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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, 2009ORo

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




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

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

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


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

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



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

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

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

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


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

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

Class of Common Stock

Outstanding at
October 27, 2009$0.01 par value

76,398,175 shares




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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


403

Quantitative and Qualitative Disclosures About Market
Risk


584

Controls and Procedures


59PART II

Other Information1

Legal Proceedings


611A

Risk Factors


612

Unregistered Sales of Equity Securities and Use of Proceeds


623

Defaults Upon Senior Securities


634

Submission of Matters to a Vote of Security Holders


635

Other Information


636

Exhibits


63Signatures


65


1

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Table of Contents

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

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

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



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



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

2

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Table of Contents

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

3

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PART I

ITEM 1FINANCIAL STATEMENTS (Unaudited)

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

September 30,
2009

December 31,
2008(Unaudited)ASSETSInvestments:Fixed maturities available for sale, at fair value (amortized cost: 2009, $970,694; 2008, $1,075,078)

$
969,839

$
1,032,393Other invested assets


1,193


23,923Total investments


971,032


1,056,316Cash and cash equivalents


414,569


511,032Accrued investment income


8,998


13,214Deferred policy acquisition costs


150,204


237,630Reinsurance recoverableslife


609,391


75,290Reinsurance recoverableshealth


132,591


145,696Due and unpaid premiums


56,250


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


173,453


192,742Goodwill and other indefinite lived intangible assets


530,031


530,031Income taxes receivable


15,718


38,032CMS contract deposit receivables


212,315


609,293Other Part D receivables


178,246


154,049Advances to agents


63,685


60,017Other assets


109,330


141,501Total assets

$
3,625,813

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

$
587,465

$
616,819Reserves for future policy benefitshealth


408,845


415,026Policy and contract claimshealth


522,370


729,070Premiums received in advance


12,854


7,183Loan payable


318,000


320,625Other long term debt


110,000


110,000Amounts due to reinsurers


11,101


22,091Deferred income tax liability


4,920


6,877Other Part D liabilities


108,585


149,523Other liabilities


162,284


168,865Total liabilities


2,246,424


2,546,079STOCKHOLDERS' EQUITYPreferred stock (Authorized: 3 million shares):Series A preferred stock (Authorized: 300,000 shares, issued and outstanding: 2009, 42,105 shares, liquidation value $39,663; 2008, 42,105 shares,
liquidation value $37,137)


42


42Series B preferred stock (Authorized: 300,000 shares, issued and outstanding: 2009, 0 shares; liquidation value $0; 2008, 0 shares, liquidation value
$0)





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


879


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





Additional paid-in capital


880,039


870,520Accumulated other comprehensive loss


(11,388
)

(36,422
)Retained earnings


620,923


558,675Less: treasury stock (2009, 11.2 million shares; 2008, 7.2 million shares)


(111,106
)

(77,605
)Total stockholders' equity


1,379,389


1,316,084Total liabilities and stockholders' equity

$
3,625,813

$
3,862,163


See notes to unaudited consolidated financial statements.

4

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended September 30, 2009 and 2008

(Unaudited)

(in thousands, per share amounts in dollars)

2009

2008Net premium and policyholder fees earned

$
1,138,282

$
1,080,170Net investment income


10,630


19,770Fee and other income


5,576


10,200Realized loss:Total other-than-temorary impairment losses on securities


(788
)

(11,938
)Portion of loss recognized in other comprehensive income


53


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


(735
)

(11,938
)Realized loss, excluding other-than-temporary impairment losses on securities


(4,048
)

(203
)Net realized losses on investments


(4,783
)

(12,141
)Total revenues


1,149,705


1,097,999Benefits, claims and expenses:Claims and other benefits


901,580


858,858Change in deferred acquisition costs


(603
)

1,595Amortization of present value of future profits


5,752


5,913Commissions


28,039


34,849Reinsurance commissions and expense allowances


(6,509
)

(15,778
)Interest expense


4,877


5,698Other operating costs and expenses


128,852


150,172Total benefits, claims and other deductions


1,061,988


1,041,307Income before equity in earnings of unconsolidated subsidiary


87,717


56,692Equity in earnings of unconsolidated subsidiary


5


20,448Income before taxes


87,722


77,140Provision for income taxes


27,976


28,328Net income

$
59,746

$
48,812Earnings per common share:Basic

$
0.74

$
0.57Diluted

$
0.74

$
0.56Weighted average shares outstanding:Weighted average common shares outstanding


87,093


73,340Less weighted average treasury shares


(10,566
)

(4,693
)Basic weighted shares outstanding


76,527


68,647Weighted average common equivalent of preferred shares outstanding


4,211


17,500Effect of dilutive securities


205


339Diluted weighted shares outstanding


80,943


86,486


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, 2009 and 2008

(Unaudited)

(in thousands, per share amounts in dollars)

2009

2008Net premium and policyholder fees earned

$
3,723,492

$
3,522,745Net investment income


38,853


63,527Fee and other income


14,684


32,986Realized loss:Total other-than-temorary impairment losses on securities


(17,129
)

(54,893
)Portion of loss recognized in other comprehensive income


3,795


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


(13,334
)

(54,893
)Realized (loss)/gain, excluding other-than-temporary impairment losses on securities


(6,716
)

459Net realized losses on investments


(20,050
)

(54,434
)Total revenues


3,756,979


3,564,824Benefits, claims and expenses:Claims and other benefits


3,150,708


3,028,692Change in deferred acquisition costs


7,980


12,394Amortization of present value of future profits


17,652


17,738Commissions


90,402


110,862Reinsurance commissions and expense allowances


(18,939
)

(50,404
)Interest expense


14,942


17,794Loss on reinsurance and other related costs


7,624


Restructuring costs


4,727


Other operating costs and expenses


406,845


429,141Total benefits, claims and other deductions


3,681,941


3,566,217Income/(loss) before equity in earnings of unconsolidated subsidiary


75,038


(1,393
)Equity in earnings of unconsolidated subsidiary


111


51,781Income before taxes


75,149


50,388Provision for income taxes


23,617


19,208Net income

$
51,532

$
31,180Earnings per common share:Basic

$
0.63

$
0.35Diluted

$
0.63

$
0.35Weighted average shares outstanding:Weighted average common shares outstanding


87,005


73,658Less weighted average treasury shares


(9,898
)

(2,821
)Basic weighted shares outstanding


77,107


70,837Weighted average common equivalent of preferred shares outstanding


4,211


17,500Effect of dilutive securities


205


470Diluted weighted shares outstanding


81,523


88,807


See notes to unaudited consolidated financial statements.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  AND COMPREHENSIVE INCOME        For the Nine Months Ended
September 30, 2009 and 2008        (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

Total2008Balance at 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
)

5Issuance 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 at September 30, 2008

$
42

$
133

$
733

$
865,027

$
(23,703
)
$
494,763

$
(56,184
)
$
1,280,8112009Balance at January 1, 2009

$
42

$


$
874

$
870,520

$
(36,422
)
$
558,675

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

















51,532





51,532Other comprehensive income














35,750








35,750Comprehensive income























87,282ASC 320-10-65 implementation adjustment














(10,716
)

10,716





Issuance of common stock








5


1,603











1,608Stock based compensation











7,893











7,893Treasury shares purchased, at cost




















(37,350
)

(37,350
)Treasury shares reissued











23








3,849


3,872Balance at September 30, 2009

$
42

$


$
879

$
880,039

$
(11,388
)
$
620,923

$
(111,106
)
$
1,379,389


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, 2009 and 2008        (Unaudited)        (in thousands)

2009

2008Cash flows from operating activities:Net income

$
51,532

$
31,180Adjustments to reconcile net income to net cash (used in) provided by operating activities, net of balances acquired:Equity in earnings of unconsolidated subsidiary


(111
)

(51,781
)Distribution from unconsolidated subsidiary


6,800


40,500Deferred income taxes


(15,437
)

(4,833
)Realized losses on investments


20,050


54,434Amortization of intangible assets


17,652


17,738Loss on reinsurance, net of tax


2,221


Net amortization of bond premium


1,767


1,575Changes in operating assets and liabilities:Deferred policy acquisition costs


7,980


12,394Reserves for future policy benefits


2,835


7,309Policy and contract claims payable


(209,464
)

44,819Reinsurance balances


(1,452
)

28,277Due and unpaid advance premium, net


46,741


(82,079
)Income taxes payable/receivable


22,314


2,234Other Part D receivables


(24,197
)

22,209Other Part D liabilities


(40,938
)

63,414Other, net


35,241


(14,101
)Cash (used in) provided by operating activities


(76,466
)

173,289Cash flows from investing activities:Proceeds from sale or redemption of fixed maturity investments


639,251


195,101Cost of fixed maturity investments purchased


(539,813
)

(214,391
)Assets transferred on life reinsurance


(454,487
)

Return of purchase price





40,990Purchase of fixed assets


(13,093
)

(15,836
)Other investing activities


99


564Cash (used in) provided by investing activities


(368,043
)

6,428Cash flows from financing activities:Net proceeds from issuance of common and preferred stock, net of tax effect


4,234


3,758Cost of treasury stock purchases


(37,350
)

(53,400
)Receipts from CMS contract deposits


2,729,669


2,375,977Withdrawals from CMS contract deposits


(2,332,691
)

(2,571,412
)Deposits and interest credited to policyholder account balances


4,357


12,262Surrenders and other withdrawals from policyholder account balances


(17,548
)

(40,003
)Principal repayment on loan payable and other long term debt


(2,625
)

(27,625
)Cash provided by (used in) financing activities


348,046


(300,443
)Net decrease in cash and cash equivalents


(96,463
)

(120,726
)Cash and cash equivalents at beginning of period


511,032


667,685Cash and cash equivalents at end of period

$
414,569

$
546,959


See notes to unaudited consolidated financial statements.

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

1. ORGANIZATION AND COMPANY BACKGROUND

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

On
April 24, 2009 we completed the closing of the previously announced Life Insurance and Annuity Reinsurance transaction with the Commonwealth Annuity and Life Insurance Company,
known as Commonwealth, and the First Allmerica Financial Life Insurance Company, Goldman Sachs Group, Inc. subsidiaries (NYSE:GS). Under this transaction, effective April 1, 2009, we
reinsured substantially all of
our in force life insurance and annuity business under a 100% coinsurance treaty. This transaction is discussed in more detail at note 15 of notes to the Consolidated Financial Statements.

2. BASIS OF PRESENTATION

We have prepared the accompanying consolidated financial statements in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, for interim reporting in
accordance with Article 10 of the Securities and Exchange Commission's Regulation S-X. Accordingly, they do not include all of the disclosures normally required by accounting
principles generally accepted in the United States of America, or those normally made in an Annual Report on Form 10-K. For the insurance and health plan subsidiaries,
U.S. GAAP differs from statutory accounting practices prescribed or permitted by regulatory authorities. We have eliminated all material intercompany transactions and balances. The interim
financial information in this report is unaudited, but in the opinion of management, includes all adjustments, including normal, recurring adjustments necessary to present fairly the financial
position and results of operations for the periods reported. For further information, the reader of this Quarterly Report on Form 10-Q should refer to our Annual Report on
Form 10-K for the year ended December 31, 2008, that was filed with the Securities and Exchange Commission, or the SEC, on March 9, 2009. The results of operations for
the three and nine months ended September 30, 2009 and 2008 are not necessarily indicative of the results to be expected for the full year. Subsequent events were evaluated through
October 30, 2009, the date these consolidated financial statements were issued.

Unconsolidated Subsidiary:Part D Management Services, L.L.C., known as PDMS, is 50% owned by Universal American and 50%
owned by Caremark. We
do not control PDMS and therefore we do not consolidate PDMS in our financial statements. We account for our investment in PDMS on the equity basis and include it in other assets. During 2008,
together with Caremark, we ended our strategic alliance which created PDMS. As such, effective January 1, 2009, PDMS no longer manages the strategic alliance and does not earn revenue or incur
expenses related to the 2009 Medicare Prescription Drug Plan (PDP) year. PDMS continues to operate in 2009 solely to service the run-off

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

activity
related to pharmacy claims, rebates, and revenue related to prior PDP years. Upon dissolution of PDMS, which is expected in the fourth quarter of 2009 following the run-out of
prior year PDP claims, the economic interest of PDMS will be split equally between us and Caremark to match the 50% voting and ownership rights held by each entity (see
note 13Unconsolidated Subsidiary).

Use of Estimates:Our consolidated financial statements have been prepared in accordance with Generally Accepted Accounting
Principles, known as
GAAP. The preparation of our financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported by us in our consolidated financial statements
and the accompanying notes. Critical accounting policies are ones that require significant subjective or complex judgments, often as a result of the need to make estimates about the effect of matters
that are inherently uncertain. These estimates are based on information available at the time the estimates are made, as well as anticipated future events. Actual results could differ materially from
these estimates. We periodically evaluate our estimates, and as additional information becomes available or actual amounts become determinable, we may revise the recorded estimates and reflect them in
operating results. In our judgment, the accounts involving estimates and assumptions that are most critical to the preparation of our financial statements are policy related liabilities and expense
recognition, deferred policy acquisition costs, goodwill and other intangible assets, investment valuation, revenue recognitionMedicare Advantage products, and income taxes. There have
been no changes in our critical accounting policies during the current quarter.

Reclassifications:Commencing with the filing of this quarterly report on Form 10-Q, we have reclassified certain balances
within
the consolidated balance sheets and statements of operations for all periods presented with respect to following line items:



We
believe that these changes will enhance the usefulness of our consolidated financial statements by combining immaterial balances and providing a clear differentiation of reinsurance
and reserve balances between health and life insurance business. These reclassifications had no effect on total assets, total liabilities, stockholders' equity, net income, or earnings per share as
previously reported.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

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, 2008.

Recognition of Premium Revenues and Policy BenefitsMedicare Plans:Medicare is a federal health insurance program that
provides
Americans age 65 and over, and some disabled persons under the age of 65, certain hospital, medical and prescription drug benefits. The Medicare program consists of four parts, labeled
Parts A-D.



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

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

Policy
and contract claims include actual claims reported but not paid and estimates of health care services and prescription drug claims incurred but not reported. The estimated claims
incurred but not reported are based upon current enrollment, historical claim receipt and payment patterns, historical medical cost trends and health service utilization statistics. These estimates
and assumptions are derived

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

from
and are continually evaluated using per member per month trend analysis, claims trends developed from our historical experience in the preceding month (adjusted for known changes in estimates of
recent hospital and drug utilization data), provider contracting changes, changes in benefit levels, product mix and seasonality. These estimates are based on information available at the time the
estimates are made, as well as anticipated future events. Actual results could differ materially from these estimates. We periodically evaluate our estimates, and as additional information becomes
available or actual amounts become determinable, we may revise the recorded estimates and reflect them in operating results.



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



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



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

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

Risk Score AdjustmentsThe monthly CMS premium is based upon the members' risk score status, which is determined by CMS, as more fully described above
under "Medicare Risk Adjustment

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

Provisions."
All health benefit organizations must capture, collect, and submit the necessary diagnosis code information to CMS within prescribed deadlines. Accordingly, we collect, capture, and
submit the
necessary and available diagnosis data to CMS within prescribed deadlines for our HMO, PPO and PFFS plans. We estimate changes in CMS premium related to risk score adjustments based upon the diagnosis
data submitted to CMS and ultimately accepted by CMS. Risk scores are updated annually by CMS and reconciled to our estimated amounts by us with any adjustments recorded in premium revenue. Although
such adjustments have not been considered to be material in the past, future adjustments could be material.

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

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

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

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

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

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

CMS Risk Corridor Provisions for the Part D benefits of our HMO and PPO PlansPremiums from CMS for members of our HMO and PPO Plans with
Part D benefits, are subject to risk corridor

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

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



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

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

Risk Score AdjustmentsThe monthly CMS premium is based upon the members' risk score status, which is determined by CMS, as more fully described above
under "Medicare Risk Adjustment Provisions." We do not have access to diagnosis data with respect to our stand-alone PDP members and therefore, we cannot anticipate changes in our members' risk
scores. Changes in CMS premiums related to risk-score adjustments for our stand alone PDP membership are recognized when the amounts become determinable and collectability is reasonably
assured, which occurs when we are notified by CMS of such adjustments. Although such adjustments have not been considered to be material in the past, future adjustments could be material.

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

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

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

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

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

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

Deposit AccountingLow-income cost sharing and catastrophic reinsurance subsidies received are reported as increases to CMS contract
deposits in the consolidated balance sheets. Payments of the actual prescription drug costs related to the low-income cost sharing and catastrophic reinsurance are reported as decreases to
CMS contract deposits in the consolidated balance sheets. We do not recognize premium revenues or claims expense for this activity. These receipts and payments are reported as financing activity in
our consolidated statements of cash flows.

3. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS

GAAP Codification:In June 2009, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting
Standard, or SFAS,
No. 168,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement
No. 162. This statement modifies the GAAP hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative accounting literature. Effective July
2009, the FASB Accounting Standards Codification, or ASC, also known collectively as the "Codification," is considered the single source of authoritative U.S. accounting and reporting standards,
except for additional authoritative rules and interpretive releases issued by the SEC. Nonauthoritative guidance and literature would include, among other things, FASB Concepts Statements, American
Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users can
more easily access authoritative accounting guidance. It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. The Codification is effective
for financial statements issued for reporting periods that end after September 15, 2009. Updates to the ASC are issued as Accounting Standards Updates, or ASU. Because the Codification did not
change GAAP, the Codification had no impact on our consolidated financial statements and footnotes, other than the replacement of pre-codification references with ASC or ASU references
herein.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS (Continued)

Measuring Liabilities at Fair Value:On August 28, 2009, the FASB issued ASU No. 2009-05,Measuring
Liabilities at Fair Value. ASU 2009-05 provides guidance on several key issues regarding the estimate of fair value for liabilities and amends ASC 820, Fair Value Measurements and
Disclosures. Among other things, the guidance addresses restrictions on the transfer of a liability, and clarifies how the price of a traded debt security should be considered
in estimating the fair value of the issuer's liability. We are currently evaluating the provisions of this ASU, which requires adoption effective for the period ending December 31, 2009.

Fair Value Measurements:In April 2009, the FASB issued new guidance to address concerns about (1) measuring the fair value
of financial
instruments when the markets become inactive and quoted prices may reflect distressed transactions and (2) recording impairment charges on investments in debt securities. The FASB also issued
new guidance to require disclosures of fair values of certain financial instruments in interim financial statements.

Fair Value Measurements and Disclosures TopicASC 820-10-65 provides additional guidance to highlight and expand
on the factors that should be considered in estimating fair value when there has been a significant decrease in market activity for a financial asset. It also requires new disclosures relating to fair
value measurement inputs and valuation techniques (including changes in inputs and valuation techniques).

InvestmentsDebt and Equity Securities TopicASC 320-65-1 modified the criteria for recognition of
other-than-temporary impairment (OTTI) of a debt security. If management intends to sell the debt security, or it is more likely than not the entity will be required to sell
the debt security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the debt security's amortized cost basis and its fair
value at the balance sheet date. After recognition of the OTTI, the debt security is accounted for as if it had been purchased on the measurement date of the OTTI, with an amortized cost basis equal
to the previous amortized cost basis less the OTTI recognized in earnings.

If
management does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before recovery of its amortized
cost basis, but the present value of the cash flows expected to be collected is less than the amortized cost basis of the debt security (referred to as the credit loss), an OTTI is considered to have
occurred. In this instance, the total OTTI is bifurcated into the amount related to the credit loss, which is recognized in earnings, with the remaining amount of the total OTTI attributed to other
factors (referred to as the noncredit portion) and recognized as a separate component in other comprehensive loss. After the recognition of an OTTI, the debt security is accounted for as if it had
been purchased on the measurement date of the OTTI, with an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. In addition, ASC 820 expands and
increases the frequency of existing disclosures about OTTIs for debt and equity securities regarding expected cash flows, credit losses and an aging of securities with unrealized losses.

Financial Instruments TopicASC 825-10-65 increases the frequency of fair value disclosures from annual to
quarterly to provide financial statement users with more timely information about the effects of current market conditions on their financial instruments.

We
adopted the aforementioned changes effective April 1, 2009, resulting in an increase in the opening balance of retained earnings by $10.7 million, with a corresponding
increase to the

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS (Continued)

accumulated
other comprehensive loss on our consolidated statements of stockholders' equity and comprehensive income to reclassify the noncredit portion of previously impaired debt securities held as
of April 1, 2009.

The
following summarizes the components of the adjustment (in thousands):

Unrealized
OTTIIncrease in amortized cost

$
16,487Income Tax


(5,771
)Net cumulative effect adjustment

$
10,716


The
adjustment was calculated for all debt securities held as of April 1, 2009, for which an OTTI was previously recognized, but as of April 1, 2009, we did not intend to
sell the security and it was not more likely than not that we would be required to sell the security before recovery of its amortized cost, by comparing the present value of cash flows expected to be
received as of April 1, 2009, to the amortized cost basis of the debt securities. The discount rate used to calculate the present value of the cash flows expected to be collected was the rate
for each respective debt security in effect before recognizing any OTTI, except for on variable rate debt securities, on which the rate used was the current rate in effect as of the date the cash flow
estimate was being made.

Following
is a summary of the adjustment as of April 1, 2009, by asset class (in thousands):

Subprime

$
15,689Non-agency residential mortgage-backed securities


798$
16,487


In
addition, we have enhanced our financial statement presentation to separately present the total OTTI recognized in realized loss, with an offset for the amount of noncredit
impairments recognized in accumulated other comprehensive loss, on the face of our consolidated statements of operations. The enhanced financial statement disclosures required under ASC 825 are
included in notes 4 and 5.

Subsequent Events DisclosureOn June 30, 2009, we adopted ASC 855-10-50,Subsequent
EventsDisclosure, which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial
statements are issued. ASC 855-10-50 defines two types of subsequent events. The effects of events or transactions that provide additional evidence about conditions that
existed at the balance sheet date, including the estimates inherent in the process of preparing financial statements, are recognized in the financial statements. The effects of events that provide
evidence about conditions that did not exist at the date of the balance sheet but arose after that date are not recognized in the financial statements.

17

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS

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

September 30, 2009Classification

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Gross
Unrealized
OTTI

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

$
35,683

$
771

$
(3
)
$


$
36,451Government sponsored agencies


141,864


4,144








146,008Other political subdivisions


9,994


310


(85
)




10,219Corporate debt securities


318,769


17,883


(917
)




335,735Foreign debt securities


22,014


1,389


(212
)




23,191Mortgage-backed and asset-backed securities


442,370


15,658


(14,865
)

(24,928
)

418,235$
970,694

$
40,155

$
(16,082
)
$
(24,928
)
$
969,839




December 31, 2008Classification

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Gross
Unrealized
OTTI

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

$
33,963

$
1,372

$


$


$
35,335Government sponsored agencies


90,030


4,999








95,029Other political subdivisions


9,993


133


(241
)




9,885Corporate debt securities


441,681


4,055


(25,453
)




420,283Foreign debt securities


32,779


41


(1,930
)




30,890Mortgage-backed and asset-backed securities


466,632


8,109


(33,770
)




440,971$
1,075,078

$
18,709

$
(61,394
)
$


$
1,032,393


At
September 30, 2009, gross unrealized losses of $39.8 million on mortgage-backed and asset-backed securities reflect unrealized losses of $34.6 million on subprime
residential mortgage loans, as discussed below, and $5.2 million related to obligations of commercial mortgage-backed securities and other asset-backed securities. The value of a majority of
these securities is depressed due to the deterioration of value in the mortgage-backed securities market and related businesses. Management and the Investment Committee have evaluated the
$14.9 million of losses not impaired, 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, 2009 by contractual maturity are shown below. Expected maturities will differ from contractual
maturities

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. 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

$
48,627

$
49,622Due after 1 year through 5 years


364,146


382,072Due after 5 years through 10 years


95,511


100,330Due after 10 years


20,040


19,580Mortgage and aset-backed securities


442,370


418,235$
970,694

$
969,839


The
fair value and unrealized loss as of September 30, 2009 and December 31, 2008 for fixed maturities, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, are shown below:

Less than 12 Months

12 Months or Longer

TotalSeptember 30, 2009

Fair
Value

Gross
Unrealized
Losses and
OTTI

Fair
Value

Gross
Unrealized
Losses and
OTTI

Fair
Value

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

$
49

$
(3
)
$


$


$
49

$
(3
)Other political subdivisions








1,914


(85
)

1,914


(85
)Corporate debt securities


1,298


(39
)

12,433


(878
)

13,731


(917
)Foreign debt securities


25





2,302


(212
)

2,327


(212
)Mortgage-backed and asset-backed securities


3,002


(16,087
)

29,719


(23,706
)

32,721


(39,793
)Total fixed maturities at September 30, 2009

$
4,374

$
(16,129
)
$
46,368

$
(24,881
)
$
50,742

$
(41,010
)Total number of securities in an unrealized loss position


62


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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)



Less than 12 Months

12 Months or Longer

TotalDecember 31, 2008

Fair
Value

Gross
Unrealized
Losses and
OTTI

Fair
Value

Gross
Unrealized
Losses and
OTTI

Fair
Value

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

$
53

$


$


$


$
53

$
Other political subdivisions


878


(122
)

920


(79
)

1,798


(201
)Corporate debt securities


182,411


(12,982
)

51,017


(12,511
)

233,428


(25,493
)Foreign debt securities


26,803


(1,318
)

1,872


(612
)

28,675


(1,930
)Mortgage-backed and asset-backed securities


79,877


(9,748
)

57,370


(24,022
)

137,247


(33,770
)Total fixed maturities at September 30, 2009

$
290,022

$
(24,170
)
$
111,179

$
(37,224
)
$
401,201

$
(61,394
)Total number of securities in an unrealized loss position


209


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, 2009, we held subprime securities with par values of $137.0 million, an amortized cost of $57.2 million and a market value of
$22.7 million representing approximately 1.6% 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 AA by Standard & Poors, a division of the McGraw Hill Companies, Inc.,
known as S&P, or equivalent.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

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

Vintage Year

Amortized
Cost

Fair
Value

Unrealized
Loss(in thousands)2003

$
4,374


3,284


(1,090
)2004


2,340


1,823


(517
)2005


23,736


12,809


(10,927
)2006


21,319


3,051


(18,268
)2007


5,427


1,696


(3,731
)Totals

$
57,196

$
22,663

$
(34,533
)


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

2009 Quarter Ended

Year Ended December 31,Cumulative

September 30

June 30

March 31

2008

2007(in thousands)Subprime

$
95,617

$
146

$
2,135

$
4,375

$
47,964

$
40,997Other structured


10,842


108


2,388


3,701


4,645


Corporate


7,177











7,177


$
113,636

$
254

$
4,523

$
8,076

$
59,786

$
40,997


During
the quarter ended September 30, 2009, we recognized an other-than-temporary impairment on two previously impaired structured securities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

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

For the three months
ended September 30,

For the nine months
ended September 30,2009

2008

2009

2008(in thousands)Realized gains:Fixed maturities

$
1,119

$
149

$
7,197

$
1,738Other








175


21,119


149


7,372


1,740Realized losses:Fixed maturities, excluding OTTI


(5,167
)

(352
)

(14,089
)

(1,006
)OTTI on fixed maturities


(254
)

(11,941
)

(12,852
)

(54,895
)OTTI on equity maturities


(481
)




(481
)

Other





3





(273
)(5,902
)

(12,290
)

(27,422
)

(56,174
)Net realized losses

$
(4,783
)
$
(12,141
)
$
(20,050
)
$
(54,434
)


Changes
in the amount of other-than-temporary impairments recognized in earnings on securities for which a portion of the
other-than-temporary impairments related to other factors was recognized in other comprehensive income:

Three months ended
September 30,

Nine months ended
September 30,2009

2009(in thousands)Balance, beginning of period

$
3,898

$
390Credit related impairments recognized in current period earnings on securities:With credit related impairments previously recognized


108


108With credit related impairments not previously recognized





3,508Cumulative credit related impairments as of September 30, 2009

$
4,006

$
4,006


In
addition, during the three and nine month periods ended September 30, 2009, we recognized other-than-temporary impairments of approximately
$0.6 million and $1.7 million, respectively, on securities for which the impairment was not split between earnings and other comprehensive income.

5. FAIR VALUE MEASUREMENTS

We carry fixed maturity investments, equity securities and interest rate swaps at fair value in our consolidated financial statements. These fair value disclosures consist of information
regarding the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

valuation
of these financial instruments, followed by the fair value measurement disclosure requirements ofFair Value Measurements and Disclosures
Topic, ASC 820-10.

We
applied the provisions of ASC 820-10 prospectively to financial instruments that we record at fair value. Our adoption did not have an impact on opening retained earnings.



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

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

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

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

The
following table presents our assets and liabilities that are carried at fair value by hierarchy levels, as of September 30, 2009 (in thousands):

Total

Level 1

Level 2

Level 3Assets:Fixed maturties, available for sale

$
969,839

$


$
966,971

$
2,868Equity securities


9








9Total assets

$
969,848

$


$
966,971

$
2,877Liabilities:Interest rate swaps

$
16,821

$


$
16,821

$



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 baed upon the lowest level input that is significant to the determination of the fair value.

23

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)



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



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



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

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

24

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

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.



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

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

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

Fixed
Maturities

Equity
Securities

Total(in thousands)Fair value as of December 31, 2008

$
3,944

$
490

$
4,434Net purchases and sales


(157
)




(157
)Net transfers in/(out)


(464
)




(464
)Unrealized losses included in AOCL(1),(2)


7





7Fair value as of March 31, 2009


3,330


490


3,820Net purchases and sales


(57
)




(57
)Net transfers in/(out)


(95
)




(95
)Unrealized losses included in AOCL(1),(2)


(710
)




(710
)Fair value as of June 30, 2009


2,468


490


2,958Net purchases and sales


(72
)




(72
)Net transfers in/(out)








Realized loss





(481
)

(481
)Unrealized gains included in AOCL(1),(2)


472





472Fair value as of September 30, 2009

$
2,868

$
9

$
2,877


(1)AOCL:
Accumulated other comprehensive loss(2)Unrealized
gains/losses represent losses from changes in values of Level 3 financial instruments only for the periods in which the instruments are
classified as Level 3.


25

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)




6. EARNINGS PER COMMON SHARE COMPUTATION

We calculate earnings per common share using the two-class method. This method requires that we allocate net income 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.

At
September 30, 2009 and 2008, we allocated earnings between common and participating preferred stock as follows:

Three months ended
September 30,

Nine months ended
September 30,2009

2008

2009

2008(in thousands)Net income attributable to common stock

$
56,627

$
38,896

$
48,864

$
25,003Undistributed income allocated to participating preferred stock


3,119


9,916


2,668


6,177Net income

$
59,746

$
48,812

$
51,532

$
31,180


7. SHARE REPURCHASE PLAN

We have approved share repurchase plans that have authorized us to repurchase up to $125 million of shares of our common stock. Through September 30, 2009, we had
repurchased 10.8 million shares of our common stock for an aggregate amount of $106.4 million, under these programs. Subsequent to quarter end, through October 27, 2009, we
repurchased an additional 0.4 million shares for $3.5 million. As of October 27, 2009, we have $15.1 million that remains available to repurchase additional shares under
these plans. We are not obligated to repurchase any specific number of shares under the programs or to make repurchases at any specific time or price.

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

For the nine months ended September 30,2009

2008Shares

Amount

Weighted
Average
Cost Per
Share

Shares

Amount

Weighted
Average
Cost Per
ShareTreasury stock beginning of year


7,194,387

$
77,605

$
10.79


285,545

$
4,258

$
14.91Shares repurchased


4,390,057


37,350


8.51


4,715,885


53,400


11.32Shares distributed in the form of employee bonuses


(356,164
)

(3,849
)

10.80


(119,312
)

(1,474
)

12.36Treasury stock, end of period


11,228,280

$
111,106

$
9.90


4,882,118

$
56,184

$
11.51


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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss are as follows:

September 30,
2009

December 31,
2008(in thousands)Net unrealized gains (losses) on investments

$
24,073

$
(42,685
)Gross unrealized OTTI


(24,928
)

Deferred acquisition cost adjustment





6,617Foreign currency translation gains


156


332Fair value of cash flow swap on debt


(16,821
)

(20,298
)Deferred income taxes


6,132


19,612Total accumulated other comprehensive loss

$
(11,388
)
$
(36,422
)


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

Three months ended September 30, 20092009

2008Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount

Before Tax
Amount

Tax Expense
(Benefit)

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

$
29,113

$
10,190

$
18,923

$
(35,865
)
$
(12,552
)
$
(23,313
)Reclassification adjustment for (losses) gains included in net income


(4,783
)

(1,674
)

(3,109
)

12,141


4,249


7,892Net unrealized gain (loss)


24,330


8,516


15,814


(23,724
)

(8,303
)

(15,421
)Cash flow hedge


(1,749
)

(612
)

(1,137
)

(2,271
)

(795
)

(1,476
)Foreign currency translation adjustment


(5
)

(2
)

(3
)

(39
)

(14
)

(25
)Other comprehensive gain/(loss)

$
22,576

$
7,902

$
14,674

$
(26,034
)
$
(9,112
)
$
(16,922
)


27

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. ACCUMULATED OTHER COMPREHENSIVE LOSS (Continued)



Nine months ended September 30, 20092009

2008Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount

Before Tax
Amount

Tax Expense
(Benefit)

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

$
55,263

$
19,342

$
35,921

$
(88,284
)
$
(30,899
)
$
(57,385
)Reclassification adjustment for (losses) gains included in net income


(20,050
)

(7,017
)

(13,033
)

54,434


19,052


35,382Net unrealized gain (loss)


35,213


12,325


22,888


(33,850
)

(11,847
)

(22,003
)Cash flow hedge


3,477


1,217


2,260


(2,445
)

(856
)

(1,589
)Foreign currency translation adjustment


(176
)

(62
)

(114
)

(69
)

(24
)

(45
)Other comprehensive gain/(loss)

$
38,514

$
13,480

$
25,034

$
(36,364
)
$
(12,727
)
$
(23,637
)


9. STOCK-BASED COMPENSATION

We have various stock-based incentive plans for our employees, non-employee directors
and agents. We issue shares upon the exercise of options granted under these plans. Detailed information for activity in our stock-based incentive plans can be found in
note 9Stock-Based Compensation to the financial statements in our annual report on Form 10-K for the year ended December 31, 2008.



Beginning January 1, 2006, we adopted provisions ofCompensation-Stock Compensation
Topic,ASC 718-10 on share-based payments using the modified prospective method, and began recognizing compensation cost for share-based payments to employees and
non-employee directors based on the grant date fair value of the award, which we amortize over the grantees' service period. We elected to use the Black-Scholes valuation model to value
employee stock options, as we had done for our previous pro forma stock compensation disclosures.

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

For options granted in:2009

2008 and PriorRisk free interest rates

1.28%  4.01%

1.33%  3.15%Dividend yields

0.0%

0.0%Expected volatility

40.61%  55.63%

35.60%  49.31Expected lives of options (in years)

3.5  3.8

3.5  5.0


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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. STOCK-BASED COMPENSATION (Continued)

The weighted-average grant-date fair value was $3.92 for options granted during the first nine months of 2009 and was $2.82 for options granted during the first nine months
of 2008.

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, 2009 is set forth below:

Options
(in thousands)

Weighted Average
Exercise PriceOutstanding, January 1, 2009


5,640

$
14.85Granted


1,039


10.03Exercised


(497
)

3.19Forfeited or expired


(650
)

17.22Outstanding, September 30, 2009


5,532

$
14.71Exercisable, September 30, 2009


3,076

$
13.72


The
total intrinsic value of options exercised during the first nine months of 2009 was $2.9 million and the total intrinsic value of options exercised during the
first nine months of 2008 was $3.5 million. As of September 30, 2009, the total compensation cost related to non-vested awards not yet recognized was $11.2 million,
which we expect to recognize over a weighted average period of 1.1 years.

We
received proceeds of $1.6 million from the exercise of stock options during the first nine months of 2009 and proceeds of $1.4 million from the exercise of stock options
during first nine months of 2008. ASC 718-10 also requires us to report the benefits of tax deductions in excess of recognized compensation cost as a financing cash flow, rather than as an
operating cash flow as required under the prior statement. We recognized $2.6 million of financing cash flows for these excess tax deductions for the nine months ended September 30, 2009
and $1.7 million for the nine months ended September 30, 2008.



In accordance with our 1998 Incentive Compensation Plan, we may grant restricted stock to our officers and non-officer
employees and directors. We have issued restricted stock grants which vest ratably over three and four year periods, and some restricted stock grants have contained portions that vest immediately. We
value restricted stock awards at an amount equal to the market price of our common stock on the date of grant and generally issue restricted stock out of treasury shares. We

29

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. STOCK-BASED COMPENSATION (Continued)

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, 2009Non-vested Restricted Stock

Shares
(in thousands)

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


471

$
18.89Granted


397


10.29Vested


(95
)

15.45Forfeited


(94
)

18.18Non-vested at end of period


679

$
14.44


The
total fair value of shares of restricted stock vested during the nine months ended September 30, 2009 was $0.8 million and the total fair value of
shares of restricted stock vested during the nine months ended September 30, 2008 was $1.0 million.

During
2009, the Board of Directors approved aperformance shareaward program for our officers. The performance shares are structured
such that target shares with a three-year cliff vesting period are awarded. The actual number of shares earned at the conclusion of the vesting period can vary from 0% to 150% of the
target award, based on our total shareholder return relative to a group of peer companies that were selected prior to the award. Compensation expense is recognized on a straight line basis over the
vesting period. Prior to vesting, previously recognized compensation expense may be reversed in the event a grantee resigns, however, once the vesting date is reached, previously recognized expense
may not be changed, even if the actual award varies from the target. In connection with this program, we awarded 373 thousand performance shares to officers during 2009. On a
year-to-date basis, related compensation cost of $0.9 million has been recognized in other operating costs and expenses.

30

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. MEDICARE PART D

At September 30, 2009 and December 31, 2008, the balances due from CMS for the 2006 through 2009 Plan years were $245.9 million and $640.9 million,
respectively. The following table provides balances due from (to) CMS by Plan year:

September 30, 2009

December 31, 2008Plan Year

Reinsurance/
Low-income
Cost
Subsidy(1)

Risk
Corridor(2)

Total Due
from (to)
CMS(3)

Reinsurance/
Low-income
Cost
Subsidy(1)

Risk
Corridor(2)

Total Due
from (to)
CMS(3)(in thousands)2009

$
(345,018
)
$
6,870

$
(338,148
)
$


$


$
2008(3)


533,317


13,145


546,462


528,993


16,551


545,5442007(4)


20,937


12,273


33,210


85,909


16,917


102,8262006


3,079


1,334


4,413


(5,609
)

(1,815
)

(7,424
)Total due from CMS

$
212,315

$
33,622

$
245,937

$
609,293

$
31,653

$
640,946


---

11. DERIVATIVE INSTRUMENTSCASH FLOW HEDGE

On December 4, 2007, we entered into two separate interest rate swap agreements, one with Citibank, N.A. and one with Calyon Corporate and Investment Bank to hedge the variability
of cash flows to be paid under our credit facility described in note 14Loan Payable in the Notes to the Consolidated Financial Statements in our Annual Report on
Form 10-K for the year ended December 31, 2008. Pursuant to the swap agreement with Citibank, we agreed to swap our floating rate interest payment based on the 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. Pursuant to the swap agreement with Calyon,
we agreed to swap our floating rate interest payment based on the 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 swap agreements provide a hedge against variability in interest payments on the a combined $250 million amount of the variable rate term loans under 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

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

11. DERIVATIVE INSTRUMENTSCASH FLOW HEDGE (Continued)

these
swaps was a $16.8 million liability at September 30, 2009 and a $20.3 million liability at December 31, 2008. We have reflected this fair value in other liabilities.
In connection with the transaction executed with Citibank, N.A. we are required to post collateral when we are in a net liability position. The collateral amount required is based on the fair value of
the swap including net accrued interest less a $1 million threshold amount as determined by our credit rating of BB+. Should we be downgraded or cease to be rated by S&P or Moody's, the
threshold amount would be reduced to zero and we would need to post $1 million in additional collateral. This collateral is reflected in cash and cash equivalents and was $8.3 million as
of September 30, 2009 and $9.3 million as of December 31, 2008. Based on the fact that, at inception, the critical terms of the hedging instrument and the hedged forecasted
transaction were the same, we have concluded that we expect changes in cash flows attributable to the risk being hedged to be completely offset by the hedging derivative, and have designated these
swaps as cash flow hedges. As a result, we reflected the unrealized loss on these hedges in accumulated other comprehensive loss. We 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.

12. COMMITMENTS AND CONTINGENCIES



Plaintiff Arthur Tsutsui filed a shareholder derivative action on December 30, 2005, in the Supreme Court for New York State,
Westchester County. The defendants in Tsutsui v. Barasch, et al., index no. 05-22523, are officers Richard A. Barasch, Robert A. Waegelein and Gary W. Bryant, as well as all of the
directors sitting on our board of directors as of the time the complaint was filed. The Tsutsui action alleges that the same alleged misstatements that were the subject of earlier shareholder actions,
which have now all been dismissed or voluntarily withdrawn, constituted a breach of fiduciary duty by the officer defendants and the directors that caused the Company to sustain damages. The Tsutsui
action also seeks recovery of any proceeds derived by the officer and director defendants from the sale of our stock that the plaintiff claims was in breach of their fiduciary duties. The defendants
filed a motion to dismiss the complaint for failure to state a claim, as well as on other grounds. The court granted this motion, and the plaintiff has appealed the dismissal. On December 26,
2008, the plaintiff filed its appeal brief, the defendants filed their responsive brief on February 26, 2009, and the plaintiff filed its reply brief on March 9, 2009. Oral argument on
the appeal took place on October 6, 2009. The matter has been fully submitted to the appellate court, and the parties are awaiting a ruling.



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.

32

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

12. COMMITMENTS AND CONTINGENCIES (Continued)



Laws and regulations governing the Medicare, Medicaid and other federal healthcare programs are complex and subject to interpretation.
We believe that we are in compliance with all applicable laws and regulations in all material respects. However, compliance with such laws and regulations can be subject to future government review
and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other federal healthcare programs. We are not aware of any
material regulatory proceeding or investigation underway or threatened involving allegations of potential wrongdoing.

In
July 2009, we received a subpoena from the Department of Health and Human Services, Office of Inspector General, known as HHS-OIG, requesting documents related to our
marketing, sales and enrollment practices for our Today's Health Medicare HMO Plans which are offered in the State of Wisconsin. We are cooperating with HHS-OIG and responding to the
subpoena.

13. 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 Prescriba RxSM PDPs and Caremark, for which it receives fees and other remuneration from our Prescriba RxSM PDPs and Caremark. We do
not control PDMS and therefore PDMS is not consolidated in our financial statements. Our investment in PDMS is accounted for on the equity basis and is included in other assets. Our investment in PDMS
was $0.2 million at September 30, 2009 and $6.9 million at December 31, 2008. 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 $0.1 million and $51.8 million for the nine months ended September 30, 2009 and 2008, respectively. PDMS made distributions to
its owners aggregating $13.6 million and $81.0 million during the nine months ended September 30, 2009 and 2008, respectively. Our share of those distributions was
$6.8 million and $40.5 million, respectively.

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

Three months ended
September 30,

Nine months ended
September 30,2009

2008

2009

2008(in thousands)Total revenue

$
29

$
41,458

$
246

$
105,901Total expenses


18


562


24


2,339Net income

$
11

$
40,896

$
222

$
103,562


On
February 13, 2008, the Company and Caremark announced that the strategic alliance would end as of December 31, 2008, subject to regulatory approval. On July 31,
2008, PDMS received approval from the Centers for Medicare and Medicaid Services (CMS) of the Novation Agreement for Change of Ownership of a Medicare Prescription Drug Plan (PDP) Line of Business. As
such, effective

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

13. UNCONSOLIDATED SUBSIDIARY (Continued)

January 1,
2009, PDMS no longer manages the strategic alliance and does not earn revenue or incur expenses related to the 2009 PDP year. PDMS will continue to operate in 2009 solely to service
the run-off activity related to pharmacy claims, rebates, and revenue related to prior PDP
years. Upon dissolution of PDMS, which is expected in the fourth quarter of 2009 following the run-out of prior year PDP claims, the economic interest of PDMS will be split equally between
the Company and Caremark to match the 50% voting and ownership rights held by each entity.

14. BUSINESS SEGMENT INFORMATION

Our business segments are based on product and consist of



We
also report the activities of our holding company in a separate segment.

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.

34

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14. 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 30,2009

2008Revenues

Income
(Loss)
Before
Income
Taxes

Revenues

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

$
660,809

$
45,686

$
615,544

$
44,077Medicare Part D


409,292


53,233


397,952


49,196Traditional Insurance


79,398


3,659


111,175


3,099Senior Administrative Services


10,158


1,410


20,823


5,034Corporate


92


(11,483
)

560


(12,125
)Intersegment revenues


(5,256
)




(15,466
)

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


(4,783
)

(4,783
)

(12,141
)

(12,141
)Equity in earnings of unconsolidated subsidiary(2)


(5
)




(20,448
)

Total

$
1,149,705

$
87,722

$
1,097,999

$
77,140


35

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14. BUSINESS SEGMENT INFORMATION (Continued)

Nine months ended September 30,2009

2008Revenues

Income
(Loss)
Before
Income
Taxes

Revenues

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

$
1,968,276

$
120,893

$
1,805,412

$
77,813Medicare Part D


1,531,698


30,965


1,498,128


30,210Traditional Insurance


266,043


(22,238
)

346,751


6,268Senior Administrative Services


32,319


7,121


65,537


17,442Corporate


526


(41,542
)

2,664


(26,911
)Intersegment revenues


(21,722
)




(47,453
)

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


(20,050
)

(20,050
)

(54,434
)

(54,434
)Equity in earnings of unconsolidated subsidiary(2)


(111
)




(51,781
)

Total

$
3,756,979

$
75,149

$
3,564,824

$
50,388


---

15. OTHER DISCLOSURES

Income Taxes:Our effective tax rate was 31.9% for the third quarter of 2009, and 36.7% for the third quarter of 2008. For the
nine months ended
September 30, 2009, our effective tax rate was 31.4%, compared with 38.1% for the same period of 2008. The decline in the effective rate for the three and nine month periods ended
September 30, 2009 is due to the recording of $5.0 million of non-recurring tax benefits during the third quarter of 2009. These benefits resulted from the settlement of the
Internal Revenue Service examination of 2005 primarily related to the treatment of a controlled foreign corporation sold in 2006.

Life Insurance and Annuity Reinsurance Transaction:On April 24, 2009 we completed the closing of the previously announced
Life Insurance and
Annuity Reinsurance transaction with the Commonwealth Annuity and Life Insurance Company, known as Commonwealth, and the First Allmerica Financial Life Insurance Company, Goldman Sachs
Group, Inc. subsidiaries (NYSE:GS). Under this transaction, we reinsured substantially all of our in force life insurance and annuity business under a 100% coinsurance treaty. In accordance
withFinancial Services-Insurance Topic.ASC 944, reinsurance recoverables are to be reported as separate assets rather than as reductions of the
related liabilities. Accordingly, we increased the amounts due from reinsurers by approximately $544 million as of the effective date of the transaction, April 1, 2009, representing the
GAAP basis liabilities reinsured. We transferred approximately $454 million of cash, net of the ceding commission of $77 million, and

36

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

15. OTHER DISCLOSURES (Continued)

$22 million
of policy loans, related to the reinsured policies, to the reinsurer. We had approximately $74 million of deferred acquisition costs and present value of future profits as of
the effective date of the transaction that were reduced to zero as a result of the recovery of such costs through the initial ceding commission.

On
a GAAP basis, the transaction resulted in a loss and other related costs of approximately $7.6 million, including approximately $2.8 million related to the transition of
the administration of the business to the reinsurer.

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

We
incurred total restructuring charges of $4.7 million during the quarter ended June 30, 2009. These charges are included in restructuring costs in our Consolidated
Statements of Operations for the nine month period ended September 30, 2009. A summary of our restructuring liability balance and restructuring activity for 2009 is as follows:

Segment

January 1,
Balance

Charge to
Earnings

Cash
Paid

Non-cash

September 30,
Balance(in thousands)2009Contract termination costs

Medicare Advantage

$


$
3,500

$
(3,500
)
$


$
Workforce reduction

Traditional





608


(360
)




248Facility consolidation

Traditional





619





(57
)

562Total



$


$
4,727

$
(3,860
)
$
(57
)
$
810


Agent Balances:In late 2006 we began recruiting career managers to develop offices for distribution of our products. We have
opened a significant
number of new "expansion" offices since then. The Company has advanced much of the cost of the development of these new offices; however, these costs are the responsibility of the manager of the
individual office, to be repaid from future profits of the office.

As
a result of recent regulatory changes, the PFFS product will no longer be available as of January 1, 2011, except in areas that have approved CMS network access requirements or
in certain designated rural areas. We have begun to develop provider network-based products in selected core

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

15. OTHER DISCLOSURES (Continued)

markets
to enable the migration of their PFFS membership to the new PPO products. Our PFFS membership is dispersed and our distribution was developed to have a presence in these areas.

We
have considered the impact of these and other changes (the reinsurance of the Life and Annuity business and the overall cost savings initiatives associated with the 2010 bids) on our
distribution. During the second quarter of 2009, we performed a review of our career offices. This review consisted of determining whether the office was in a "core" market, the level of expenses
being incurred by the office, the level of in-force commission and the anticipated production. As a result of this review, we have identified a significant number of offices to be closed
or restructured. We increased our reserve for agent balances by approximately $6.3 million in the second quarter of 2009 to provide for the amounts that we anticipate will not be collectible.

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, 2009, all of our primary reinsurers
were rated "A-" (Excellent) or better by A.M. Best. We do not know of any instances where any of our reinsurers have been unable to pay any policy claims on any reinsured business.

In
connection with the termination of our strategic alliance with CVS/Caremark on December 31, 2008, the agreement to reinsure the Prescription PathwaySM PDPs
sponsored by our subsidiaries on a 50% coinsurance funds withheld basis to PharmaCare Re ended. Net premiums under this agreement in the third quarter of 2008 amounted to $47.8 million. For the
nine months ended September 30, 2008, net premiums, net of reinsurance, under this agreement was $219.0 million.

On
July 1, 2008, the agreement to provide an insured drug benefit for the employees of the State of Connecticut and to reinsure the risk with PharmaCare Re under a 100%
quota-share contract was not renewed. Direct and ceded premium under this agreement in the third quarter of 2008 amounted to $0.1 million. For the nine months ended September 30, 2008,
direct and ceded premium under this agreement was $172.0 million.

Supplemental Cash Flow Information:Supplemental cash flow information for non-cash financing activities is as follows:

Nine months ended
September 30,2009

2008(in thousands)Supplemental cash flow information for non-cash financing activities:Return of common stock in connection with MemberHealth acquisition

$


$
(34,541
)


Statutory Financial Data:Effective for the quarter ended September 30, 2009, the National Association of Insurance
Commissioners, known as
the NAIC, is requiring adoption of SSAP No. 43R,Loan-backed and Structured Securities, SSAP 43R supersedes SSAP 98, which amended
SSAP 43. SSAP

38

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

15. OTHER DISCLOSURES (Continued)

43R
establishes statutory accounting principles for evaluating and recording other-than-temporary impairments on investments in loan-backed and structured
securities.

SSAP
43R effectively changed the impairment trigger for loan-backed and structures securities from an undiscounted cash flow test to a discounted cash flow test. In addition,
SSAP 43R changes the method of valuing the new cost basis of the impaired security from an undiscounted cash flow basis to a discounted cash flow basis. We adopted SSAP 43R effective for
September 30, 2009, as required. For the quarter ended September 30, 2009, we recognized an additional $50.9 million of realized losses, pre-tax, for
other-than-temporary impairments of investments on a statutory basis, all related to the current quarter. Of this amount, $50.1 million related to securities with an
NAIC rating of 6, which were, therefore, already marked to the lower of cost or market for statutory reporting purposes. Accordingly, the implementation of SSAP 43R reduced surplus by
$0.8 million at September 30, 2009.

Prior Plan Year Settlements and Adjustments Under Stand-alone Medicare Part D Plans and
MA-PD:The Medicare Part D prescription drug benefit program is detail oriented and relatively complex. The amount due to or from CMS consists
of low-income cost subsidy, catastrophic reinsurance and the risk corridor adjustment. These amounts are affected by: membership; risk scores; prescription drug events ("PDEs") and
rebates. Approximately 9 months after the close of the annual Plan year (December 31st) CMS completes its reconciliation of membership and PDEs and provides the information
needed to finalize the accounting for these items to each Plan. See note 10 of this Quarterly Report on Form 10-Q for a summary of amounts due to or from CMS.

For
our stand-alone Part D Plans, retroactive risk score adjustments and Plan year settlements for the 2008 Plan year were received in the third quarter of 2009. Net premiums for
the nine months ended September 30, 2009 included retroactive adjustments related to prior Plan years, which increased total revenue by approximately $13.9 million (net of the impact of
government risk corridor). These adjustments were comprised of $9.2 million in risk adjustment revenue related to our 2008 membership and $4.7 million related to the final CMS PDE
reconciliations for prior Plan years. For the 2007 Plan year, we received retroactive risk score adjustments and Plan year settlements in the third quarter of 2008. Net premiums for the nine months
ended September 30, 2008 included retroactive adjustments which reduced total revenue by approximately $4.6 million (net of the impact of government risk corridor). These adjustments
were comprised of $0.8 million related to risk adjustment revenue for our 2007 membership and $3.8 million related to the final CMS PDE reconciliation for the 2007 Plan year.

The
reconciliation and settlement process with CMS for the Part D coverage within Medicare Advantage Plans is similar to Medicare Part D Plans with the two exceptions:
1) PFFS Plans are ineligible for aggregate risk corridor payments; and 2) prospective monthly catastrophic reinsurance payments to PFFS Plans are based on CMS estimated average
reinsurance payments to other MA-PD Plans for their Part D coverage. In the third quarter of 2009, for MA-PD, we received a retroactive risk score adjustment for the
2008 Plan year that increased revenues by $0.6 million (net of risk corridor). In the third quarter of 2008, we received a retroactive risk score adjustment for the 2007 Plan year that
increased revenues by $0.3 million (net of risk corridor). In the third quarters of 2009 and 2008, we received notification from CMS of an adjustment to our catastrophic reinsurance payment for
the Part D coverage within our PFFS Plans for the prior Plan year that lowered the payment by $6.4 million and $4.5 million, respectively.

39

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Table of Contents

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

Introduction

The following discussion and analysis presents a review of our financial condition as of September 30, 2009 and our results of
operations for the three and nine months ended September 30, 2009 and 2008. 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, 2008. You should also read the following analysis in conjunction with the Risk Factors contained in our annual report on
Form 10-K for the year ended December 31, 2008, as supplemented by the risk factors set forth in Part II, Item 1A "Risk Factors" below.

Significant Third Quarter Items



40

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Table of Contents

Membership

The following table presents our membership in Medicare Advantage and Part D products as of September 30, 2009 and 2008.

As of September 30,Membership by Segment

2009

2008(in thousands)Medicare AdvantagePFFS


177


188Network-based (HMO and PPO)


64


55Total Medicare Advantage


241


243Part DCCRx


1,263


1,309PRx(1)


435


264Total Part D


1,698


1,573Total Membership


1,939


1,816


(1)2008
amount represents estimated net retained membership for our Prescription PathwaySM PDP, which was succeeded in 2009 by Prescriba
RxSM (PRx). While membership in PRx is 100% retained by us, Prescription PathwaySM was operated in connection with a 50% joint venture partner. Actual membership at
September 30, 2008 was 527,000.


Results of OperationsConsolidated Overview

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

Three months ended
September 30,

Nine months ended
September 30,2009

2008

2009

2008(in thousands)Senior Managed CareMedicare Advantage(1)

$
45,686

$
44,077

$
120,893

$
77,813Medicare Part D(1)


53,233


49,196


30,965


30,210Traditional Insurance(1)


3,659


3,099


(22,238
)

6,268Senior Administrative Services(1)


1,410


5,034


7,121


17,442Corporate(1)


(11,483
)

(12,125
)

(41,542
)

(26,911
)Net realized losses on investments(1)


(4,783
)

(12,141
)

(20,050
)

(54,434
)Income before provision for income taxes(1)


87,722


77,140


75,149


50,388Provision for income taxes


27,976


28,328


23,617


19,208Net income

$
59,746

$
48,812

$
51,532

$
31,180Earnings per common share (diluted)

$
0.74

$
0.56

$
0.63

$
0.35


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


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Table of Contents






Net income for the three months ended September 30, 2009 was $59.7 million, or $0.74 per diluted share, compared to net
income of $48.8 million, or $0.56 per diluted share for the three months ended September 30, 2008. The net income for the third quarter of 2009 includes realized investment losses, net
of taxes, of $3.1 million, or $0.04 per diluted share, of which $0.5 million relates to the recognition of other-than-temporary impairments on investments. Net
income for the third quarter of 2008 includes realized investment losses, net of taxes, of $7.9 million, or $0.09 per diluted share, related primarily to the recognition of
other-than-temporary impairments on investments. Our effective tax rate was 31.9% for the third quarter of 2009, and 36.7% for the third quarter of 2008. The decline in the
effective rate for the quarter ended September 30, 2009 is due to the recording of $5.0 million of non-recurring tax benefits during the third quarter of 2009. These benefits
resulted from the settlement of the Internal Revenue Service examination of 2005 primarily related to the treatment of a controlled foreign corporation sold in 2006. Absent these
non-recurring benefits, the effective rate would have been 37.6% for the third quarter of 2009.

Our
Senior Managed CareMedicare Advantage segment generated income before taxes of $45.7 million for the three months ended September 30, 2009, an increase of
$1.6 million compared to the three months ended September 30, 2008. The increase in earnings was driven primarily by lower expenses and higher investment income partially offset by lower
medical operating income. The lower medical operating income was driven primarily by a decline in net positive prior period items, including CMS reconciliations and reserve development of
$11.7 million in 2009 as compared to $20.4 million in 2008.

Our
Medicare Part D segment income for the third quarter of 2009, increased by $4.0 million versus the comparable period in 2008. These results reflect an increase of
$8.5 million related to net positive prior period items, including CMS reconciliations and reserve development of $5.9 million in 2009 as compared to net negative prior period items of
$2.6 million in 2008. Excluding these items, premium growth and improved benefit and expense ratios substantially offset the elimination of income generated from our interest in PDMS and the
amortization of the below market contract liability that was recorded in connection with the MemberHealth acquisition (described in the Annual Report on Form 10-K for the year ended
December 31, 2008).

Our
Traditional Insurance segment income increased by $0.6 million compared to the three months ended September 30, 2008. The increase to segment income was primarily due
to a decrease in commissions and general expenses, net of allowances. This reduction in expenses was partially offset by the decrease in net premiums, benefits expense, and investment income related
to the lower level of business in-force.

Segment
income before taxes for our Senior Administrative Services segment declined by $3.6 million, or 72%, to $1.4 million for the third quarter of 2009, as compared to
the same period of 2008. This decrease is primarily the result of a reduction in service fee revenues, net of a corresponding decrease in general expenses.

The
loss from our Corporate segment decreased by $0.6 million, or 5%, for the third quarter of 2009 compared to the third quarter of 2008. This was due primarily to lower
borrowing costs and slightly lower general expenses, partially offset by higher stock- based compensation costs for equity awards to employees and directors.



Net income for the nine months ended September 30, 2009 was $51.5 million, or $0.63 per diluted share, compared to net
income of $31.2 million, or $0.35 per diluted share for the nine months ended September 30, 2008. The net loss for the first nine months of 2009 includes realized investment losses, net
of taxes, of $13.0 million, or $0.16 per diluted share, relating primarily to the recognition of

42

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Table of Contents

other-than-temporary
impairments on investments. Net income for the first nine months of 2008 includes realized investment losses, net of taxes, of $35.4 million, or
$0.40 per diluted share, also related primarily to the recognition of other-than-temporary impairments on investments. For the nine months
ended September 30, 2009, our effective tax rate was 31.4%, compared with 38.1% for the same period of 2008. The decline in the effective rate for the nine months ended September 30,
2009 is due to the recording of $5.0 million of non-recurring tax benefits during the third quarter of 2009. These benefits resulted from the settlement of the Internal Revenue
Service examination of 2005 primarily related to the treatment of a controlled foreign corporation sold in 2006. Absent these non-recurring benefits, the effective rate would have been
38.0% for the nine months ended September 30, 2009.

Our
Senior Managed CareMedicare Advantage segment generated income before taxes of $120.9 million for the nine months ended September 30, 2009, an increase of
$43.1 million compared to the nine months ended September 30, 2008. The increase in earnings was driven by higher medical operating income generated by an improvement in the medical
benefit ratio of 100 basis points and higher net investment income, partially offset by the restructuring costs incurred during the second quarter and continued investment in the development of
provider networks for our expansion PPO markets. The improvement in the medical benefit ratio is due primarily to higher premium per member related to improvements in the risk scoring process and
changes in our membership mix, partially offset by a decline in net positive prior year items, including CMS reconciliations and reserve development; $22.9 million in 2009 as compared to
$32.5 million in 2008.

Our
Medicare Part D segment income for the nine months ended September 30, 2009 increased by $0.8 million versus the comparable period in 2008. These results reflect
an increase of $6.0 million related to net positive prior period items, including CMS reconciliations and reserve development of $3.4 million in 2009 as compared to net negative prior
period items of $2.6 million in 2008. Excluding these items, premium growth and improved benefit and expense ratios substantially offset the elimination of income generated from our interest in
PDMS and the amortization of the below market contract liability.

Our
Traditional Insurance segment income decreased by $28.5 million compared to the nine months ended September 30, 2008. The reinsurance transaction with Commonwealth to
reinsure substantially all of the net retained life and annuity business resulted in a loss and other related costs of approximately $7.6 million. Additionally, a $1.2 million
restructuring charge was recorded as a result of re-alignment of operations with the lower level of net retained business. Excluding these impacts, the decrease to net income was primarily
caused by a $26.4 million decrease in net investment income caused by lower average yields and a lower invested asset base due to the transfer of assets in conjunction with the reinsurance
transaction noted above.

Segment
income before taxes for our Senior Administrative Services segment declined by $10.3 million, or 59%, to $7.1 million for the nine months ended September 30,
2009, as compared to the same period of 2008. This decrease is primarily the result of a reduction in service fee revenues, net of a corresponding decrease in general expenses.

The
loss from our Corporate segment increased by $14.6 million, or 54%, for the nine months ended September 30, 2009 compared to the same period of 2008. This was due
primarily to a $6.3 million charge related to the proposed closing and restructuring of certain career sales offices in 2009, a
significant non-recurring release of a bonus accrual in the first quarter of 2008, higher stock-based compensation costs for equity awards to employees and directors, higher levels of
expense and lower net investment income, partially offset by lower borrowing costs.

43

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Table of Contents

Segment ResultsSenior Managed CareMedicare Advantage

Three months ended
September 30,

Nine months ended
September 30,2009

2008

2009

2008(in thousands)Net premiums

$
654,246

$
610,734

$
1,949,117

$
1,791,862Net investment and other income


6,563


4,810


19,159


13,550Total revenue


660,809


615,544


1,968,276


1,805,412Medical expenses


535,834


488,136


1,604,721


1,493,222Amortization of intangible assets


1,146


1,014


3,438


3,042Restructuring costs








3,500


Commissions and general expenses


78,143


82,317


235,724


231,335Total benefits, claims and other deductions


615,123


571,467


1,847,383


1,727,599Segment income before taxes

$
45,686

$
44,077

$
120,893

$
77,813


Our
Senior Managed CareMedicare Advantage segment includes the operations of our private fee-for-service business, known as PFFS, which offers
coverage to Medicare beneficiaries in approximately 3,100 counties across 45 states and our Medicare coordinated care Plans including PPOs and HMOs. Our HMOs offer coverage to Medicare beneficiaries
in 17 counties in Texas, primarily in Southeastern Texas, 22 counties in Oklahoma (includes Special Needs Plans) and 4 counties in Wisconsin. The PPO Plans currently offer coverage in 52 counties in 9
states. As of September 30, 2009, we have received approval from CMS to offer PPO Plans in 126 counties in 17 states for the 2010 Plan year. Marketing for all our MA Plans began on
October 1, 2009. These businesses provide managed care for seniors under contracts with CMS.

Membership.For a discussion of the accounting for Medicare Advantage policies, see note 2 of the notes to the consolidated
financial
statements in this quarterly report on Form 10-Q. 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. Although we are unable to precisely quantify the
impact of any potential member change from that used in our consolidated financial results, we believe that any change from the amounts reported as of September 30, 2009 is likely to be
immaterial.



Our Senior Managed CareMedicare Advantage segment generated income before taxes of $45.7 million for the three
months ended September 30, 2009, an increase of $1.6 million compared to the three months ended September 30, 2008. The increase in earnings was driven primarily by lower expenses
and higher investment income partially offset by lower medical operating income. The lower medical operating income was driven primarily by a decline in net positive prior period items, including CMS
reconciliations and reserve development of $11.7 million in 2009 as compared to $20.4 million in 2008.

Revenues.Net premiums for the Senior Managed CareMedicare Advantage segment increased by $43.5 million compared to the
three
months ended September 30, 2008, primarily due to increased member premium rates, growth in HMO membership and net premium generated by our new PPO markets. Total member months in our Medicare
Advantage Plans for the three months ended September 30, 2009 were down slightly from prior year with gains in membership in our HMO Plans being offset by lapses in our PFFS Plans. In addition,
net investment income increased due to higher investment levels, partially offset by lower yields.

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Benefits, Claims and Expenses.Medical expenses increased by $47.7 million compared to the third quarter of 2008, consistent with
the higher
level of earned premium. The Medicare Advantage medical benefit ratio increased to 81.9% for the third quarter of 2009 from 79.9% for the same period in 2008 primarily as a result of the decline in
net positive prior year development discussed above. The ratio of commissions and general expenses to premiums decreased to 11.9% in the third quarter of 2009 from 13.5% in third quarter of 2008
primarily due to increased efficiencies.



Our Senior Managed CareMedicare Advantage segment generated income before taxes of $120.9 million for the nine
months ended September 30, 2009, an increase of $43.1 million compared to the nine months ended September 30, 2008. The increase in earnings was driven by higher medical operating
income generated by an improvement in the medical benefit ratio of 100 basis points and higher net investment income, partially offset by the restructuring costs incurred during the second quarter and
continued investment in the development of provider networks for our expansion PPO markets. The improvement in the medical benefit ratio is due primarily to higher premium per member related to
improvements in the risk scoring process and changes in our membership mix, partially offset by a decline in net positive prior year items, including
CMS reconciliations and reserve development; $22.9 million in 2009 as compared to $32.5 million in 2008.

Revenues.Net premiums for the Senior Managed CareMedicare Advantage segment increased by $157.3 million compared to the
nine
months ended September 30, 2008, primarily due to premium growth resulting from an increase in overall premium rates per member, growth in HMO membership and net premium generated by our new
PPO markets. Total member months in our Medicare Advantage Plans for the nine months ended September 30, 2009 were down slightly from prior year with gains in membership in our HMO Plans being
offset by lapses in our PFFS Plans. In addition, net investment income increased due to higher investment levels, partially offset by lower yields.

Benefits, Claims and Expenses.Medical expenses increased by $111.5 million compared to the nine months ended September 30,
2008,
consistent with the higher level of earned premium. The Medicare Advantage medical benefit ratio decreased to 82.3% for the nine months ended September 30, 2009 from 83.3% for the same period
in 2008, primarily as a result of the items discussed above. In the second quarter of 2009 we recorded a $3.5 million restructuring charge related to the in-sourcing of billing and
enrollment for our health Plan business. Commissions and general expenses increased by $4.4 million compared to the first nine months of 2008 primarily as the result of an increase in expenses
to support the continued investment in the development of provider networks for our expansion PPO markets. However, the ratio of commissions and general expenses to premiums decreased to 12.1% for the
nine months ended September 30, 2009 from 12.9% in 2008 primarily due to increased efficiencies.

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Table of Contents

Segment ResultsMedicare Part D

Three months ended
September 30,

Nine months ended
September 30,2009

2008

2009

2008(in thousands)Direct and assumed premiums

$
513,819

$
516,453

$
1,522,093

$
1,570,611Risk corridor adjustment/government reinsurance


(103,508
)

(91,784
)

8,175


91,140Direct and assumed premiums after risk corridor adjustment


410,311


424,669


1,530,268


1,661,751Ceded premiums


(1,877
)

(51,869
)

(1,589
)

(231,283
)Net premiums


408,434


372,800


1,528,679


1,430,468Other Part D incomePDMS


5


20,448


111


51,781Total Part D revenue


408,439


393,248


1,528,790


1,482,249Net investment and other income


853


4,704


2,908


15,879Total revenue


409,292


397,952


1,531,698


1,498,128Pharmacy benefits


308,039


292,887


1,347,031


1,292,481Amortization of intangibles


4,012


4,012


12,035


12,011Commissions and general expenses


44,008


51,857


141,667


163,426Total benefits, claims and other deductions


356,059


348,756


1,500,733


1,467,918Segment income before taxes

$
53,233

$
49,196

$
30,965

$
30,210


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

For
a discussion of the accounting for Part D see note 2 of the notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q. Our
revenues and claims expense are based on earned premiums and incurred pharmacy benefits for the reported enrolled membership. The membership information is subject to reconciliation and refinement
with CMS 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, 2009 is likely to be material.

Other
Part D incomePDMS represents our equity in the earnings of PDMS. We report this as revenue for segment reporting purposes because the amount is incorporated in
the calculation of the risk corridor adjustment. For consolidated reporting, we reflect this amount as a separate line following income from continuing operations. See the reconciliation of segment
revenues in note 14 of the notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q. Our strategic alliance with CVS/Caremark was terminated
effective December 31, 2008. Upon termination of this strategic alliance, CVS/Caremark and Universal American were each assigned responsibility for the drug benefit of specific Prescription
Pathway's Plan members in a manner to achieve an approximately equal distribution of the value of business that had been generated by the strategic alliance. Universal

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American
has continued to operate PDPs derived from this business under the name PrescribaRx. Effective January 1, 2009, PDMS no longer manages the strategic alliance and does not earn revenue
or incur expenses related to the 2009 Medicare PDP year.

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



Our Medicare Part D segment income for the third quarter of 2009, increased by $4.0 million versus the comparable period
in 2008. These results reflect an increase of $8.5 million related to net positive prior period items, including CMS reconciliations and reserve development of $5.9 million in 2009 as
compared to net negative prior period items of $2.6 million in 2008. Excluding these items, premium growth and improved benefit and expense ratios substantially offset the elimination of income
generated from our interest in PDMS and the amortization of the below market contract liability that was recorded in connection with the MemberHealth acquisition (described in the Annual Report on
Form 10-K for the year ended December 31, 2008).

Membership.At September 30, 2009, total membership for Medicare Part D, based on enrollment information provided by CMS, was
approximately 1,698,000 members, an increase of 125,000 members, or 7.9%, compared to net retained membership of 1,573,000 members at September 30, 2008. Net retained membership at
September 30, 2008 excludes members that were reinsured to CVS/Caremark. The increase in membership is principally attributable to growth from open enrollment and dual eligible members
automatically assigned to our Plans in 2009.

Revenues.Net premiums for the third quarter of 2009 increased by $35.6 million, or 10% versus the comparable period in 2008. The
increase in
net premiums was primarily attributable to an increase in net retained membership of 125,000 members, offset by an increase in the government risk corridor adjustment. Net premiums for the third
quarter of 2009 included adjustments related to prior Plan years, which increased total revenue by approximately $13.9 million (net of the impact of the government risk corridor). These
adjustments were comprised of $9.2 million in risk adjustment revenue related to our 2008 membership (see note 15 of the notes to the Consolidated Financial Statements in this Quarterly
Report on Form 10-Q) and $4.7 million related to the final CMS PDE reconciliations for prior Plan years. Net premiums for the third quarter of 2008 included adjustments which
reduced total revenue by approximately $4.6 million (net of the impact of the government risk corridor). These adjustments were comprised of $0.8 million related to risk adjustment
revenue for our 2007 membership and $3.8 million related to the final CMS PDE reconciliation for the 2007 Plan year. In addition, net premiums for the third quarter of 2008 included
$9.8 million in amortization of the below market contract liability.

Other
Part D incomePDMS for the third quarter of 2009 decreased by $20.4 million versus the third quarter of 2008, as a result of the termination of our
strategic alliance with CVS/Caremark. Net investment and other income decreased by $3.9 million principally as a result of a decrease in revenue earned by MemberHealth for third party services
performed in 2008 that were discontinued in 2009.

Benefits, Claims and Expenses.Pharmacy benefits for the third quarter of 2009 increased by $15.2 million, or 5%, compared to the
third
quarter of 2008. The ratio of incurred prescription drug benefits to net premiums was 75.4% and 78.6% for the third quarters of 2009 and 2008, respectively. The improvement in pharmacy benefits is
attributable to more competitive network rates available through our claims processor, combined with higher rebates that resulted from the consolidation of our Medicare Part D contracts with
pharmaceutical manufacturers. In addition, pharmacy benefits for the third quarter of 2009 include $8.0 million in adjustments related to prior periods. These adjustments

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increased
pharmacy benefits and are primarily attributable to co-pay refunds that will be issued to members for the 2008 Plan year, partially offset by rebates earned in prior periods. Pharmacy
benefits for the third quarter of 2008 included a $2.0 million reduction related to the final 2007 CMS PDE reconciliation. Commissions and general expenses for the third quarter of 2009
decreased by $7.8 million versus the third quarter of 2008 with the decrease largely attributable to the restructuring of our Medicare Part D call center, other member services and PBM
services which began during 2008 and was completed in 2009.



Our Medicare Part D segment income for the nine months ended September 30, 2009 increased by $0.8 million versus
the comparable period in 2008. These results reflect an increase of $6.0 million related to net positive prior period items, including CMS reconciliations and reserve development of
$3.4 million in 2009 as compared to net negative prior period items of $2.6 million in 2008. Excluding these items, premium growth and improved benefit and expense ratios substantially
offset the elimination of income generated from our interest in PDMS and the amortization of the below market contract liability.

Revenues.Net premiums for the nine months ended September 30, 2009 increased by $98.2 million, or 7%, versus the comparable
period in
2008. The increase in net premiums was primarily attributable to an increase in net retained membership of 125,000 members, offset by a decrease in the government risk corridor adjustment. Net
premiums for the nine months ended September 30, 2009 included adjustments related to prior Plan years, which increased total revenue by approximately $13.9 million (net of the impact of
government risk corridor). These adjustments were comprised of $9.2 million in risk adjustment revenue related to our 2008 membership (see note 15 of the notes to the Consolidated
Financial Statements in this Quarterly Report on Form 10-Q) and $4.7 million related to the final CMS PDE reconciliations for prior Plan years. Net premiums for the nine
months ended September 30, 2008 included adjustments which reduced total revenue by approximately $4.6 million (net of the impact of government risk corridor). These adjustments were
comprised of $0.8 million related to risk adjustment revenue for our 2007 membership and $3.8 million related to the final CMS PDE reconciliation for the 2007 Plan year. In addition, net
premiums for the nine months ended September 30, 2008 included $29.5 million in amortization of the below market contract liability

Other
Part D incomePDMS for the nine months ended September 30, 2009, decreased by $51.7 million versus the comparable period in 2008, as a result of
the termination of our strategic alliance with CVS/Caremark. Net investment and other income decreased by $13.0 million principally as a result of a decrease in revenue earned by MemberHealth
for third party services performed in 2008 that were discontinued in 2009.

Benefits, Claims and Expenses.Pharmacy benefits for the nine months ended September 30, 2009, increased by $54.6 million, or
4%,
compared to the nine months ended September 30, 2008. The ratio of incurred prescription drug benefits to net premium was 88.1% and 90.4% for the nine months ended September 30, 2009 and
2008, respectively. The improvement in the ratio of incurred prescription drug benefits to net premium is attributable to more competitive network rates available through our claims processor,
combined with higher rebates that resulted from the consolidation of our Medicare Part D contracts with pharmaceutical manufacturers. In addition, pharmacy benefits for the nine months ended
September 30, 2009 include $10.5 million in adjustments related to prior plan years. These adjustments increased pharmacy benefits and are primarily attributable to co-pay refunds that
will be issued to members for the 2008 plan year, partially offset by rebates earned in prior periods. Pharmacy benefits for the nine months ended September 30, 2008 included a
$2.0 million reduction related to the final 2007 CMS PDE reconciliation. Commissions and general expenses for the nine months ended September 30, 2009 decreased by $21.8 million
versus the comparable period in 2008 with the decrease

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largely
attributable to our restructuring of the Medicare Part D call center, other member services and PBM services which began during 2008 and was completed in 2009.

Segment ResultsTraditional Insurance

Three months ended
September 30,

Nine months ended
September 30,2009

2008

2009

2008(in thousands)Net premiums

$
75,541

$
96,635

$
245,711

$
300,423Net investment income


4,077


14,232


19,030


45,421Other income


(220
)

308


1,302


907Total revenue


79,398


111,175


266,043


346,751Policyholder benefits


57,649


77,834


198,972


242,997Change in deferred acquisition costs


(603
)

1,595


7,980


12,394Amortization of intangible assets


543


796


2,023


2,411Loss on reinsuance and other related costs








7,624


Restructuring costs








1,227


Commissions and general expenses, net of allowances


18,150


27,851


70,455


82,681Total benefits, claims and other deductions


75,739


108,076


288,281


340,483Segment income (loss) before taxes

$
3,659

$
3,099

$
(22,238
)
$
6,268




Our Traditional Insurance segment income increased by $0.6 million compared to the three months ended September 30, 2008.
The increase to segment income was primarily due to a decrease in commissions and general expenses, net of allowances. This reduction in expenses was partially offset by the decrease in net premiums,
benefits expense, and investment income related to the lower level of business in-force. The following tables detail premium for the segment by major lines of business:

Premium

Three months ended September 30,2009

2008Gross

Ceded

Net

Gross

Ceded

Net(in thousands)Senior market

$
78,650

$
(20,029
)
$
58,621

$
91,007

$
(24,116
)
$
66,891Specialty health


17,670


(2,736
)

14,934


19,740


(3,199
)

16,541Life insurance and annuity


19,114


(17,128
)

1,986


19,450


(6,247
)

13,203Total premium

$
115,434

$
(39,893
)
$
75,541

$
130,197

$
(33,562
)
$
96,635


Revenues.Net premium declined by $21.1 million, or 21.8%. This is primarily a result of the reinsurance transaction with
Commonwealth which
caused life and annuity premium ceded to increase by $10.9 million. The remaining decrease in net premium is primarily due to the continued effect of lapsation of our senior market
in-force business. The decrease in net investment income is primarily due to the decrease in invested assets as a result of the reinsurance transaction as well as lower yield on retained
assets.

Benefits, Claims and Expenses.Policyholder benefits incurred declined by $20.2 million, or 25.9%, compared to the third quarter of
2008. This
decline was partially due to the reinsurance transaction with Commonwealth, which resulted in a decrease in net life and annuity benefits retained of

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$10.8 million.
The remaining decrease of $9.4 million is a result of a decline in the business in force and a decrease in the loss ratios on the senior market products. Individual loss
ratios for the three months ended September 30, 2009 were 71.7% for senior market compared with 76.9% for the same period last year, and 97.1% for specialty health, compared with 87.4% for the
same period last year. The increase in the Specialty loss ratio was caused by an increase in frequency of long term care claims. The change in deferred acquisition cost decreased $2.2 million
or 137.8%. This was primarily caused by the elimination of the deferred acquisition costs and the related amortization on the life and annuity business reinsured to Commonwealth.

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

Three months ended
September 30,2009

2008(in thousands)Commissions

$
12,833

$
15,313Other operating costs


14,215


20,030Reinsurance allowances


(8,898
)

(7,492
)Commissions and general expenses, net of allowances

$
18,150

$
27,851


Commissions
and general expenses, net of allowances, decreased by $9.7 million compared to the third quarter of 2008. The lower level of commissions is associated
with the continued aging of our in-force renewal premium and less new business production that has higher commission rates. Other operating costs decreased $5.8 million for the
quarter ended September 30, 2009, compared to the third quarter of 2008. This is primarily due to the lower levels of business in-force combined with ongoing cost savings realized
as a result of the corporate restructuring that had occurred as of June 30, 2009. Allowances received from reinsurers increased $1.4 million for the third quarter of 2009 from the third
quarter of 2008, primarily due to an increase in allowances received on life and annuity business reinsured to Commonwealth.



Results for our Traditional Insurance segment decreased by $28.5 million compared to the nine months ended September 30,
2008. The reinsurance transaction with Commonwealth to reinsure substantially all of the net retained life and annuity business resulted in a loss and other related costs of approximately
$7.6 million. Additionally, a $1.2 million restructuring charge was recorded as a result of re-alignment of operations with the lower level of net retained business.
Excluding these impacts, the decrease to net income was primarily caused by a $26.4 million decrease in net investment income caused by a lower invested asset base due to the transfer of assets
in conjunction with the reinsurance transaction noted above and by lower average yields on retained business.

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

Premium

Nine months ended September 30,2009

2008Gross

Ceded

Net

Gross

Ceded

Net(in thousands)Senior market

$
246,524

$
(63,782
)
$
182,742

$
285,016

$
(76,460
)
$
208,556Specialty health


54,897


(8,429
)

46,468


232,611


(181,433
)

51,178Life insurance and annuity


57,529


(41,028
)

16,501


58,312


(17,623
)

40,689Total premium

$
358,950

$
(113,239
)
$
245,711

$
575,939

$
(275,516
)
$
300,423


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Revenues.Net premium declined by $54.7 million, or 18.2% compared to the nine months ended September 30, 2008. As a result
of the
reinsurance transaction with Commonwealth, life and annuity premium ceded increased by $23.4 million. The remaining decrease is primarily a result of the continued effect of lapsation of our
senior market in-force business. The decrease in net investment income is primarily due to the decrease in invested assets as a result of the reinsurance transaction as well as lower yield
on retained assets.

Benefits, Claims and Expenses.Policyholder benefits incurred declined by $44.0 million, or 18.1%, compared to the nine months
ended
September 30, 2008. This decline was due to the reinsurance transaction with Commonwealth, which resulted in a decrease in net life and annuity benefits retained of $21.3 million, and a
net reduction in senior market product benefits of $23.0 million. The reduction in senior market benefits is mainly a result of a decline in the business in-force. Individual loss
ratios for the nine months ended September 30, 2009 were 75.0% for senior market, compared with 76.6% for the same period last year, and 98.4% for specialty health, compared with 89.4% for the
same period last year. The increase in the Specialty loss ratio was primarily caused by an increase in frequency of long term care claims. The change in deferred acquisition cost decreased
$4.4 million, or 35.6%. This was primarily caused by the elimination of the deferred acquisition costs and the related amortization on the life and annuity business reinsured to Commonwealth.

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

Nine months ended
September 30,2009

2008(in thousands)Commissions

$
41,605

$
48,045Other operating costs


52,555


59,559Reinsurance allowances


(23,705
)

(24,923
)Commissions and general expenses, net of allowances

$
70,455

$
82,681


Commissions
and general expenses, net of allowances, decreased by $12.2 million compared to the nine months ended September 30, 2008. The lower level of commissions is
associated with the continued aging of our in-force renewal premium and less new business production that has higher commission rates. Other operating costs decreased $7.0 million
for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008. This is primarily due to the lower levels of business in-force. Allowances
received from reinsurers decreased $1.2 million for the nine months ended September 30, 2009 from the nine months ended September 30, 2008, primarily due to the termination of the
reinsurance arrangement with PharmaCare Re effective June 30, 2008 partially offset by an increase in allowances received on life and annuity business reinsured to Commonwealth.

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Segment ResultsSenior Administrative Services

Three months ended
September 30,

Nine months ended
September 30,2009

2008

2009

2008(in thousands)Affiliated fee revenueMedicare supplement

$
2,943

$
4,541

$
9,551

$
14,919Part D





6,909





20,930Long term care


1,018


756


3,150


1,883Life insurance


1,159


1,340


4,294


3,081Other


1,597


1,571


4,913


5,170Total affiliated revenue


6,717


15,117


21,908


45,983Unaffiliated fee revenueMedicare Advantage


868


2,721


2,863


9,935Medicare supplement


1,234


1,299


3,484


4,176Long term care


1,146


1,448


3,608


4,445Non-insurance products


174


198


399


676Part D











200Other


19


40


57


122Total unaffiliated revenue


3,441


5,706


10,411


19,554Total revenue


10,158


20,823


32,319


65,537Amortization of present value of future profits


52


92


156


275General Expenses


8,696


15,697


25,042


47,820Total expenses


8,748


15,789


25,198


48,095Segment income before taxes

$
1,410

$
5,034

$
7,121

$
17,442


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



Segment income before taxes for our Senior Administrative Services segment declined by $3.6 million, or 72%, to
$1.4 million for the third quarter of 2009, as compared to the same period of 2008. This decrease is primarily the result of a reduction in service fee revenues, net of a corresponding decrease
in general expenses.

Revenue
declined by $10.7 million, or 51%, during the third quarter of 2009 compared to the second quarter of 2008. Affiliated service fee revenue decreased by $8.4 million
primarily as a result of the loss of fee income associated with the administration of our Part D business that is performed directly by the affiliated entities in 2009 as well as a reduction in
fee levels and lower policies in-force for our affiliated Medicare supplement business. Unaffiliated service fee revenue decreased by $2.3 million, due primarily to a decrease in
services performed for unaffiliated Medicare Advantage and long term care business. General expenses for the segment decreased by $7.0 million, or 45%, primarily due to the decline in the
business discussed above.



Segment income before taxes for our Senior Administrative Services segment declined by $10.3 million, or 59%, to
$7.1 million for the nine months ended September 30, 2009, as compared to the same period of 2008. This decrease is primarily the result of a reduction in service fee revenues, net of a
corresponding decrease in general expenses.

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Revenue declined by $33.2 million, or 51%, during the nine months ended September 30, 2009 compared to the same period of 2008. Affiliated service
fee revenue decreased by $24.1 million primarily as a result of the loss of fee income associated with the administration of our Part D business that is performed directly by the
affiliated entities in 2009 as well as a reduction in fee levels and lower policies in-force for our affiliated Medicare supplement business, partially offset by growth in revenues on
services performed for affiliated long term care and life insurance business. Unaffiliated service fee revenue decreased by $9.1 million, due primarily to a decrease in services performed for
unaffiliated Medicare Advantage, long term care and Medicare supplement business. General expenses for the segment decreased by $22.8 million, or 48%, primarily due to the decline in the
business discussed above.

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 30,2009

2008

2009

2008(in thousands)Interest expense

$
4,877

$
5,699

$
14,942

$
17,794Amortization of capitalized loan origination fees


262


262


786


786Stock-based compensation expense


1,935


1,541


6,150


4,778Other parent company expenses, net revenues


4,409


4,623


19,664


3,553Segment loss before taxes

$
11,483

$
12,125

$
41,542

$
26,911




The loss from our Corporate segment decreased by $0.6 million, or 5%, for the third quarter of 2009 compared to the third
quarter of 2008. This was due primarily to lower borrowing costs and slightly lower general expenses, partially offset by higher stock- based compensation costs for equity awards to employees and
directors.

The
decrease in interest expense of $0.8 million is due primarily to a reduction in the interest rates charged on the debt, as compared to the third quarter of 2008. The weighted
average interest rate on our loan payable was 3.9% for the third quarter of 2009 compared to 4.6% for the third quarter of 2008. The weighted average interest rate on our other long term debt was 6.0%
for the third quarter of 2009 compared to 7.3% for the third quarter of 2008. See "Liquidity and Capital Resources" for additional information regarding our loan payable and other long term debt.

The
increase in stock-based compensation expense of $0.4 million resulted primarily from option and stock awards, in last quarter of 2008 and the first nine months of 2009, to
directors, officers and other employees approved by the compensation committee.

Other
parent company expenses, net of revenues, decreased $0.2 million primarily due to decreased staffing and outside service costs partially offset by a $0.6 million
decrease in net investment income as a result of lower invested assets at a lower rate.



The loss from our Corporate segment increased by $14.6 million, or 54%, for the nine months ended September 30, 2009
compared to the same period of 2008. This was due primarily to a $6.3 million charge related to the proposed closing and restructuring of certain career sales offices in 2009, a significant
non-recurring release of a bonus accrual in the first
quarter of 2008, higher stock-based compensation costs for equity awards to employees and directors, higher levels of expense and lower net investment income, partially offset by lower borrowing
costs.

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The
decrease in interest expense of $2.9 million is due primarily to a reduction in the interest rates charged on the debt, as compared to the same period of 2008. The weighted
average interest rate on our loan payable was 4.0% for the first nine months of 2009 compared to 4.6% for the same period of 2008. The weighted average interest rate on our other long term debt was
6.3% for the first nine months of 2009 compared to 7.5% for the same period of` 2008. See "Liquidity and Capital Resources" for additional information regarding our loan payable and other long term
debt.

The
increase in stock-based compensation expense of $1.4 million resulted primarily from option and stock awards, in the last quarter of 2008 and the first nine months of 2009, to
directors, officers and other employees approved by the compensation committee.

Other
parent company expenses, net of revenues, increased $16.1 million. In the second quarter of 2009, primarily in relation to a management decision to close or restructure
under-performing field offices in connection with a company-wise cost reduction effort, we recorded a $6.3 million charge to earnings. The remaining variance was primarily due to
the release in the first quarter of 2008 of a 2007 bonus accrual that was $5.6 million in excess of the final amounts approved by the compensation committee and paid in 2008, compared with a
$0.5 million release for similar reasons in the first quarter of 2009 as well as increased staffing and outside service costs. In addition, net investment income decreased $2.4 million
as a result of lower invested assets as a lower rate.

Liquidity and Capital Resources

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

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

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



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

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

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

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Table of Contents

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

At
September 30, 2009, we held cash and cash equivalents totaling $338 million and fixed maturity securities that could readily be converted to cash with carrying values of
$969 million at our insurance companies and HMO affiliates. We believe that this level of liquidity is sufficient to meet our obligations and pay expenses.

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

In
2007, Pyramid issued $60.0 million of surplus notes payable to our holding company, which bears interest at an average fixed rate of 7.5%. The notes are repayable beginning
March 29, 2009 provided that capital and surplus are sufficient to maintain risk-based capital levels of 450% or greater in the immediate prior year end. However, at
December 31, 2008, Pyramid's risk-based capital ratio was below 450%, thus no payments of principal or interest were made in the nine months ended September 30, 2009.

Our
parent holding company did not make capital contributions to American Exchange during 2009 and 2008. American Exchange did not make capital contributions to its subsidiaries during
the nine months ended September 30, 2009 and made a $7 million capital contribution to its Pyramid subsidiary during the same period ended September 30, 2008. Further, no
dividends were declared nor paid to American Exchange from its subsidiaries during the nine month periods ended September 2009 and 2008.

Capital
contributions to and dividends from for our HMO affiliates are made through our managed care holding company, Heritage Health Systems, Inc. ("HHSI"). HHSI made capital
contributions totaling $3.1 million to its HMO subsidiaries for the nine months ended September 30, 2009. No
dividends were declared nor paid to HHSI from its subsidiaries during the first nine months of 2009. HHSI made no capital contributions and did not receive any dividends during the first nine months
of 2008.

Debt principal and interestCredit Facility, Swaps and Other Long Term Debt.We currently have a credit facility consisting of a
$350 million term loan and a $150 million revolver. As of September 30, 2009, $318.0 million was outstanding under the term loan agreement and the interest rate on the term
loan portion of the credit facility was 1.07%. $250 million of this $318 million term loan outstanding has been swapped from a LIBOR-based floating rate to an average fixed rate of 4.14%
(see note 11Derivative InstrumentsCash Flow Hedgeand the ensuing paragraph), resulting in a total blended interest rate of 3.93%
on the $318.0 million as of September 30, 2009. We pay a commitment fee on the unutilized revolving loan facility at an annualized rate of 10 basis points. We had not drawn on the
revolving loan facility as of the date of this report. We made regularly scheduled principal payments totaling $2.6 million and interest payments totaling $6.3 million during the nine
months ended September 30, 2009.

On
December 4, 2007, we entered into two separate interest rate swap agreements on a total notional amount of $250 million, where we pay an average locked-in
fixed rate of 4.14% and receive a floating rate based on LIBOR. In the first nine months of 2009, we paid a net amount of $4.0 million in association with these swap agreements.

We
formed statutory business trusts, in order to issue a combined $125.0 million in thirty year trust preferred securities, with $110 million currently outstanding.
$60 million of these securities have floating interest rates based on LIBOR and are currently at an average rate of 4.51%. The remaining $50 million is fixed at 7.68% until March 2012.
We made interest payments on the trust preferred securities totaling $5.5 million during the first nine months of 2009.

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Investments

We invest primarily in fixed maturity securities of the U.S. Government and its agencies, mortgage back securities and in corporate
fixed maturity securities with investment grade ratings of BBB- or higher by S&P or Baa3 or higher by Moody's Investor Service.
As of September 30, 2009, approximately 99% of our fixed maturity investments had investment grade ratings from S&P or Moody's.

We
have recently adopted a more conservative approach to our investment portfolio, which focuses more on capital preservation than on generation of investment yield. As a result, as of
September 30, 2009, approximately 32% of our portfolio is in cash equivalents, largely in government money market funds, and, in the aggregate, approximately 66% of our portfolio is securities
backed by the US government or its agencies.

The
net yields on our cash and invested assets decreased to 3.5% for the nine months ended September 30, 2009, from 4.9% for the nine months ended September 30, 2008.

For
additional information on Liquidity and Capital Resources, please refer to our annual report on Form 10-K for the year ended December 31, 2008.

Critical Accounting Policies

There have been no changes in our critical accounting policies during the current quarter. For a description of significant accounting
policies, see note 2Summary of Significant Accounting Policies in the notes to the consolidated financial statements included in our Annual Report on Form 10-K
for the year ended December 31, 2008.



The following table presents the components of the change in our liability in policy and contract claims health for the nine months
ended September 30, 2009:

September 30, 2009(in thousands)Balance at beginning of year

$
729,070Less reinsurance recoverable


(33,086
)Net balance at beginning of year


695,984Incurred related to:Current year


3,137,809Prior year development


(1,218
)Total incurred


3,136,591Paid related to:Current year


2,817,597Prior year


408,631Total paid


3,226,228Change in Part D subsidy liabilities


(106,187
)Net balance at end of period


500,160Plus reinsurance recoverable


22,210Balance at end of period

$
522,370


Policy
and contract claimshealth decreased by $206.7 million from December 31, 2008 to September 30, 2009. This decrease was due
primarily to a change in our Part D claims processing that resulted in reducing days' claims payable for Part D claims at September 30, 2009 compared to December 31, 2008.
At December 31, 2008, there were 30 days of Part D claims outstanding, which were subsequently settled in January 2009 compared to 12 days of claims outstanding at
September 30, 2009, which were subsequently settled in October 2009.

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The
Prior Year Development component of Incurred Costs in the table above represents favorable adjustments as a result of prior year claim estimates being settled for amounts less than
originally anticipated. These favorable developments occur due to differences between the actual medical utilization and other components of medical cost trends, and actual claim processing and
payment patterns compared to the assumptions for claims trend and completion factors used to estimate our claim liabilities.

The
claim reserve balances at December 31, 2008 settled during 2009 for $1.2 million less than originally estimated, representing less than 0.1% of the incurred claims
recorded through the first nine months of 2009. The majority of the favorable development of 2008 and prior claim reserves resulted from our Senior Managed CareMedicare Advantage segment.

Based
on our historical experience, it is reasonably likely that our actual trend and completion factors may vary from the factors used in our September 30, 2009 estimates. Any
future variances are expected to be within the ranges presented in our sensitivity analysis table.

Policy
and contract claimshealth for our Part D business includes payments owed to pharmacies as well as claims reserves. CMS reimburses us for a portion of our
Part D claim payments made to the pharmacies through low income cost sharing subsidies and catastrophic reinsurance. We do not recognize claims expense for these subsidies and the related
receivables are recorded as CMS contract deposits in our consolidated balance sheets. The amounts owed to pharmacies for which we will be reimbursed included in Policy and contract
claimshealth amounted to $122.3 million at September 30, 2009 and $228.5 million at December 31, 2008. The decrease in these liabilities is primarily
attributable to the reduction in days claims payable that resulted from the change in our Part D claims processing noted above.

Sensitivity Analysis

The following table illustrates the sensitivity of our accident and health IBNR payable at September 30, 2009 to identified
reasonably possible changes to the estimated weighted average completion factors and health care cost trend rates. However, it is possible that the actual completion factors and health care cost trend
rates will develop differently from our historical patterns and therefore could be outside of the ranges illustrated below.

Completion Factor(1):

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

Increase
(Decrease) in
Net Accident
& Health
IBNR

(Decrease)
Increase
in Factor

(Decrease)
Increase in
Net Accident
& Health
IBNR(S in thousands)-3
%
$
1,571


-3
%
$
(12,903
)-2
%
$
1,047


-2
%
$
(8,602
)-1
%
$
523


-1
%
$
(4,301
)1
%
$
(523
)

1
%
$
4,3152
%
$
(1,046
)

2
%
$
8,6303
%
$
(1,569
)

3
%
$
12,945


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


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Effects of Recently Issued and Pending Accounting Pronouncements

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

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, 2009, 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, 2009September 30, 2009200 Basis
Point Decrease

100 Basis
Point Decrease

100 Basis
Point Increase

200 Basis
Point IncreaseMarket Value of
Fixed Income Portfolio(in millions)$969.8

$42.5

$24.3

$(31.7)

$(65.6)


Debt

We pay interest on our term loan and a portion of our trust preferred securities based on the London Inter Bank Offering Rate, known as
LIBOR, over one, two, three or six month interest periods. Due to the variable interest rate, we would be subject to higher interest costs if short-term interest rates rise. We have
attempted to mitigate our exposure to adverse interest rate movements by fixing the rate on a portion of our loan payable through the use of cash flow swaps and our trust preferred securities through
the contractual terms of the security at inception. At September 30, 2009, we have fixed the rate on a total of $300 million of our debt, including $250 million of our loan
payable and $50 million of our trust preferred securities.

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

The
sensitivity analysis of interest rate risk assumes 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, 2009, and with all other variables held constant. The following table summarizes the impact of changes in LIBOR.

Effect of Change in LIBOR on Pre-tax Income
for the nine months ended September 30, 2009Weighted
Average
Balance
OutstandingDescription of Floating Rate Debt

Weighted
Average
Interest Rate

200 Basis
Point
Decrease(1)

100 Basis
Point
Decrease(1)

100 Basis
Point
Increase

200 Basis
Point
Increase(in millions)Loan payable


1.29
%
$
69.7

$
0.3

$
0.2

$
(0.5
)
$
(1.1
)Other long tern debt


5.20
%
$
60.0


0.5


0.4


(0.5
)

(0.9
)Total







$
0.8

$
0.6

$
(1.0
)
$
(2.0
)


(1)During
the first nine months of 2009, the LIBOR rate on our loan payable and our other long term debt has steadily decreased to approximately 45 basis
points as of September 30, 2009. As a result, for the purposes of this illustration, decreases in monthly rates over this period have been limited to the year to date average of 56 basis points
on our loan payable and 109 basis points on our other long term debt.


As
noted above, we have fixed the interest rate on $300 million of our $428 million of total debt outstanding, leaving $128 million of the debt exposed to rising
interest rates, as of September 30, 2009. We had approximately $415 million of cash and cash equivalents as of September 30, 2009. We anticipate that any increase or decrease in
the interest cost of our debt as a result of an increase in interest rates will be mitigated by an increase or decrease in the net investment income from our cash and cash equivalents.

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

ITEM 4Controls and Procedures



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



Our disclosure controls and procedures and our internal controls over financial reporting may not prevent or detect all errors and all
fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

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The
design of a control system must reflect the fact that there are resource constraints, and we must consider the benefits of controls relative to their costs. Further, because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that we have detected all control issues and
instances of fraud, if any, within Universal American. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple
error or mistake. The individual acts of some persons or collusion of two or more people can also circumvent controls. The design of any system of controls is based in part on certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all 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, 2009. 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, 2009, at a reasonable assurance level, to timely alert management to
material information required to be included in our periodic filings with the Securities and Exchange Commission.



There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2009 that have
materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II

ITEM 1LEGAL PROCEEDINGS

For information relating to litigation affecting us, please see note 12Commitments and Contingencies of the notes
to the consolidated financial statements in Part IItem 1 of this report, which is incorporated into this Part IIItem 1Legal
Proceedings by reference.

ITEM 1ARISK FACTORS

Information concerning certain risks and uncertainties appears in Part I, Item 1A "Risk Factors" of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2008. You should carefully consider these risks and uncertainties, which could materially affect our business,
financial position and results of operations.

The
Company has identified the following additional risk factors to supplement those set forth in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2008:

Our results of operations, financial position and cash flows may be materially adversely affected as a result of the outbreak of swine flu.

In April 2009, the World Health Organization assessed the status of the influenza known as swine flu and classified it as a
phase 5 alert. Recent indications from the Centers for Disease Control and Prevention are that the incidence of swine flu has not abated. This strain of influenza can become a pandemic health
event that may cause a significant increase in the utilization of our health benefits, and may impact the health of our employees which might increase absenteeism, either or both of which can
adversely impact our business.

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

Reductions in payments under Medicare or the other programs under which we offer health Plans could reduce our profitability. The
Medicare Modernization Act of 2003, or MMA, permits premium levels for certain Medicare Plans to be established through competitive bidding, with Congress retaining the ability to limit increases in
premium levels established through bidding from year to year. On April 6, 2009, CMS released final 2010 Medicare Advantage payment rates which represent an effective rate decrease of 4 to
5 percent for the industry. Reduced Medicare Advantage rates will require us to consider changes to our current Plans including possible increases to member premiums, reduction of the benefits
that we offer under our Medicare Advantage Plans, or some combination thereof, thereby making them potentially less attractive to members. Congress is considering other reductions to rates or other
changes to the Medicare reimbursement system which could also have a material adverse effect on our results of operations, financial position, and cash flows.

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

Although the new administration and U.S. Congress have expressed some support for measures intended to expand the number of citizens
covered by health insurance and other changes within the health care system, the costs of implementing any of these proposals could be financed, in part, by reductions in the payments made under
Medicare Advantage and other government programs. In addition, in February 2009, President Obama signed the American Recovery and Reinvestment Act that provides funding for, among other things: state
Medicaid programs; the modernization of health

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Table of Contents

information
technology systems and aid to states to help defray budget cuts. Because of the unsettled nature of these initiatives and the numerous steps required to implement them we remain uncertain
as to the ultimate impact they will have on our business.

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

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

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

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

We historically invested in our career distribution agencies to provide monetary assistance in the development of offices and
recruitment of agents to build a controlled distribution force for our various products. Collectability of these advances generally comes from the
commissions earned from the production of these offices or personal guarantees of the office managers. No assurance can be given that production levels or personal assets of the managers will be
sufficient to repay the obligation and may result in future write-off of these advances. During the second quarter of 2009, we wrote off $6.3 million of agents' advances.

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

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


262,734

$
8.08


262,734

$
23,986August 1, 2009  August 31, 2009


224,518

$
9.10


224,518


21,944September 1, 2009  September 30, 2009


345,400

$
9.76


345,400


18,575832,652





832,652


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Table of Contents

Recent Sales of Unregistered Securities

None.

ITEM 3DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5OTHER INFORMATION

None.

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.

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).10.1
*
Indemnity Reinsurance Agreement between Constitution Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009.10.2
*
Indemnity Reinsurance Agreement between American Exchange Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009.


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Table of Contents

10.3
*
Indemnity Reinsurance Agreement between Marquette National Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009.10.4
*
Indemnity Reinsurance Agreement between Pennsylvania Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009.10.5
*
Indemnity Reinsurance Agreement between American Pioneer Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009.10.6
*
Indemnity Reinsurance Agreement between American Progressive Life and Health Insurance Company of New York (Ceding Company) and First Allmerica Financial Life Insurance Company (Reinsurer) effective as of April 1,
 2009.10.7
*
Indemnity Reinsurance Agreement between The Pyramid Life Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 2009.10.8
*
Indemnity Reinsurance Agreement between Union Bankers Insurance Company (Ceding Company) and Commonwealth Annuity and Life Insurance Company (Reinsurer) effective as of April 1, 200931.1
*
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.October 30, 2009

/s/ RICHARD A. BARASCHRichard A. Barasch Chief Executive OfficerOctober 30, 2009

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


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