we reflect changes in the market value of these securities in our balance sheet.
Therefore, interest rate fluctuations and changes in the values of
securities we hold could adversely affect our results of operations and financial condition. In addition, while the statutory accounting rules applicable to our insurance company subsidiaries do not
currently require that we revalue investment securities as generally accepted accounting principles require, those statutory accounting rules could change, which could lead to requirements that we
increase the capital of some of these subsidiaries, and as a result of any required capital increase, we could be required to deposit unrestricted cash held at our parent company or borrow.

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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

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 Programs(1)July 1, 2008  July 31, 2008











4,766,591August 1, 2008  August 31, 2008


112,325

$
12.51


112,325


3,689,732September 1, 2008  September 30, 2008


156,605

$
12.31


156,605


3,828,407Total


268,930





268,930


---

Recent Sales of Unregistered Securities

None.

ITEM 3DEFAULTS UPON SENIOR SECURITIES

There were no defaults upon senior securities during the third quarter of 2008.

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

None.

ITEM 5OTHER INFORMATION

None.

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ITEM 6EXHIBITS

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

2.1

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

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

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

Certificate of Amendment of the Certificate of Incorporation of Universal American Financial Corp. (filed as Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004, filed August 9, 2004, and incorporated by reference herein).3.3

Amended and Restated By-Laws of Universal American Corp. (filed as Exhibit 3.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, filed on May 12, 2008, and
incorporated by reference herein).3.4

Certificate of Amendment to the Certificate of Incorporation of Universal American Financial Corp. for the Series A Preferred Stock (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K
filed May 11, 2007, and incorporated by reference herein).3.5

Certificate of Amendment of the Certificate of Incorporation of Universal American Financial Corp. for the Registrant's Series B Preferred Stock (filed as Exhibit 3.2 to the Registrant's Current Report on
Form 8-K filed May 11, 2007, and incorporated by reference herein).3.6

Certificate of Amendment to Certificate of Incorporation changing the name of Universal American Financial Corp. to Universal American Corp. (filed as Exhibit 99.1 to the Registrant's Current Report on
Form 8-K filed December 3, 2007, and incorporated by reference herein).4.1

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

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

Guarantee Agreement, dated as of March 22, 2007, by Universal American Financial Corp., as Guarantor, and Wilmington Trust Company, as Trustee (filed as Exhibit 4.3 to the Registrant's Current Report on
Form 8-K filed March 28, 2007, and incorporated by reference herein).


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4.4

Indenture, dated as of March 22, 2007, between Universal American Financial Corp. and Wilmington Trust Company, as Trustee, relating to Fixed/Floating Rate Junior Subordinated Debentures Due 2037 (filed as
Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed March 28, 2007, and incorporated by reference herein).4.5

Stockholders' Agreement, dated as of September 21, 2007, among Universal American Corp. and security holders listed on the signature pages thereto (filed as Exhibit 4.1 to the Registrant's Current Report on
Form 8-K filed September 25, 2007, and incorporated by reference herein).10.1

Employment Agreement dated July 30, 1999, between Registrant and Richard A. Barasch (filed as Exhibit D to the Registrant's Current Report on Form 8-K/A filed March 19, 2001 and incorporated
by reference herein).10.2

Letter dated April 9, 2008, correcting clerical error in Employment Agreement dated July 30, 1999, between Registrant and Richard A. Barasch. (filed as Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2008, filed on May 12, 2008, and incorporated by reference herein).10.3

Employment Agreement dated July 30, 1999, between Registrant and Gary Bryant (filed as Exhibit E to the Registrant's Current Report on Form 8-K/A filed March 19, 2001 and incorporated by reference
herein).10.4

Employment Agreement dated July 30, 1999, between Registrant and Robert Waegelein (filed as Exhibit E to the Registrant's Current Report on Form 8-K/A filed March 19, 2001 and incorporated by
reference herein).10.5

Employment Letter dated September 17, 2002, between the Company and Jason Israel (filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2005, filed
March 16, 2006, and incorporated by reference herein).10.6

Employment Agreement dated March 9, 2004, by and among the Company, Heritage Health Systems, Inc. and Theodore M. Carpenter, Jr. (filed as Exhibit 10.18 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2005, filed March 16, 2006, and incorporated by reference herein).10.7

1998 Incentive Compensation Plan (filed as Exhibit A to the Registrant's Definitive Proxy Statement on Form 14A filed April 29, 1998, and incorporated by reference herein).10.8

First Amendment to the Universal American Financial Corp. 1998 Incentive Compensation Plan (filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-3, Registration No. 333-120190,
 filed on November 3, 2004, and incorporated by reference herein).10.9

Agent Stock Plan for Agents of Pennsylvania Life and PennCorp Canada (filed as part of Amendment 1 to the Registrant's Registration Statement on Form S-2, dated July 13, 2000, and incorporated by
reference herein).10.10

Agent Equity Plan for Regional Managers and Sub Managers of Pennsylvania Life and PennCorp Canada (filed as part of Amendment 1 to the Registrant's Registration Statement on Form S-2, dated July 13,
2000, and incorporated by reference herein).10.11

Agreement dated as of September 14, 2000, by and between ALICOMP, a division of ALICARE, Inc. and Universal American Financial Corp., as amended (filed as Exhibit 10.1 to Amendment No. 1 to the
Registrant's Form 10-Q/A for the period ended September 30, 2003, filed December 23, 2003, and incorporated by reference herein).


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10.12

Amended and Restated Credit Agreement dated as of May 28, 2004, among Universal American Financial Corp., various lending institutions and Bank of America, N.A., as the Administrative Agent, the Collateral Agent and
the L/C Issuer (filed as Exhibit 10 to the Registrant's Current Report on Form 8-K filed June 1, 2004, and incorporated herein by reference).10.13

First Amendment to Amended and Restated Credit Agreement dated as of September 2, 2005 among Universal American Financial Corp., the Banks party to the Credit Agreement and Bank of America, N.A., as the
Administrative Agent (filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2005, filed March 16, 2006, and incorporated by reference herein).10.14

Waiver and Second Amendment to Amended and Restated Credit Agreement dated as of December 30, 2005 among Universal American Financial Corp., the Banks party to the Credit Agreement and Bank of America, N.A., as
the Administrative Agent (filed as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2005, filed March 16, 2006, and incorporated by reference herein).10.15

Waiver and Third Amendment to Amended and Restated Credit Agreement dated as of November 29, 2006, among Universal American Financial Corp., the Banks party to the Credit Agreement and Bank of America, N.A., as
the Administrative Agent (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed January 24, 2007, and incorporated by reference herein).10.16

Credit Agreement dated as of January 18, 2007, among Universal American Financial Corp., one or more Lending Institutions, and Bank of America, N.A., as the Administrative Agent and the L/C Issuer (filed as
Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed January 24, 2007, and incorporated by reference herein).10.17

Addendum II for Item 1A to Agreement dated as of September 14, 2000, between ALICOMP, a division of ALICARE, Inc. and Universal American Financial Corp. (filed as Exhibit 10.13 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2004, filed March 16, 2005, and incorporated by reference herein).10.18

Quota Share Reinsurance Agreement, dated as of June 30, 2005, between Pennsylvania Life Insurance Company and PharmaCare Captive Re, Ltd. (filed as Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2005, filed November 9, 2007, and incorporated by reference herein).10.19

Fourth Amendment dated as of March 22, 2007, to Amended and Restated Credit Agreement dated as of May 28, 2004 among Universal American Financial Corp., the Banks party to the Credit Agreement and Bank of
America, N.A., as the Administrative Agent (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, filed May 10, 2007, and incorporated by reference herein).10.20

First Amendment dated as of March 22, 2007, to Credit Agreement dated as of January 18, 2007, among Universal American Financial Corp., the Banks party to the Credit Agreement, and Bank of America, N.A., as
the Administrative Agent (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, filed May 10, 2007, and incorporated by reference herein).10.21

Stage 1 Securities Purchase Agreement dated as of May 7, 2007 among Universal American Financial Corp. and the several investors party thereto (filed as Exhibit 10.1 to the Registrant's Current Report
on Form 8-K filed May 11, 2007, and incorporated by reference herein).


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10.22

Stage 2 Securities Purchase Agreement dated as of May 7, 2007 among Universal American Financial Corp. and the several investors party thereto. (filed as Exhibit 10.2 to the Registrant's Current Report on
Form 8-K filed May 11, 2007, and incorporated by reference herein).10.23

Fifth Amendment dated as of May 7, 2007to Amended and Restated Credit Agreement dated as of May 28, 2004, among Universal American Financial Corp., the Banks party to the Amended and Restated Credit
Agreement, and Bank of America, N.A., as Administrative Agent (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed May 17, 2007, and incorporated by reference herein).10.24

Second Amendment dated as of May 7, 2007to Credit Agreement dated as of January 18, 2007, among Universal American Financial Corp., the Banks party to the Credit Agreement, and Bank of America, N.A., as
Administrative Agent (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed May 17, 2007, and incorporated by reference herein).10.25

Fourth Amendment dated as of March 22, 2007, to Amended and Restated Credit Agreement dated as of May 28, 2004 among Universal American Financial Corp., the Banks party to the Credit Agreement and Bank of
America, N.A., as the Administrative Agent. (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 filed May 10, 2007, and incorporated by reference herein).10.26

First Amendment dated as of March 22, 2007, to Credit Agreement dated as of January 18, 2007, among Universal American Financial Corp., one or more Lending Institutions, and Bank of America, N.A., as the
Administrative Agent and L/C Issuer (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 filed May 10, 2007, and incorporated by reference herein).10.27

Credit Agreement dated as of September 18, 2007, among Universal American Financial Corp., each lender from time to time party thereto, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and
L/C Issuer (filed as Exhibit 10.26 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 filed November 9, 2007, and incorporated by reference herein).10.28

Settlement Agreement and Amendment to Merger Agreement, dated as of March 5, 2008 (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated March 10, 2008, and incorporated herein
by reference).11.1*

Statement re Computation of per share Earnings (contained in the Consolidated Statements of Operations in this Report).31.1*

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

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

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


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SIGNATURES

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

UNIVERSAL AMERICAN CORP.November 10, 2008

/s/ RICHARD A. BARASCH Richard A. Barasch Chief Executive OfficerNovember 10, 2008

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


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