<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



                                    FORM 10-Q



                 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                       FOR THE PERIOD ENDED JUNE 30, 2002
                            COMMISSION FILE #0-11321

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


              NEW YORK                                 11-2580136
      ------------------------                 --------------------------
      (State of Incorporation)                 (I.R.S. Employer I.E. No.)


             Six International Drive, Suite 190, Rye Brook, NY 10573
             -------------------------------------------------------
               (Address of principal executive offices) (Zip Code)


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


         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 and (2) has been subject to such filing
requirements for the past 90 days.

                            Yes  X        No
                                ---         ---

         The number of shares outstanding of the Registrant's Common Stock as of
August 5, 2002 was 52,910,515.



<PAGE>






                       UNIVERSAL AMERICAN FINANCIAL CORP.
                                    FORM 10-Q

                                    CONTENTS




<TABLE>
<CAPTION>
                                                                                                            Page No.
                                                                                                            --------


<S>                                                                                                         <C>
PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements (unaudited)

         Consolidated Balance Sheets at June 30, 2002 and December 31, 2001                                      3

         Consolidated Statements of Operations for the six months ended June 30, 2002                            4
         and June 30, 2001

         Consolidated Statements of Operations for the three months ended June 30, 2002 and                      5
         June 30, 2001

         Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and                        6
         and June 30, 2001

         Notes to Consolidated Financial Statements                                                           7-15

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations               16-31

Item 3.  Quantitative and Qualitative Disclosure of Market Risk                                              31-32

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings                                                                                      32

Item 2.  Changes in Securities and Use of Proceeds                                                              32

Item 3.  Defaults upon Senior Securities                                                                        32

Item 4.  Submission of Matters to a Vote of Security Holders                                                    33

Item 5.  Other Information                                                                                      33

Item 6.  Exhibits and Reports on Form 8-K                                                                       33

         Signature                                                                                              33
</TABLE>




                                       2
<PAGE>


                          PART 1. FINANCIAL INFORMATION
                    ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

               UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
ASSETS                                                                           JUNE 30,        DECEMBER 31,
                                                                                   2002              2001
                                                                                -----------     -------------
                                                                                (Unaudited)
                                                                                      (In thousands)
<S>                                                                             <C>             <C>
Investments:
  Fixed maturities available for sale, at fair value
    (amortized cost: 2002, $816,904; 2001, $786,844)                            $   837,486     $     799,218
  Equity securities, at fair value (cost: 2002, $3,776; 2001, $4,339)                 3,675             4,199
  Policy loans                                                                       23,902            24,043
  Other invested assets                                                               3,032             3,773
                                                                                -----------     -------------
    Total investments                                                               868,095           831,233

Cash and cash equivalents                                                            22,706            47,990
Accrued investment income                                                            13,326            12,663
Deferred policy acquisition costs                                                    79,046            66,025
Amounts due from reinsurers                                                         216,461           212,532
Due and unpaid premiums                                                               4,022             3,385
Deferred income tax asset                                                            52,883            59,952
Present value of future profits and goodwill                                         11,089            11,921
Other assets                                                                         24,644            24,515
                                                                                -----------     -------------
    Total assets                                                                  1,292,272         1,270,216
                                                                                ===========     =============

LIABILITIES  AND STOCKHOLDERS' EQUITY

LIABILITIES
Policyholder account balances                                                       244,555           236,742
Reserves for future policy benefits                                                 601,634           591,453
Policy and contract claims - life                                                     6,991             6,282
Policy and contract claims - health                                                  85,619            79,596
Loan payable                                                                         56,225            61,475
Amounts due to reinsurers                                                             4,490             6,680
Other liabilities                                                                    43,277            57,218
                                                                                -----------     -------------
    Total liabilities                                                             1,042,791         1,039,446
                                                                                -----------     -------------

STOCKHOLDERS' EQUITY

Common stock (Authorized: 80 million shares, issued and outstanding:
  2002, 53.1 million shares; 2001, 52.8 million shares)                                 531               528
Additional paid-in capital                                                          157,247           155,746
Accumulated other comprehensive income                                               12,109             5,603
Retained earnings                                                                    80,094            69,279
Less:  Treasury Stock (2002, 0.1 million shares; 2001, 0.1 million shares)             (500)             (386)
                                                                                -----------     -------------
    Total stockholders' equity                                                      249,481           230,770
                                                                                -----------     -------------
       Total liabilities and stockholders' equity                               $ 1,292,272     $   1,270,216
                                                                                ===========     =============
</TABLE>


            See notes to unaudited consolidated financial statements.



                                       3
<PAGE>




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


<TABLE>
<CAPTION>
                                                                               SIX MONTHS ENDED JUNE 30,
                                                                               -------------------------
                                                                           2002                          2001
                                                                     ---------------               ---------------
                                                                     (In thousands, per share amounts in dollars)
<S>                                                                  <C>                           <C>
Revenues:
   Gross premium and policyholder fees earned                        $       291,605               $       253,853
   Reinsurance premiums assumed                                                2,085                         1,370
   Reinsurance premiums ceded                                               (163,127)                     (139,757)
                                                                     ---------------               ---------------
         Net premium and policyholder fees earned                            130,563                       115,466

   Net investment income                                                      28,761                        28,547
   Net realized (losses) gains on investments                                 (6,457)                        1,853
   Fee income                                                                  5,989                         5,569
                                                                     ---------------               ---------------
          Total revenues                                                     158,856                       151,435
                                                                     ---------------               ---------------

Benefits, claims and expenses:
   Increase in future policy benefits                                          6,531                         5,365
   Claims and other benefits                                                  85,286                        79,064
   Interest credited to policyholders                                          5,213                         4,989
   Increase in deferred acquisition costs                                    (12,856)                       (8,371)
   Amortization of present value of future profits and goodwill                  832                         1,360
   Commissions                                                                57,425                        48,294
   Commission and expense allowances on reinsurance ceded                    (49,364)                      (42,599)
   Interest expense                                                            1,588                         3,013
   Other operating costs and expenses                                         48,103                        39,933
                                                                     ---------------               ---------------
          Total benefits, claims and other deductions                        142,758                       131,048
                                                                     ---------------               ---------------

Operating income before taxes                                                 16,098                        20,387
Federal income tax expense                                                     5,282                         7,277
                                                                     ---------------               ---------------
Net income                                                           $        10,816               $        13,110
                                                                     ===============               ===============

Earnings per common share:
  Basic                                                              $          0.20               $          0.28
                                                                     ===============               ===============
  Diluted                                                            $          0.20               $          0.28
                                                                     ===============               ===============
</TABLE>

            See notes to unaudited consolidated financial statements



                                       4
<PAGE>


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




<TABLE>
<CAPTION>
                                                                                 THREE MONTHS ENDED JUNE 30,
                                                                        --------------------------------------------
                                                                              2002                         2001
                                                                        ---------------              ---------------
                                                                        (In thousands, per share amounts in dollars)
<S>                                                                     <C>                          <C>
Revenues:
     Gross premium and policyholder fees earned                         $       144,169              $       127,640
     Reinsurance premiums assumed                                                 1,147                          548
     Reinsurance premiums ceded                                                 (79,665)                     (70,315)
                                                                        ---------------              ---------------
           Net premium and policyholder fees earned                              65,651                       57,873
     Net investment income                                                       14,434                       14,090
     Net realized (losses) on investments                                        (6,600)                        (237)
     Fee income                                                                   3,205                        3,038
                                                                        ---------------              ---------------
            Total revenues                                                       76,690                       74,764
                                                                        ---------------              ---------------
  Benefits, claims and expenses:
     Increase in future policy benefits                                           3,961                        1,602
     Claims and other benefits                                                   42,640                       40,026
     Interest credited to policyholders                                           2,606                        2,477
     Increase in deferred acquisition costs                                      (6,924)                      (4,043)
     Amortization of present value of future profits and goodwill                   410                          636
     Commissions                                                                 28,868                       24,026
     Commission and expense allowances on reinsurance ceded                     (24,627)                     (21,197)
     Interest expense                                                               782                        1,395
     Other operating costs and expenses                                          24,501                       20,376
                                                                        ---------------              ---------------
            Total benefits, claims and other deductions                          72,217                       65,298
                                                                        ---------------              ---------------
  Operating income before taxes                                                   4,473                        9,466
  Federal income tax expense                                                      1,155                        3,392
                                                                        ---------------              ---------------
  Net income                                                            $         3,318              $         6,074
                                                                        ===============              ===============
  Earnings per common share:
    Basic                                                               $          0.06              $          0.13
                                                                        ===============              ===============
    Diluted                                                             $          0.06              $          0.13
                                                                        ===============              ===============
</TABLE>


            See notes to unaudited consolidated financial statements



                                       5
<PAGE>

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



<TABLE>
<CAPTION>
                                                                                             SIX MONTHS ENDED JUNE 30,
                                                                                       -------------------------------------
                                                                                            2002                  2001
                                                                                       ---------------       ---------------
                                                                                                  (In thousands)
<S>                                                                                    <C>                   <C>
Cash flows from operating activities:
Net income                                                                             $        10,816       $        13,110
Adjustments to reconcile net income to net cash provided by operating activities:
  Deferred income taxes                                                                          3,006                 5,968
  Change in reserves for future policy benefits                                                  4,719                20,697
  Change in policy and contract claims                                                           6,731                 7,149
  Change in deferred policy acquisition costs                                                  (12,856)               (8,371)
  Amortization of present value of future profits and goodwill                                     832                 1,360
  Change in policy loans                                                                           141                   244
  Change in accrued investment income                                                             (663)               (1,152)
  Change in reinsurance balances                                                                (5,134)              (14,453)
  Realized losses (gains) on investments                                                         6,457                (1,853)
  Change in restructuring liability                                                                 --                (2,264)
  Change in income taxes payable                                                                (2,396)                 (864)
  Other, net                                                                                    (5,206)              (10,039)
                                                                                       ---------------       ---------------
Net cash provided by operating activities                                                        6,447                 9,532
                                                                                       ---------------       ---------------
Cash flows from investing activities:
  Proceeds from sale or maturity of fixed maturities available for sale                         93,476               151,918
  Cost of fixed maturities purchased available for sale                                       (121,385)             (159,626)
  Change in amounts held in trust by reinsurer                                                  (1,830)               (1,013)
  Proceeds from sale of equity securities                                                        1,293                    11
  Cost of equity securities purchased                                                             (639)               (1,092)
  Change in other invested assets                                                                  742                   269
  Change in due from/to broker                                                                  (5,863)                   --
  Cost of equipment purchased                                                                   (1,091)                   --
                                                                                       ---------------       ---------------
Net cash provided (used) by investing activities                                               (35,297)               (9,533)
                                                                                       ---------------       ---------------
Cash flows from financing activities:
  Net proceeds from issuance of common stock                                                       858                   156
  Cost of treasury stock purchases                                                                (699)                 (460)
  Change in policyholder account balances                                                        7,813                (2,157)
  Change in reinsurance balances on policyholder account balances                                  844                   136
  Principal repayment on loan payable                                                           (5,250)               (3,700)
                                                                                       ---------------       ---------------
Net cash used by financing activities                                                            3,566                (6,025)
                                                                                       ---------------       ---------------
Net decrease in cash and cash equivalents                                                      (25,284)               (6,026)
Cash and cash equivalents at beginning of period                                                47,990                40,250
                                                                                       ---------------       ---------------
Cash and cash equivalents at end of period                                             $        22,706       $        34,224
                                                                                       ===============       ===============
Supplemental cash flow information:
  Cash paid during the period for interest                                             $         1,069       $         2,994
                                                                                       ===============       ===============
  Cash paid during the period for income taxes                                         $         4,762       $         1,233
                                                                                       ===============       ===============
</TABLE>

            See notes to unaudited consolidated financial statements



                                       6
<PAGE>



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

1.       BASIS OF PRESENTATION

         The interim financial information herein is unaudited, but in the
opinion of management, includes all adjustments (consisting of normal, recurring
adjustments) necessary to present fairly the financial position and results of
operations for such periods. The results reported in these consolidated
financial statements should not be regarded as necessarily indicative of the
results that may be expected for the entire year. The consolidated financial
statements should be read in conjunction with the Form 10-K for the year ended
December 31, 2001. Certain reclassifications have been made to prior year's
financial statements to conform with current period classifications.

         The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States ("GAAP") and
consolidate the accounts of Universal American Financial Corp. ("Universal
American" or the "Parent Company") and its subsidiaries (collectively the
"Company"), American Progressive Life & Health Insurance Company of New York
("American Progressive"), American Pioneer Life Insurance Company ("American
Pioneer"), American Exchange Life Insurance Company ("American Exchange"),
Pennsylvania Life Insurance Company ("Pennsylvania Life"), Peninsular Life
Insurance Company ("Peninsular"), Union Bankers Insurance Company ("Union
Bankers"), Constitution Life Insurance Company ("Constitution"), Marquette
National Life Insurance Company ("Marquette"), PennCorp Life Insurance Company,
a Canadian company ("PennCorp Life (Canada)"), and CHCS Services, Inc.

         The Company offers life and accident and health insurance designed for
the senior market and self-employed market in all fifty states, the District of
Columbia and all the provinces of Canada. It also provides administrative
services to other insurers by servicing their senior market products. The
Company's principal insurance products are Medicare supplement, fixed benefit
accident and sickness disability insurance, long term care, home health care,
senior life insurance and annuities. The Company distributes these products
through an independent general agency system and a career agency system. The
career agents focus only on sales for Pennsylvania Life and PennCorp Life
(Canada) while the independent general agents sell for American Pioneer,
American Progressive and Constitution.

2.       COMPREHENSIVE INCOME

         The components of comprehensive income, net of related tax, for the six
months ended June 30, 2002 and 2001 are as follows:

<TABLE>
<CAPTION>

                                              SIX MONTHS ENDED JUNE 30,
                                       -------------------------------------
                                             2002                  2001
                                       ---------------       ---------------
                                                  (in thousands)
<S>                                    <C>                   <C>
Net income                             $        10,816       $        13,110
Other comprehensive income (loss)                6,506                (2,375)
                                       ---------------       ---------------
Comprehensive income                   $        17,322       $        10,735
                                       ===============       ===============
</TABLE>



                                       7
<PAGE>



<TABLE>
<CAPTION>
                                                  SIX MONTHS ENDED JUNE 30, 2002         SIX MONTHS ENDED JUNE 30, 2001
                                                -----------------------------------    -------------------------------------
                                                 Before         Tax        Net of      Before           Tax         Net of
                                                  Tax         Expense       Tax         Tax           Expense         Tax
                                                 Amount      (Benefit)     Amount      Amount        (Benefit)      Amount
                                                ---------    ---------    ---------    ---------     ---------     ---------
                                                                               (in thousands)
<S>                                             <C>          <C>          <C>          <C>           <C>           <C>
Net unrealized gain (loss)
arising during the year (net of deferred
acquisition costs)                              $   1,391    $     485    $     906    $    (478)    $    (167)    $    (311)
Reclassification adjustment for (gains)
losses included in net income                       6,457        2,261        4,196       (1,853)         (649)       (1,204)
                                                ---------    ---------    ---------    ---------     ---------     ---------
Net unrealized gains (losses)                       7,848        2,746        5,102       (2,331)         (816)       (1,515)
Currency translation adjustments                    2,160          756        1,404         (945)          (85)         (860)
                                                ---------    ---------    ---------    ---------     ---------     ---------
Other comprehensive income (loss)               $  10,008    $   3,502    $   6,506    $  (3,276)    $    (901)    $  (2,375)
                                                =========    =========    =========    =========     =========     =========
</TABLE>

         The components of comprehensive income, net of related tax, for the
three months ended June 30, 2002 and 2001 are as follows:

<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED JUNE 30,
                                       -----------------------------------
                                             2002               2001
                                       ---------------     ---------------
                                                 (in thousands)
<S>                                    <C>                 <C>
Net income                             $         3,318     $         6,074
Other comprehensive income (loss)               15,310              (4,392)
                                       ---------------     ---------------
Comprehensive income                   $        18,628     $         1,682
                                       ===============     ===============
</TABLE>

         The components of other comprehensive income and the related tax
effects for each component for the three months ended June 30, 2002 and 2001 are
as follows:

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED JUNE 30, 2002        THREE MONTHS ENDED JUNE 30, 2001
                                              --------------------------------       ----------------------------------
                                              Before         Tax        Net of       Before         Tax          Net of
                                               Tax         Expense       Tax          Tax          Expense        Tax
                                              Amount      (Benefit)     Amount       Amount       (Benefit)      Amount
                                              ------      ---------     ------       ------       ---------      ------
                                                                         (in thousands)
<S>                                           <C>          <C>          <C>          <C>           <C>           <C>
Net unrealized gain (loss)
arising during the year (net of deferred
acquisition costs)                            $14,834      $ 5,192      $ 9,642      $(9,160)      $(3,206)      $(5,954)
Reclassification adjustment for (gains)
losses included in net income                   6,600        2,309        4,291          237            83           154
                                              -------      -------      -------      -------       -------       -------
Net unrealized gains (losses)                  21,434        7,501       13,933       (8,923)       (3,123)       (5,800)
Currency translation adjustments                2,108          731        1,377        2,166           758         1,408
                                              -------      -------      -------      -------       -------       -------
Other comprehensive income
  (loss)                                      $23,542      $ 8,232      $15,310      $(6,757)      $(2,365)      $(4,392)
                                              =======      =======      =======      =======       =======       =======

</TABLE>



                                       8
<PAGE>



3.       EARNINGS PER SHARE

         A reconciliation of the numerators and the denominators of the basic
and diluted EPS for the six months ended June 30, 2002 and 2001 is as follows:

<TABLE>
<CAPTION>
                                                                                    SIX MONTHS ENDED JUNE 30, 2002
                                                                        ----------------------------------------------------
                                                                            Income               Shares            Per Share
                                                                         (Numerator)          (Denominator)          Amount
                                                                        -------------         -------------        ---------
                                                                             (in thousands, per share amounts in dollars)
<S>                                                                     <C>                       <C>               <C>
Weighted average common stock outstanding                                                         52,979
  Less: Weighted average treasury shares                                                             (93)
                                                                                                  ------
  Net income applicable to common shareholders                          $      10,816             52,886           $    0.20
                                                                        =============                              =========
Effect of Dilutive Securities
  Incentive stock options                                                                          3,908
  Director stock options                                                                             214
  Agents and others stock options                                                                  1,006
  Treasury stock assumed from proceeds of options                                                 (3,635)
                                                                                                  ------
Diluted EPS
  Net income applicable to common shareholders
   plus assumed conversions                                             $      10,816             54,379           $    0.20
                                                                        =============             ======           =========
</TABLE>

<TABLE>
<CAPTION>
                                                                                    SIX MONTHS ENDED JUNE 30, 2001
                                                                        ------------------------------------------------------
                                                                           Income              Shares             Per Share
                                                                        (Numerator)        (Denominator)            Amount
                                                                        -------------      -------------        --------------
                                                                             (in thousands, per share amounts in dollars)

<S>                                                                     <C>                <C>                  <C>
Weighted average common stock outstanding                                                         46,898
  Less: Weighted average treasury shares                                                             (66)
                                                                                           -------------
Basic EPS
  Net income applicable to common shareholders                          $      13,110             46,832        $         0.28
                                                                        =============                           ==============
Effect of Dilutive Securities
  Incentive stock options                                                                          2,585
  Director stock options                                                                             128
  Agents and others stock options                                                                    793
  Treasury stock assumed from proceeds of options                                                 (2,811)
                                                                                           -------------
Diluted EPS
  Net income applicable to common shareholders
   plus assumed conversions                                             $      13,110             47,527       $          0.28
                                                                        =============      =============       ===============
</TABLE>




                                       9
<PAGE>


         A reconciliation of the numerators and the denominators of the basic
and diluted EPS for the three months ended June 30, 2002 and 2001 is as follows:

<TABLE>
<CAPTION>

                                                                                    THREE MONTHS ENDED JUNE 30, 2002
                                                                        ------------------------------------------------------
                                                                           Income              Shares             Per Share
                                                                        (Numerator)        (Denominator)            Amount
                                                                        -------------      -------------        --------------
                                                                              (in thousands, per share amounts in dollars)
<S>                                                                     <C>                <C>                   <C>
Weighted average common stock outstanding                                                        53,065
  Less: Weighted average treasury shares                                                            (64)
                                                                                           ------------
Basic EPS
  Net income applicable to common shareholders                          $       3,318            53,001          $        0.06
Effect of Dilutive Securities
  Incentive stock options                                                                         3,912
  Director stock options                                                                            223
  Agents and others stock options                                                                   992
  Treasury stock assumed from proceeds of options                                                (3,581)
                                                                                           ------------
Diluted EPS
  Net income applicable to common shareholders
   plus assumed conversions                                             $       3,318            54,547          $        0.06
                                                                        =============      ============          =============
</TABLE>


<TABLE>
<CAPTION>

                                                                                    THREE MONTHS ENDED JUNE 30, 2001
                                                                        ------------------------------------------------------
                                                                           Income              Shares             Per Share
                                                                        (Numerator)        (Denominator)            Amount
                                                                        -------------      -------------        --------------
                                                                              (in thousands, per share amounts in dollars)
<S>                                                                     <C>                <C>                   <C>
Weighted average common stock outstanding                                                         46,952
  Less: Weighted average treasury shares                                                             (36)
                                                                                           -------------
Basic EPS
  Net income applicable to common shareholders                         $        6,074             46,916        $         0.13
                                                                       ==============                           ==============
Effect of Dilutive Securities
  Incentive stock options                                                                          3,668
  Director stock options                                                                             167
  Agents and others stock options                                                                    789
  Treasury stock assumed from proceeds of options                                                 (3,601)
                                                                                           -------------
Diluted EPS
  Net income applicable to common shareholders
   plus assumed conversions                                            $        6,074             47,939        $         0.13
                                                                       ==============      =============        ==============
</TABLE>




                                       10
<PAGE>


4.       INVESTMENTS

         As of June 30, 2002 and December 31, 2001, fixed maturity securities
are classified as investments available for sale and are carried at fair value,
with the unrealized gain or loss, net of tax and other adjustments (deferred
policy acquisition costs), included in accumulated other comprehensive income.

<TABLE>
<CAPTION>
                                                              JUNE 30, 2002
                                           --------------------------------------------------------
                                                            Gross          Gross
                                           Amortized     Unrealized      Unrealized         Fair
Classification                               Cost           Gains          Losses           Value
-------------------------------------      ---------     ----------      ----------       ---------
                                                              (In thousands)
<S>                                        <C>           <C>             <C>              <C>
US Treasury securities
  and obligations of US government         $  41,815     $    1,322      $       --       $  43,137
Corporate debt securities                    387,598         14,528          (3,675)        398,451
Foreign debt securities (1)                  164,437          2,357          (1,484)        165,310
Mortgage- and asset-backed securities        223,054          7,936            (402)        230,588
                                           ---------     ----------      ----------       ---------
                                           $ 816,904     $   26,143      $   (5,561)      $ 837,486
                                           =========     ==========      ==========       =========
</TABLE>

(1)      Primarily Canadian denominated bonds supporting our Canadian Insurance
         reserves.

<TABLE>
<CAPTION>
                                                              DECEMBER 31, 2001
                                           --------------------------------------------------------
                                                            Gross          Gross
                                           Amortized     Unrealized      Unrealized         Fair
Classification                               Cost           Gains          Losses           Value
-------------------------------------      ---------     ----------      ----------       ---------
                                                              (In thousands)
<S>                                        <C>           <C>             <C>              <C>
US Treasury securities
  and obligations of US government         $  35,719     $    1,262      $      (11)      $  36,970
Corporate debt securities                    357,431          8,990          (1,805)        364,616
Foreign debt securities (1)                  157,077          2,225          (1,640)        157,662
Mortgage- and asset-backed securities        236,617          5,700          (2,347)        239,970
                                           ---------     ----------      ----------       ---------
                                           $ 786,844     $   18,177      $   (5,803)      $ 799,218
                                           =========     ==========      ==========       =========
</TABLE>

(1)      Primarily Canadian denominated bonds supporting our Canadian Insurance
         reserves.

         The amortized cost and fair value of fixed maturities at June 30, 2002
by contractual maturity are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                AMORTIZED             FAIR
                                                  COST               VALUE
                                            ---------------     ---------------
                                                     (In thousands)
<S>                                         <C>                 <C>
Due in 1 year or less                       $        42,146     $        43,296
Due after 1 year through 5 years                    106,267             109,514
Due after 5 years through 10 years                  283,386             290,886
Due after 10 years                                  162,051             163,202
Mortgage- and asset-backed securities               223,054             230,588
                                            ---------------     ---------------
                                            $       816,904     $       837,486
                                            ===============     ===============
</TABLE>

         During the six months ended June 20, 2002 we wrote down the value of
certain fixed maturity securities by $7.4 million (0.9% of investments),
primarily as a result of the impairment of our WorldCom holdings. During the six
months ended June 30, 2001, we wrote down the value of certain fixed maturity
securities by $1.6 million (0.2% of investments). These write downs represent
management's estimate of other than temporary declines in value and were
included in net realized gains (losses) on investments in our consolidated
statement of operations.



                                       11
<PAGE>

5.       STOCKHOLDERS' EQUITY

         Common Stock

         The par value of common stock is $.01 per share with 80,000,000 shares
authorized for issuance. Changes in the number of shares of common stock
outstanding, from December 31, 2001 through June 30, 2002, were as follows:

<TABLE>
<S>                                                         <C>
Common stock outstanding at December 31, 2001                     52,799,899
Stock options exercised                                              224,302
Agent stock award                                                     69,789
Stock purchases pursuant to Agents' Stock Purchase Plan               21,950
                                                             ---------------
Common stock outstanding at June 30, 2002                         53,115,940
                                                             ===============
</TABLE>

         Treasury Stock

         During 2001, the Board of Directors approved a plan to repurchase up to
0.5 million shares of Company stock in the open market. In March 2002, the Board
of Directors approved an amendment of the plan to increase the amount of shares
available for repurchase from 0.5 million to 1.0 million shares. The purpose of
the plan is to fund employee stock bonuses. During the six months ended June 30,
2002, the Company acquired 104,295 shares on the open market for a cost of $0.7
million at a weighted average market price of $6.70 per share. The Company
distributed 103,216 shares in the form of officer and employee bonuses at a
weighted average market price of $6.45 per share, at the date of distribution.

6.       STATUTORY CAPITAL AND SURPLUS REQUIREMENTS

         American Progressive, American Pioneer, American Exchange,
Constitution, Marquette, Peninsular, PennCorp Life (Canada), Pennsylvania Life
and Union Bankers (collectively, the "Insurance Subsidiaries") are required to
maintain minimum amounts of capital and surplus as determined by statutory
accounting. Each of the Insurance Subsidiaries' statutory capital and surplus
exceeds its respective minimum requirement. However, substantially more than
such minimum amounts are needed to meet statutory and administrative
requirements of adequate capital and surplus to support the current level of the
Insurance Subsidiaries' operations. At June 30, 2002 the statutory capital and
surplus, including asset valuation reserve, of the U.S. insurance subsidiaries
totaled $100.3 million.

         The National Association of Insurance Commissioners ("NAIC") has
developed, and state insurance regulators have adopted, risk-based capital
("RBC") requirements on life insurance enterprises. At June 30, 2002 all of the
Insurance Subsidiaries maintained ratios of total adjusted capital to RBC in
excess of the Authorized Control Level.

         PennCorp Life (Canada) reports to Canadian regulatory authorities based
upon Canadian statutory accounting principles that vary in some respects from
U.S. statutory accounting principles. Canadian net assets based upon Canadian
statutory accounting principles were $39.4 million as of June 30, 2002. PennCorp
Life (Canada) maintained a Minimum Continuing Capital and Surplus Requirement
Ratio ("MCCSR") in excess of the minimum requirement at June 30, 2002.




                                       12
<PAGE>


7.       EFFECTS OF ACCOUNTING PRONOUNCEMENTS

         In June, 2001, The Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill, and intangible assets deemed to have
indefinite lives, will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statement. Other intangible assets will
continue to be amortized over their useful lives.

         The Company applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of the Statement resulted in an increase in net
income of $0.2 million (less than $0.01 per diluted share) for the six months
ended June 30, 2002. The Company performed the first of the required impairment
tests of goodwill and indefinite lived intangible assets as of January 1, 2002
and has determined that, based on these tests, goodwill and indefinite lived
intangibles were not impaired.

8.       BUSINESS SEGMENT INFORMATION

         The Company offers life and health insurance designed for the senior
market and the self-employed market in all 50 states, the District of Columbia
and all of the provinces of Canada. The Company also provides administrative
services to other issuers by servicing their senior market products. Our
principal insurance products are Medicare supplemental health insurance, fixed
benefit accident and sickness disability insurance, long term care insurance,
senior life insurance, annuities and other individual life insurance. Our
principal business segments are: Career Agency, Senior Market Brokerage and
Administrative Services. The Company also reports the corporate activities of
our holding company in a separate segment. During 2002 we modified the way we
report segment information by combining our previously defined Senior Market
Brokerage and Special Markets segments into one segment, Senior Market
Brokerage. Our decision to combine the two segments was based on the significant
reduction in the insurance in force in the Special Markets segment as a result
of our exit from the major medical line of business. Reclassifications have been
made to conform prior year amounts to the current year presentation. A
description of these segments follows:

         CAREER AGENCY -- The Career Agency segment is comprised of the
         operations of Pennsylvania Life and PennCorp Life (Canada), both of
         which we acquired in 1999. PennCorp Life (Canada) operates exclusively
         in Canada, while Pennsylvania Life operates in the United States. The
         Career Agency segment includes the operations of a career agency field
         force, which distributes fixed benefit accident and sickness disability
         insurance, life insurance and supplemental senior health insurance in
         the United States and Canada. The career agents are under exclusive
         contract with either Pennsylvania Life or PennCorp Life (Canada).

         SENIOR MARKET BROKERAGE -- This segment includes the operations of
         general agency and insurance brokerage distribution systems that focus
         on the sale of insurance products to the senior market, including
         Medicare Supplement/Select, long term care, senior life insurance and
         annuities. In 2002, we combined our Special Markets segment with our
         Senior Market Brokerage segment.

         ADMINISTRATIVE SERVICES -- The Company acts as a third party
         administrator and service provider for both affiliated and unaffiliated
         insurance companies, primarily with respect to various senior market
         products and a growing portion of non-insurance products. The services
         that we perform include policy underwriting, telephone verification,
         policyholder services, claims adjudication, clinical case management,
         care assessment and referral to health care facilities.



                                       13
<PAGE>


         CORPORATE -- This segment reflects the corporate activities of our
         holding company, including the payment of interest on our debt and our
         public company administrative expenses.

         Intersegment revenues and expenses are reported on a gross basis in
each of the operating segments but eliminated in the consolidated results. These
eliminations affect the amounts reported on the individual financial statement
line items, but do not change operating income before taxes. The significant
items eliminated include intersegment revenue and expense relating to services
performed by the administrative services segment for the Career Agency and
Senior Market Brokerage segments and interest on notes issued by the Corporate
segment to the other operating segments.

         Financial results by segment for the six months ended June 30, 2002 and
2001 are as follows:

<TABLE>
<CAPTION>
                                                     Income                          Income
                                                     (Loss)                          (Loss)
                                                     Before                          Before
                                                     Income                          Income
                                     Revenue          Taxes          Revenue         Taxes
                                    ---------       ---------       ---------       ---------
                                          June 30, 2002                 June 30, 2001
                                    -------------------------       -------------------------
                                                          (in thousands)
<S>                                 <C>             <C>             <C>             <C>
Career Agency                       $  79,788       $  14,965       $  81,215       $  14,719
Senior Market Brokerage                79,843           7,246          64,034           5,373
Administrative Services                19,712           3,676          15,998           3,121
                                    ---------       ---------       ---------       ---------
   Subtotal                           179,343          25,887         161,247          23,213
Corporate                                 222          (3,332)            158          (4,679)
Intersegment revenues                 (14,252)             --         (11,823)             --
                                    ---------       ---------       ---------       ---------
  Segment total                       165,313          22,555         149,582          18,534
Adjustments to segment total
   Net realized (losses) gains         (6,457)         (6,457)          1,853           1,853
                                    ---------       ---------       ---------       ---------
                                    $ 158,856       $  16,098       $ 151,435       $  20,387
                                    =========       =========       =========       =========
</TABLE>

         Financial results by segment for the three months ended June 30, 2002
and 2001 are as follows:


<TABLE>
<CAPTION>
                                                     Income                          Income
                                                     (Loss)                          (Loss)
                                                     Before                          Before
                                                     Income                          Income
                                     Revenue          Taxes          Revenue         Taxes
                                    ---------       ---------       ---------       ---------
                                          June 30, 2002                 June 30, 2001
                                    -------------------------       -------------------------
                                                          (in thousands)
<S>                                 <C>             <C>             <C>             <C>

Career Agency                       $  40,024       $   7,758       $  40,680       $   7,353
Senior Market Brokerage                40,167           3,091          32,144           2,972
Administrative Services                10,016           1,800           7,952           1,611
                                    ---------       ---------       ---------       ---------
   Subtotal                            90,207          12,649          80,776          11,936
Corporate                                   3          (1,576)            131          (2,233)
Intersegment revenues                  (6,920)             --          (5,906)             --
                                    ---------       ---------       ---------       ---------
  Segment total                        83,290          11,073          75,001           9,703
Adjustments to segment total
   Net realized (losses)               (6,600)         (6,600)           (237)           (237)
                                    ---------       ---------       ---------       ---------
                                    $  76,690       $   4,473       $  74,764       $   9,466
                                    =========       =========       =========       =========
</TABLE>




                                       14
<PAGE>


         Identifiable assets by segment as of June 30, 2002 and December 31,
2001 are as follows:

<TABLE>
<CAPTION>
                                        June 30, 2002      December 31, 2001
                                       ---------------     -----------------

<S>                                    <C>                 <C>
Career Agency                                  650,907     $         605,758
Senior Market Brokerage                        658,349               663,069
Administrative Services                         20,677                30,930
                                       ---------------     -----------------
   Subtotal                                  1,329,933             1,229,757
                                       ---------------     -----------------
   Corporate                                   346,995               313,709
Intersegment assets (1)                       (384,656)             (343,250)
                                       ---------------     -----------------
                                       $     1,292,272     $       1,270,216
                                       ===============     =================
</TABLE>

(1)      Intersegment assets include the elimination of the parent holding
         company's investment in its subsidiaries as well as the elimination of
         other intercompany balances.

9.       FOREIGN OPERATIONS

         A portion of the Company's career agency segment is conducted in Canada
through Penn Corp Life (Canada). The assets and liabilities of the Canadian
business are located in Canada where the insurance risks are written. Revenues,
excluding capital gains, of the career agency segment by geographic area are as
follows:

<TABLE>
<CAPTION>
                        For the six months ended  For the three months ended
                                June 30,                  June 30,
                        ------------------------  --------------------------
                            2002         2001        2002           2001
                        ----------    ----------  ----------     -----------
                                          (in thousands)
<S>                     <C>           <C>         <C>            <C>
Revenues
  United States         $   52,156    $   52,961  $   26,134     $    26,863
  Canada                    27,632        28,254      13,890          13,817
                        ----------    ----------  ----------     -----------
     Total              $   79,788    $   81,215  $   40,024     $    40,680
                        ==========    ==========  ==========     ===========
</TABLE>



                                       15
<PAGE>



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

FORWARD LOOKING STATEMENTS

         We caution readers regarding certain forward-looking statements
contained in the following discussion and elsewhere in this report and in any
other oral or written statements, either made by, or on behalf of the Company,
whether or not in future filings with the Securities and Exchange Commission
("SEC"). Forward-looking statements are statements not based on historical
information. They relate to future operations, strategies, financial results or
other developments. In particular, statements using verbs such as "expect,"
"anticipate," "believe" or similar words generally involve forward-looking
statements. Forward-looking statements include statements that represent our
products, investment spreads or yields, or the earnings or profitability of our
activities.

         Forward-looking statements are based upon estimates and assumptions
that are subject to significant business, economic and competitive
uncertainties, many of which are beyond our control and are subject to change.
These uncertainties can affect actual results and could cause actual results to
differ materially from those expressed in any forward-looking statements made by
us, or on our behalf. Whether or not actual results differ materially from
forward-looking statements may depend on numerous foreseeable and unforeseeable
events or developments, some of which may be national in scope, such as general
economic conditions and interest rates. Some of these events may be related to
the insurance industry generally, such as pricing competition, regulatory
developments and industry consolidation. Others may relate to us specifically,
such as credit, volatility and other risks associated with our investment
portfolio, and other factors. We disclaim any obligation to update
forward-looking information.

INTRODUCTION

         The following analysis of our consolidated results of operations and
financial condition should be read in conjunction with the consolidated
financial statements and related consolidated footnotes included elsewhere.

         We own nine insurance companies (collectively, the "Insurance
Subsidiaries"): American Progressive Life & Health Insurance Company of New York
("American Progressive"), American Pioneer Life Insurance Company ("American
Pioneer"), American Exchange Life Insurance Company ("American Exchange"),
Constitution Life Insurance Company ("Constitution"), Marquette National Life
Insurance Company ("Marquette"), Peninsular Life Insurance Company
("Peninsular"), Pennsylvania Life Insurance Company ("Pennsylvania Life"),
PennCorp Life Insurance Company of Canada ("PennCorp Life (Canada)") and Union
Bankers Insurance Company ("Union Bankers"). In addition to the Insurance
Subsidiaries, we own a third party administrator, CHCS Services, Inc. that
processes our senior market policies, as well as business for unaffiliated
insurance companies.

OVERVIEW

         We offer life and health insurance designed for the senior market and
the self-employed market in all 50 states, the District of Columbia and all of
the provinces of Canada. We also provide administrative services to other
insurers by servicing their senior market products. Our principal insurance
products are Medicare Supplement/Select health insurance, fixed benefit accident
and sickness disability insurance, long term care insurance, senior life
insurance, annuities and other individual life insurance. Our principal business
segments are: Career Agency, Senior Market Brokerage and Administrative
Services. We also report the corporate activities of our holding company in a
separate segment. During 2002 we modified the way we report segment information
by combining our previously defined Senior Market Brokerage and Special Markets
segments into one segment, Senior Market Brokerage. Our decision to combine the
two segments was based on the significant reduction in the insurance in force in
the Special Markets segment as a result of our exit from the major medical line
of business. Reclassifications have been made to conform prior year amounts to
the current year presentation. A description of these segments follows:



                                       16
<PAGE>

         CAREER AGENCY -- The Career Agency segment is comprised of the
         operations of Pennsylvania Life and PennCorp Life (Canada). PennCorp
         Life (Canada) operates exclusively in Canada, while Pennsylvania Life
         operates in the United States. The Career Agency segment includes the
         operations of a career agency field force, which distributes fixed
         benefit accident and sickness disability insurance, life insurance and
         supplemental senior health insurance in the United States and Canada.
         The career agents are under exclusive contract with either Pennsylvania
         Life or PennCorp Life (Canada).

         SENIOR MARKET BROKERAGE -- This segment includes the operations of
         general agency and insurance brokerage distribution systems that focus
         on the sale of insurance products to the senior market, including
         Medicare Supplement/Select, long term care, senior life insurance and
         annuities. In 2002, we combined our Special Markets segment with our
         Senior Market Brokerage segment.

         ADMINISTRATIVE SERVICES -- We act as a third party administrator and
         service provider for both affiliated and unaffiliated insurance
         companies, primarily with respect to various senior market products and
         a growing portion of non-insurance products. The services that we
         perform include policy underwriting, telephone verification,
         policyholder services, claims adjudication, clinical case management,
         care assessment and referral to health care facilities.

         CORPORATE -- This segment reflects the corporate activities of our
         holding company, including the payment of interest on our debt and our
         public company administrative expenses.

         Intersegment revenues and expenses are reported on a gross basis in
each of the operating segments. These eliminations affect the amounts reported
on the individual financial statement line items, but do not change operating
income before taxes. The significant items eliminated include intersegment
revenue and expense relating to services performed by the Administrative
Services segment for the Career Agency and Senior Market Brokerage segments and
interest on notes issued by the Corporate segment to the other operating
segments.

CRITICAL ACCOUNTING POLICIES

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




                                       17
<PAGE>


RESULTS OF OPERATIONS - CONSOLIDATED OVERVIEW

           The following table presents operating income by segment along with a
reconciliation to net income:

<TABLE>
<CAPTION>
                                                        For the quarters ended        For the six months ended
                                                                June 30,                     June 30,
                                                        -----------------------       ------------------------
                                                          2002           2001           2002           2001
                                                        --------       --------       --------       ---------
                                                                           (in thousands)
<S>                                                     <C>            <C>            <C>            <C>
Career agency                                           $  7,758       $  7,353       $ 14,965       $  14,719
Senior market brokerage                                    3,091          2,972          7,246           5,373
Administrative services                                    1,800          1,611          3,676           3,121
                                                        --------       --------       --------       ---------
  Segment operating income                                12,649         11,936         25,887          23,213
Corporate                                                 (1,576)        (2,233)        (3,332)         (4,679)
                                                        --------       --------       --------       ---------

Operating income before realized gains and federal
income taxes                                              11,073          9,703         22,555          18,534
Federal income taxes on operating items                   (3,465)        (3,475)        (7,542)         (6,628)
                                                        --------       --------       --------       ---------

  Net operating income                                     7,608          6,228         15,013          11,906
  Realized (losses) gains net of tax                      (4,290)          (154)        (4,197)          1,204
                                                        --------       --------       --------       ---------
Net income                                              $  3,318       $  6,074       $ 10,816       $  13,110
                                                        ========       ========       ========       =========
Per share data (diluted):
  Net operating income (1)                              $   0.14       $   0.13       $   0.28       $    0.25
  Realized (losses) gains net of tax                       (0.08)            --          (0.08)           0.03
                                                        --------       --------       --------       ---------
Net income                                              $   0.06       $   0.13       $   0.20       $    0.28
                                                        ========       ========       ========       =========
</TABLE>

(1)      We evaluate the results of operations of our segments based on
         operating income by segment. Operating income excludes realized gains
         (losses). This differs from generally accepted accounting principles,
         which includes the effect of realized gains (losses) in the
         determination of net income. The schedule above reconciles our
         operating income to net income in accordance with generally accepted
         accounting principles.

Quarters ended June 30, 2002 and 2001

         Consolidated net income after Federal income taxes decreased by $2.8
million to $3.3 million ($0.06 per share diluted) in the first quarter of 2002,
compared to $6.1 million ($0.13 per share diluted) in 2001. During the second
quarter of 2002, we reported realized investment losses of $4.3 million after
tax or $0.08 per share, relating to the impairment of our WorldCom holdings. The
effective tax rate for the Company was 25.8% for 2002 as compared to 35.8% in
2001. The decrease in the effective rate relates to the true up of the provision
for Canadian taxes identified in conjunction with the filing of our Canadian tax
return for the year ended December 31, 2001.

         Operating income before realized (losses) gains and Federal income
taxes increased by $1.4 million to $11.1 million in 2002 compared to $9.7
million in 2001. A summary of the operating results by segment is presented
below, with additional detail by segment in the sections that follow.

         Operating income from the Career Agency segment increased by $0.4
million, or 6%, compared to the second quarter of 2001. This reflects an
increase in new sales and improved loss ratios primarily for our disability
business.



                                       18
<PAGE>

         Operating results for the Senior Market Brokerage segment improved by
$0.1 million or 4%, compared to the second quarter of 2001. This improvement is
the result of continued internally generated growth of Medicare
supplement/select business combined with improved loss ratios. However, this was
partially offset by an increase in claims relating to a block of home health
care policies that we stopped selling last year.

         Operating income for the Administrative Services segment improved by
$0.2 million or 12%, compared to the second quarter of 2001. This improvement is
primarily as a result of the increase in Medicare premiums being serviced by our
administrative services company.

         The operating loss from the Corporate segment decreased by 29%,
compared to the second quarter of 2001, primarily due to a decrease in the
interest cost relating to our outstanding debt.

Six Months ended June 30, 2002 and 2001

         Consolidated net income after Federal income taxes decreased by $2.3
million to $10.8 million ($0.20 per share diluted) in the first six months of
2002, compared to $13.1 million ($0.28 per share diluted) in 2001. The realized
losses for 2002 relate primarily to the impairment of our WorldCom holdings.
Realized gains for 2001 were generated during the first quarter of 2001 as a
result of efforts to utilize tax capital loss carry forwards, and to limit
exposure to foreign exchange risk. The effective tax rate for the Company was
33.4% for 2002 as compared to 35.8% in 2001.

         Operating income before realized (losses) gains and Federal income
taxes increased by $4.0 million to $22.6 million in 2002 compared to $18.5
million in 2001. A summary of the operating results by segment is presented
below, with additional detail by segment in the sections that follow.

         Operating income from the Career Agency segment increased by $0.2
million compared to the six months ended June 30, 2001. This reflects an
increase in new sales and improved loss ratios for our disability business.

         The Senior Market Brokerage segment improved its operating results by
35% or $1.9 million compared to the first six months of 2001. This improvement
is the result of continued internally generated growth of Medicare
supplement/select business combined with improved loss ratios. However, this was
partially offset by an increase in claims relating to a block of home health
care policies that we stopped selling last year.

         Operating income for the Administrative Services segment improved by
$0.5 million or 18%, compared to the first six months of 2001. This improvement
is primarily as a result of the increase in Medicare premiums being serviced by
our administrative services company.

         The operating loss from the Corporate segment decreased by $1.3 million
or 29% over the first six months of 2001. This increase is primarily due to a
decrease in the interest cost relating to our outstanding debt.





                                       19
<PAGE>





SEGMENT RESULTS - CAREER AGENCY

<TABLE>
<CAPTION>
                                                    For the quarters ended       For the six months ended
                                                           June 30,                      June 30,
                                                   -------------------------     -------------------------
                                                      2002           2001           2002           2001
                                                   ----------     ----------     ----------     ----------
                                                                        (in thousands)
<S>                                                <C>            <C>            <C>            <C>
Net premiums and policyholder fees:
  Life and annuity                                 $    3,589     $    3,483     $    7,334     $    7,140
  Accident & health                                    27,923         28,595         55,718         57,290
                                                   ----------     ----------     ----------     ----------
  Net premiums                                         31,512         32,078         63,052         64,430
Net investment income                                   8,343          7,838         16,487         15,888
Other income                                              169            764            249            897
                                                   ----------     ----------     ----------     ----------
  Total revenue                                        40,024         40,680         79,788         81,215
                                                   ----------     ----------     ----------     ----------

Policyholder benefits                                  19,912         21,463         40,094         42,858
Interest credited to policyholders                        671            568          1,307            956
Change in deferred acquisition costs                   (3,781)        (2,994)        (7,008)        (6,119)
Commissions and general expenses, net of
  Allowances                                           15,464         14,290         30,430         28,801
                                                   ----------     ----------     ----------     ----------
  Total benefits, claims and other deductions          32,266         33,327         64,823         66,496
                                                   ----------     ----------     ----------     ----------
  Segment operating income                         $    7,758     $    7,353     $   14,965     $   14,719
                                                   ==========     ==========     ==========     ==========
</TABLE>

Quarters ended June 30, 2002 and 2001

         Operating income from the Career Agency segment increased by $0.4
million, or 6%, compared to the second quarter of 2001. This reflects an
increase in new sales and improved loss ratios primarily for our disability
business.

         Revenues. Net premiums for the quarter fell by approximately 2% for the
segment compared to the second quarter of 2001. Canadian operations accounted
for approximately 35% of the net premiums for the second quarter of 2002 and 34%
of the net premiums for the second quarter of 2001. New sales during the second
quarter of 2002 increased by 9% over the second quarter of 2001. This increase
was driven by sales of our senior market products, such as senior life, long
term care and Medicare supplement, which accounted for 49% of the new sales in
the U.S. New sales include more than $5.3 million of annuities in the second
quarter of 2002. New sales do not have a direct impact on net premium due to the
fact that our retention on most of the new premium is only 50% and annuity
deposits are not reported as premium.

         Net investment income increased by approximately 6% compared to the
second quarter of 2001. This is due to an increase in the invested asset base,
primarily as a result of the increased sales of annuity products.

         Benefits, Claims and Other Deductions. Policyholder benefits, including
the change in reserves, decreased by approximately 7% over the second quarter of
2001. This was due primarily to improved loss ratios on our disability and long
term care lines of business, which resulted in a decrease in the segment's
overall loss ratios from 67% for the second quarter of 2001 to 63% for the
second quarter of 2002.

           The increase in deferred acquisition costs was approximately $0.8
million more in the second quarter of 2002, compared to the increase in the
second quarter of 2001. This increase is primarily the result of an increase in
the underwriting and issue costs for the Career Agency segment associated with
the increase in new business.

         Commissions and other operating expenses increased by approximately
$1.2 million or 8% in the second quarter of 2002 compared to 2001. The increase
is directly related to the increase in new business.



                                       20
<PAGE>

Six Months ended June 30, 2002 and 2001

         Operating income from the Career Agency segment increased $0.2 million
compared to the six months ended June 30, 2001. This reflects an increase in new
sales and improved loss ratios primarily for our disability business.

         Revenues. Net premiums for the first six months of 2002 fell by
approximately 2% for the segment compared to the first six months of 2001.
Canadian operations accounted for approximately 35% of the net premiums in both
2001 and 2002. New sales during the first six months of 2002 increased by 13%
over the first six months of 2001.

         Net investment income increased by approximately 4% compared to the
first six months of 2001. This is due to an increase in the invested asset base,
primarily as a result of the increased sales of annuity products.

         Benefits, Claims and Other Deductions. Policyholder benefits, including
the change in reserves, decreased by approximately 6% over the first six months
of 2001. This was due primarily to improved loss ratios on our disability and
long term care lines of business, which resulted in a decrease in the segment's
overall loss ratios from 67% for the first six months of 2001 to 64% for the
first six months of 2002.

         The increase in deferred acquisition costs was approximately $0.9
million more in the first six months of 2002, compared to the increase in 2001.
This increase is primarily the result of an increase in the underwriting and
issue costs for the Career Agency segment associated with the increase in new
business.

         Commissions and other operating expenses increased by approximately
$1.6 million or 6% in the first six months of 2002 compared to 2001. The
increase is directly related to the increase in new business.

SEGMENT RESULTS - SENIOR MARKET BROKERAGE

<TABLE>
<CAPTION>
                                                  For the quarters ended        For the six months ended
                                                         June 30,                      June 30,
                                                 -------------------------     -------------------------
                                                    2002           2001           2002           2001
                                                 ----------     ----------     ----------     ----------
                                                                      (in thousands)
<S>                                              <C>            <C>            <C>            <C>
Net premiums and policyholder fees:
  Life and annuity                               $    4,936     $    4,128     $    9,538     $    8,496
  Accident & health                                  29,203         21,667         57,973         42,540
                                                 ----------     ----------     ----------     ----------
  Net premiums                                       34,139         25,795         67,511         51,036
Net investment income                                 5,980          6,352         12,107         12,928
Other income                                             48             (3)           225             70
                                                 ----------     ----------     ----------     ----------
  Total revenue                                      40,167         32,144         79,843         64,034
                                                 ----------     ----------     ----------     ----------

Policyholder benefits                                26,689         20,165         51,723         41,571
Interest credited to policyholders                    1,935          1,909          3,906          4,033
Change in deferred acquisition costs                 (3,143)        (1,040)        (5,848)        (2,243)
Amortization of present value of future
  profits and goodwill                                   32             69             75            219
Commissions and general expenses, net
   of allowances                                     11,563          8,069         22,741         15,081
                                                 ----------     ----------     ----------     ----------
Total benefits, claims and other deductions          37,076         29,172         72,597         58,661
                                                 ----------     ----------     ----------     ----------
  Segment operating income                       $    3,091     $    2,972     $    7,246     $    5,373
                                                 ==========     ==========     ==========     ==========
</TABLE>




                                       21
<PAGE>


           The table below details the gross premiums and policyholder fees
before reinsurance for the major product lines in the Senior Market brokerage
segment and the corresponding average amount of premium retained. The Company
reinsures its senior market brokerage products to unaffiliated third party
reinsurers under various quota share agreements. Medicare Supplement/Select
written premium is reinsured under quota share reinsurance agreements ranging
between 50% and 75% based upon the geographic distribution. During the first
quarter of 2002, we increased our retention on certain new business written from
25% to 50%. We are considering to further increase our retention on new business
further by the end of the year. The Company has also acquired various blocks of
Medicare Supplement premium, which are reinsured under quota share reinsurance
agreements ranging from 75% to 100%. Under these reinsurance agreements, the
Company reinsures the claims incurred and commissions on a pro rata basis and
receives additional expense allowances for policy issue, administration and
premium taxes.

<TABLE>
<CAPTION>
                                                 For the quarters ended June 30,
                                                2002                          2001
                                      -------------------------    -------------------------
                                       Gross              Net        Gross            Net
                                      Premiums         Retained    Premiums         Retained
                                      --------         --------    --------         --------
                                                          (in thousands)
<S>                                   <C>                  <C>     <C>                  <C>
Medicare supplement acquired          $ 35,870             4%      $ 37,404             6%
Medicare supplement/select
  written                               61,031            37%        38,189            31%
Other senior supplemental health         6,328            59%         5,516            62%
Other health                             2,520            65%         8,269            51%
Senior life insurance                    3,275            73%         1,898            66%
Other life                               3,199            69%         3,910            74%
                                      --------                     --------
Total gross premiums                  $112,223            30%      $ 95,186            27%
                                      ========                     ========
</TABLE>


<TABLE>
<CAPTION>
                                                 For the six months ended June 30,
                                                2002                          2001
                                      -------------------------    -------------------------
                                       Gross              Net        Gross            Net
                                      Premiums         Retained    Premiums         Retained
                                      --------         --------    --------         --------
                                                          (in thousands)
<S>                                   <C>                  <C>     <C>                  <C>
Medicare supplement acquired          $ 75,310             6%      $ 75,922             6%
Medicare supplement/select
   written                             120,058            36%        73,203            30%
Other senior supplemental health        12,415            60%        11,402            61%
Other health                             7,069            48%        16,637            52%
Senior life insurance                    5,552            71%         3,834            67%
Other life                               7,225            76%         7,896            75%
                                      --------                     --------
Total gross premiums                  $227,629            30%      $188,894            27%
                                      ========                     ========
</TABLE>

Quarters ended June 30, 2002 and 2001

         Operating results for the Senior Market Brokerage segment improved by
4% or $0.1 million, compared to the second quarter of 2001. This improvement is
the result of continued internally generated growth of Medicare
supplement/select business combined with improved loss ratios. However, this was
partially offset by an increase in claims relating to a block of home health
care policies that we stopped selling last year.

         Revenues. Gross premium written increased $17.0 million, or 18% over
2001 as a result of



                                       22
<PAGE>

continued strong sales of our Senior Market products. New production of our
Senior Market products amounted to $23.6 million in the current quarter compared
to $22.5 million in the same period of the prior year. The increase in gross
premium written over the second quarter of 2001 was primarily due to a 60%
increase, or $22.8 million, on Medicare supplement/select business written by
the Insurance Subsidiaries. Medicare supplement/select written premium grew as a
result of the increase in number of general agents under contract, expansion of
sales into more states in the northeast and by the dis-enrollment of
policyholders from several Health Maintenance Organizations ("HMO's"). In
addition, premiums increased due to normal rate increases implemented by the
Company on a periodic basis, offset by expected lapses. We also experienced a
15% increase, or $0.8 million in other senior supplemental health premium and a
73% increase, or $1.4 million in senior life insurance premium. These increases
are offset by a decrease of $5.7 million in other health premium - primarily as
a result of our decision to exit the major medical line of business, a decrease
of $1.5 million on Medicare supplement premium acquired though acquisition and a
decrease of $0.7 million in other life premium.

         Net premiums for the second quarter of 2002 increased by approximately
$8.3 million, or 32%, compared to 2001. The net premiums did not increase in
line with the gross premiums due to the change in the mix of annualized premium
in force. The amount of premium retained increased from 27% in 2001 to 30% in
2002 due to the increase in Medicare supplement/select premiums written, which
we retain 30% on average, as well as our decision to increase retention on new
business.

         Net investment income decreased by $0.4 million compared to the second
quarter of 2001. This is due to a decrease in investment yields and a decreasing
asset base.

         Benefits, Claims and Other Deductions. Policyholder benefits, including
the change in reserves, increased by approximately $6.5 million, or 32%,
compared to the second quarter of 2001 due primarily to higher annualized
premium in force, primarily Medicare supplement. Overall, loss ratios of the
segment were flat for the quarter, compared to the second quarter of 2001.
During the current quarter, we experienced an improvement in loss ratios on our
Medicare supplement business. However, that improvement was offset by an
increase in claims in a block of home health care business that we stopped
selling last year.

         Interest credited to policyholders remained flat compared to the second
quarter of 2001.

         The increase in deferred acquisition costs was approximately $2.1
million more in the second quarter of 2002, compared to the increase in the
second quarter of 2001. The increase in deferred acquisition costs relates to
the increase in premiums issued during 2002 compared to 2001.

         Commissions and other operating expenses increased by approximately
$3.5 million or 43% in the second quarter of 2002 compared to 2001. The
following table details the components of commission and other operating
expenses:

<TABLE>
<CAPTION>
                                                         For the quarters ended June 30,
                                                            2002            2001
                                                         ------------       ------------
                                                               (in thousands)
<S>                                                      <C>                <C>
Commissions                                              $     20,355       $     16,547
Other operating costs                                          15,159             12,351
Reinsurance allowances                                        (23,951)           (20,829)
                                                         ------------       ------------
Commissions and general expenses, net of allowances      $     11,563       $      8,069
                                                         ============       ============
</TABLE>

         The ratio of commissions to gross premiums increased to 18.1% during
the second quarter of 2002, from 17.4% in 2001. Other operating costs as a
percentage of gross premiums increased to 13.5% during the second quarter of
2002 from 13.0% in 2001. The increase in the percentage of commissions and
operating costs to gross premiums are primarily the result of the decrease in
the major medical premium. Commission and expense allowances received from
reinsurers as a percentage of the premiums ceded increased slightly to 30.7%
during the second quarter of 2002 compared to 30.0% in 2001.



                                       23
<PAGE>

Six Months ended June 30, 2002 and 2001

         The Senior Market Brokerage segment improved its operating results by
35% or $1.9 million compared to the first six months of 2001. This improvement
is the result of continued internally generated growth of Medicare
supplement/select business combined with improved loss ratios. However, this was
partially offset by an increase in claims relating to a block of home health
care policies that we stopped selling last year.

         Revenues. Gross premium written increased $38.7 million, or 21% over
the first six months of 2001 as a result of continued strong sales of our Senior
Market products. New production of our Senior Market products amounted to $59.4
million in the current quarter compared to $56.4 million in the same period of
the prior year. The increase in gross premium written over the first six months
of 2001 was primarily due to a 64% increase, or $46.9 million, on Medicare
supplement/select business written by the Insurance Subsidiaries. Medicare
supplement/select written premium grew as a result of the increase in number of
general agents under contract, expansion of sales into more states in the
northeast and by the dis-enrollment of policyholders from several Health
Maintenance Organizations ("HMO's"). In addition, premiums increased due to
normal rate increases implemented by the Company on a periodic basis, offset by
expected lapses. We also experienced a 9% increase, or $1.0 million in other
senior supplemental health premium and a 45% increase, or $1.7 million in senior
life insurance premium. These increases are offset by a decrease of $9.6 million
in other health premium - primarily as a result of our decision to exit the
major medical line of business, a decrease of $0.6 million on Medicare
supplement premium acquired though acquisition and a decrease of $0.7 million in
other life premium.

         Net premiums for the first six months of 2002 increased by
approximately $16.5 million, or 32%, compared to 2001. The net premiums did not
increase in line with the gross premiums due to the change in the mix of
annualized premium in force. The amount of premium retained increased from 27%
in 2001 to 30% in 2002 due to the increase in Medicare supplement/select
premiums written, which we retain 30% on average, as well as our decision to
increase retention on new business.

         Net investment income decreased by $0.8 million compared to the first
six months of 2001. This is due to a decrease in investment yields and a
decreasing asset base.

         Benefits, Claims and Other Deductions. Policyholder benefits, including
the change in reserves, increased by approximately $10.2 million, or 24%,
compared to the first six months of 2001 due primarily to higher annualized
premium in force, primarily Medicare supplement. Overall, loss ratios of the
segment improved over the first six months of 2001, due primarily to the
implementation of rate increases on our Medicare supplement business.

         Interest credited to policyholders was relatively flat compared to the
first six months of 2001.

         The increase in deferred acquisition costs was approximately $3.6
million more in the first six months of 2002, compared to the increase in the
first six months of 2001. The increase in deferred acquisition costs relates to
the increase in premiums issued during 2002 compared to 2001.




                                       24
<PAGE>


         Commissions and other operating expenses increased by approximately
$7.7 million, or 51%, in the first six months of 2002 compared to 2001. The
following table details the components of commission and other operating
expenses:

<TABLE>
<CAPTION>
                                                            For the six months ended June 30,
                                                                2002                 2001
                                                           ---------------     ---------------
                                                                     (in thousands)
<S>                                                        <C>                 <C>
Commissions                                                $        40,580     $        32,511
Other operating costs                                               30,211              24,330
Reinsurance allowances                                             (48,050)            (41,760)
                                                           ---------------     ---------------
Commissions and general expenses, net of allowances        $        22,741     $        15,081
                                                           ===============     ===============
</TABLE>

         The ratio of commissions to gross premiums increased to 17.8% during
the first six months of 2002, from 17.2% in 2001. Other operating costs as a
percentage of gross premiums increased to 13.3% during the first six months of
2002 from 12.9% in 2001. The increase in the percentage of commissions and
operating costs to gross premiums are primarily the result of the decrease in
the major medical premium. Commission and expense allowances received from
reinsurers as a percentage of the premiums ceded decreased to 30.0% during the
first six months of 2002 compared to 30.3% in 2001.

SEGMENT RESULTS - ADMINISTRATIVE SERVICES

<TABLE>
<CAPTION>
                                                         For the quarters ended        For the six months ended
                                                                June 30,                        June 30,
                                                           2002          2001           2002                2001
                                                       ------------  ------------   ------------        ------------
                                                                            (In thousands)
<S>                                                    <C>           <C>            <C>                 <C>
Service fee and other income                           $      9,907  $      7,893   $     19,474        $     15,873
Net investment income                                           109            59            238                 125
                                                       ------------  ------------   ------------        ------------
  Total revenue                                              10,016         7,952         19,712              15,998
                                                       ------------  ------------   ------------        ------------

Amortization of present value of future profits
  and goodwill                                                  378           567            757               1,134
General expenses                                              7,838         5,774         15,279              11,743
                                                       ------------  ------------   ------------        ------------
  Total expenses                                              8,216         6,341         16,036              12,877
                                                       ------------  ------------   ------------        ------------
  Segment operating income                                    1,800         1,611          3,676               3,121
                                                       ------------  ------------   ------------        ------------
Depreciation, amortization and interest                         698           759          1,387               1,513
                                                       ------------  ------------   ------------        ------------
Earnings before interest, taxes, depreciation and
amortization (1)                                       $      2,498  $      2,370   $      5,063        $      4,634
                                                       ============  ============   ============        ============
</TABLE>

(1)      For our Administrative Services segment, we evaluate results based on
         earnings before interest, taxes, depreciation and amortization, which
         is not in accordance with generally accepted accounting principles.



                                       25
<PAGE>


         The table below details service fee revenue earned by our
Administrative Services segment:


<TABLE>
<CAPTION>
                                                  For the quarters ended          For the six months ended
                                                         June 30,                         June 30,
                                              ------------------------------   --------------------------------
                                                  2002              2001           2002                2001
                                              ------------      ------------   ------------        ------------
                                                                      (In thousands)
<S>                                           <C>               <C>            <C>                 <C>
Affiliated Fee Revenue
      Medicare supplement                     $      4,289      $      3,108   $      8,423        $      6,069
      Long term care                                   630               366          1,238                 747
      Nurse Navigator(TM)                              284                45            659                  51
      Other health insurance                            20               120             46                 296
      Life insurance                                    95                95            190                 199
                                              ------------      ------------   ------------        ------------
Total Affiliated Fee Revenue                         5,318             3,734         10,556               7,362
                                              ------------      ------------   ------------        ------------

Unaffiliated Fee Revenue
      Medicare supplement                            2,232             2,396          4,574               4,797
      Long term care                                 1,861             1,241          3,386               2,780
      Other health insurance                           111               170            235                 309
      Non-insurance assistance                         385               352            723                 625
                                              ------------      ------------   ------------        ------------
      Total Unaffiliated Fee Revenue                 4,589             4,159          8,918               8,511
                                              ------------      ------------   ------------        ------------
Total Administrative Service Fee Revenue      $      9,907      $      7,893   $     19,474        $     15,873
                                              ============      ============   ============        ============
</TABLE>

Quarters ended June 30, 2002 and 2001

         Operating income for the Administrative Services segment improved by
$0.2 million, or 12%, over the second quarter of 2001, primarily as the result
of the increase in Medicare supplement premiums being serviced by our
administrative services company and the reduction in the amortization of the
present value of future profits ("PVFP"). Earnings before interest, taxes,
depreciation and amortization ("EBITDA") for this segment increased $0.1 million
or 5% to $2.5 million, compared to the second quarter of 2001.

         During the second quarter of 2002, we completed the closing of our
Clearwater office and the consolidation of those functions into our Pensacola
operations. Operating results for the second quarter of 2002 were reduced by
approximately $0.3 million as a result of the cost of this transition, but we
expect to see increased efficiency and cost savings during the second half of
2002.

         Service fee revenue increased by $2.0 million, or 26%, as compared to
the first quarter of 2001. In 2002, approximately 46% of the total fees earned
were from non-affiliated companies compared to 53% in 2001. The relative
decrease in the non-affiliated fees is the result of continued growth of
business from our Senior Market Brokerage segment. Affiliated fee revenue
increased $1.6 million compared to the second quarter of 2001. Additionally,
during the second quarter of 2002, we reported our first revenues from
underwriting support work we are now performing for the consortium that is
offering long term care to the employees of the federal government and their
families. We anticipate that this program will generate additional revenue over
the remainder of this year and next year.

         General expenses for the segment increased by $2.1 million, or 36%,
compared to the second quarter of 2001. The increase is due to the increase in
business, costs incurred in the Clearwater transition, and costs incurred to
bring new clients on line.

         The amortization of PVFP relates primarily to the acquisition of
American Insurance Administration Group, Inc. ("AIAG"). Approximately $7.7
million of PVFP was established when AIAG was acquired in January, 2000. It is
being amortized in proportion to the expected profits from the contracts in
force on the date of acquisition. A large portion of the contracts had a
remaining term of three years at the date of acquisition; accordingly, the
amortization is heavily weighted to those periods. During the second




                                       26
<PAGE>

quarter of 2002, approximately $0.4 million was amortized compared to $0.6
million in 2001. As of June 30, 2002, $2.0 million or 26%, of the original
amount remains unamortized.

Six Months ended June 30, 2002 and 2001

         Operating income for the Administrative Services segment for the first
six months of 2002 increased by $0.6 million or 18% compared to the first six
months of 2001.

         Service fee revenue increased by $3.7 million, or 23%, in the first six
months of 2002 as compared to 2001. The growth in business from affiliates added
$3.2 million of fees during the period, while fees from unaffiliated clients
grew by $0.4 million.

           General expenses for the segment increased by $3.5 million, or 30%,
compared to the first six months of 2001. The increase is due to the increase in
business, costs incurred in the Clearwater transition, and costs incurred to
bring new clients on line.

           The reduction of $0.4 million in the amortization of PVFP relates
primarily to a decrease in the amounts related to the acquisition of AIAG.

SEGMENT RESULTS - CORPORATE

The following table presents the primary components comprising the segment's
operating loss:

<TABLE>
<CAPTION>
                                                       For the quarters ended   For the six months ended
                                                               June 30,                   June 30,
                                                       -----------------------  ------------------------
                                                          2002        2001          2002         2001
                                                       ----------  -----------  ------------  ----------
                                                                       (in thousands)
<S>                                                    <C>         <C>          <C>           <C>
Interest cost on outstanding debt                      $      782  $     1,395  $      1,588  $    3,013
Amortization of capitalized loan origination fees             133          133           265         265
Stock-based compensation expense                              160          160           320         410
Other parent company expenses, net                            501          545         1,159         991
                                                       ----------  -----------  ------------  ----------
  Segment operating loss                               $    1,576  $     2,233  $      3,332  $    4,679
                                                       ==========  ===========  ============  ==========
</TABLE>

Quarters ended June 30, 2002 and 2001

         The net loss from the Corporate segment decreased by $0.7 million, or
29%, compared to the second quarter of 2001, due primarily to a reduction in
interest cost. The decrease in the interest cost is due to a combination of a
reduction in the weighted average interest rate and lower average outstanding
balance as a result of principal repayments, compared to 2001. (See "Liquidity
and Capital Resources" for additional information regarding our credit
facility).

Six Months ended June 30, 2002 and 2001

         The net loss from the Corporate segment decreased by $1.3 million, or
29%, compared to the first six months of 2001, due to primarily to a reduction
in interest cost, as noted above.

LIQUIDITY AND CAPITAL RESOURCES

         We use capital primarily to maintain or increase the surplus of our
insurance company subsidiaries and to support our parent company as an insurance
holding company. In addition, we require capital to fund our anticipated growth
through acquisitions of other companies or blocks of insurance or administration
business.




                                       27
<PAGE>

         We require cash at our parent company to meet our obligations under our
credit facility and our outstanding debentures held by our subsidiary, American
Progressive. We also require cash to pay the operating expenses necessary to
function as an insurance holding company (applicable insurance department
regulations require us to bear our own expenses), and to meet the costs involved
in being a public company.

         We believe that our current cash position, the availability of the
revolving credit facility, the expected cash flows of our administrative service
company and the surplus note interest payments from American Exchange can
support our parent company obligations for the foreseeable future. However,
there can be no assurance as to our actual future cash flows or to the continued
availability of dividends from our insurance company subsidiaries.

         Contractual Obligations and Commercial Commitments

         Our $80 million credit facility consists of a $70 million term loan and
a $10 million revolving loan facility. The loans call for interest at LIBOR for
one, two, three or six months plus 350 basis points (5.3% beginning July 31,
2002). Principal repayments are due on a quarterly basis over a seven-year
period that commenced on July 31, 2000. The final maturity date of the facility
is July 31, 2006. We pay a commitment fee of 50 basis points on the unutilized
portion of the revolving facility. The term loan is secured by a first priority
security interest in 100% of the outstanding common stock of American Exchange,
American Progressive, and WorldNet Services and 65% of the outstanding under
common stock of UAFC (Canada) Inc. (the parent of PennCorp Life (Canada)) and a
subordinate interest in 100% of the outstanding common stock of American
Pioneer. As of June 30, 2002, $53.2 million was outstanding under the term loan
and $3.0 million was outstanding under the revolving loan facility. We incurred
the revolving indebtedness in connection with our acquisition of CHCS in August
2000. During the six months ended June 30, 2002, we paid $1.0 million in
interest and repaid $5.3 million in principal on the term loan. Additionally,
during July 2002, we made a regularly scheduled repayment that further reduced
the term loan to $50.6 million. During the six months ended June 30, 2001, we
paid $2.9 million in interest and repaid $3.7 million in principal on the term
loan.

The following table shows the schedule of remaining principal payments, as of
August 1, 2002, on the Company's outstanding term loan, with the final payment
in July 2006:

<TABLE>
<CAPTION>
                                                    (In thousands)
<S>                                                  <C>
             2002                                     $   2,825
             2003                                        11,525
             2004                                        12,400
             2005                                        13,275
             2006                                        10,575
                                                      ---------
                         Total                        $  50,600
                                                      =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                    (In thousands)
<S>                                                  <C>
             2002                                        $   1,737
             2003                                            1,516
             2004                                            1,435
             2005                                              947
             2006 and thereafter                             5,686
                                                         ---------
                         Total                           $  11,321
                                                         =========
</TABLE>

         Other than the lease obligations noted above, we do not have any
contractual or other commitments involving off-balance sheet arrangements.



                                       28
<PAGE>

         Administrative Service Company

         Liquidity for our administrative service company is measured by its
ability to pay operating expenses. The primary source of liquidity is fees
collected from clients. We believe that the sources of cash for our
administrative service company exceed scheduled uses of cash and results in
amounts available to dividend to our parent holding company. We measure the
ability of the administrative service company to pay dividends based on its
earnings before interest, taxes, depreciation and amortization ("EBITDA"). For
the six months ended June 30, 2002, EBITDA for our administrative services
segment was $5.1 million. For the year ended December 31, 2001, EBITDA for our
administrative services segment was $9.7 million.

         Insurance Subsidiary - Surplus Note

         Cash generated by our insurance company subsidiaries will be made
available to our holding company, principally through periodic payments of
principal and interest on surplus notes. As of June 30, 2002, the principal
amount of surplus notes owed to our holding company from our American Exchange
subsidiary totaled $70 million. The notes pay interest to our parent holding
company at LIBOR plus 375 basis points. We anticipate that the surplus notes
will be primarily serviced by dividends from Pennsylvania Life, a wholly owned
subsidiary of American Exchange, and by tax-sharing payments among the insurance
companies that are wholly owned by American Exchange and file a consolidated
Federal income tax return. During the six months ended June 30, 2002, American
Exchange made interest payments of $2.0 million relating to the surplus notes.
American Exchange made no principal payments on the surplus notes to our parent
holding company during the six months ended June 30, 2002.

         Insurance Subsidiaries

         Our insurance subsidiaries are required to maintain minimum amounts of
capital and surplus as determined by statutory accounting practices. As of June
30, 2002, each insurance company subsidiary's statutory capital and surplus
exceeded its respective minimum requirement. However, substantially more than
these minimum amounts are needed to meet statutory and administrative
requirements of adequate capital and surplus to support the current level of our
insurance subsidiaries' operations. As of June 30, 2002 the statutory capital
and surplus, including asset valuation reserves, of our U.S. domiciled insurance
subsidiaries totaled $100.3 million.

         The National Association of Insurance Commissioners has developed, and
state insurance regulators have adopted, risk-based capital requirements on life
insurance enterprises. As of June 30, 2002 all of our insurance company
subsidiaries maintained ratios of total adjusted capital to risk-based capital
in excess of the minimum trigger point for regulatory action.

         PennCorp Life (Canada) is subject to Canadian capital requirements and
reports results to Canadian regulatory authorities based upon Canadian statutory
accounting principles that vary in some respects from U.S. statutory accounting
principles. Canadian net assets based upon Canadian statutory accounting
principles were $39.4 million as of June 30, 2002. PennCorp Life (Canada)
maintained a minimum continuing capital and surplus requirement ratio in excess
of the minimum requirement as of June 30, 2002.

         Dividend payments by our insurance companies to our parent holding
company or to intermediate subsidiaries are limited by, or subject to the
approval of the insurance regulatory authorities of each insurance company's
state of domicile. Such dividend requirements and approval processes vary
significantly from state to state. The maximum amount of dividends which can be
paid to American Exchange from Pennsylvania Life (to assist in the service of
the surplus note held by American Exchange) without the prior approval of the
Pennsylvania Department of Insurance is restricted to the greater of 10% of the
Pennsylvania Life's surplus as regards policyholders as of the preceding
December 31 or the net gain from operations during the preceding year, but such
dividends can be paid only out of unassigned surplus. Thus, future earnings of
Pennsylvania Life would be available for dividends without prior approval,
subject to the restrictions noted above. During the second quarter of 2002,
Pennsylvania Life



                                       29
<PAGE>

paid a dividend of $1.5 million to its parent, American Exchange. Based upon the
current dividend regulations of the respective states, Pennsylvania Life would
be able to pay ordinary dividends of up to $6.9 million and Constitution Life
would be able to pay ordinary dividends of approximately $1.7 million to
American Exchange (their direct parent) without the prior approval from their
respective insurance departments in the remainder of 2002. Additionally, in
2002, Peninsular Life would be able to pay ordinary dividends of up to $0.7
million to American Pioneer without approval from the Florida Department. We do
not expect that our remaining subsidiaries will be able to pay ordinary
dividends in 2002.

         Liquidity for our insurance company subsidiaries is measured by their
ability to pay scheduled contractual benefits, pay operating expenses, and fund
investment commitments. Sources of liquidity include scheduled and unscheduled
principal and interest payments on investments, premium payments and deposits
and the sale of liquid investments. We believe that these sources of cash for
our insurance company subsidiaries exceed scheduled uses of cash.

         Liquidity is also affected by unscheduled benefit payments including
death benefits, benefits under accident and health insurance policies and
interest-sensitive policy surrenders and withdrawals. The amount of surrenders
and withdrawals is affected by a variety of factors such as credited interest
rates for similar products, general economic conditions and events in the
industry that affect policyholders' confidence. Although the contractual terms
of substantially all of our in force life insurance policies and annuities give
the holders the right to surrender the policies and annuities, we impose
penalties for early surrenders. As of June 30, 2002 we held reserves that
exceeded the underlying cash surrender values of our inforce life insurance and
annuities by $16.8 million. Our insurance company subsidiaries, in our view,
have not experienced any material changes in surrender and withdrawal activity
in recent years.

         Changes in interest rates may affect the incidence of policy surrenders
and withdrawals. In addition to the potential impact on liquidity, unanticipated
surrenders and withdrawals in a changed interest rate environment could
adversely affect earnings if we were required to sell investments at reduced
values in order to meet liquidity demands. We manage our asset and liability
portfolios in order to minimize the adverse earnings impact of changing market
rates. We seek to invest in assets that have duration and interest rate
characteristics similar to the liabilities that they support.

         The net yields on our cash and invested assets increased slightly from
6.76% in 2001 to 6.80% in 2002. A significant portion of these securities are
held to support the liabilities for policyholder account balances, which
liabilities are subject to periodic adjustments to their credited interest
rates. The credited interest rates of the interest-sensitive policyholder
account balances are determined by us based upon factors such as portfolio rates
of return and prevailing market rates and typically follow the pattern of yields
on the assets supporting these liabilities.

         As of June 30, 2002, our insurance company subsidiaries held cash and
cash equivalents totaling $17.7 million, as well as fixed maturity securities
that could readily be converted to cash with carrying values (and fair values)
of $836.3 million. The fair values of these holdings totaled more than $857.3
million as of June 30, 2002.

         INVESTMENTS

         Our investment policy is to balance the portfolio duration to achieve
investment returns consistent with the preservation of capital and maintenance
of liquidity adequate to meet payment of policy benefits and claims. We invest
in assets permitted under the insurance laws of the various states in which we
operate. However, we do not invest in partnerships, special purpose entities,
real estate, commodity contracts, or other derivative securities. Such laws
generally prescribe the nature, quality of and limitations on various types of
investments that may be made. We currently engage the services of two investment
advisors under the direction of the management of our insurance company
subsidiaries and in accordance with guidelines adopted by the Investment
Committees of their respective boards of directors. Conning Asset Management
Company manages our fixed maturity portfolio in the United States and Elliot &
Page, Limited manages our Canadian fixed maturity portfolio. Our policy is not
to invest in derivative programs or other hybrid securities, except for GNMA's,
FNMA's and investment grade corporate



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<PAGE>

collateralized mortgage obligations. We invest primarily in fixed maturity
securities of the U.S. Government and its agencies and in corporate fixed
maturity securities with investment grade ratings of "Baa3" (Moody's Investor
Service), "BBB-" (Standard & Poor's Corporation) or higher. As of June 30, 2002,
99.0% of our fixed maturity investments had investment grade ratings from
Moody's Investors Service or Standard & Poor's Corporation. However, we do own
some investments that are rated "BB+" or below by Standard & Poor's (together
1.0% of total fixed maturities as of June 30, 2002). There were $2.1 million
non-income producing fixed maturities as of June 30, 2002. We wrote down the
value of certain fixed maturity securities by $9.1 million during the six months
ended June 30, 2002 (primarily as a result of the impairment of our WorldCom
holdings), and by $1.6 million during the six months ended June 30, 2001. In
each case, these write-downs represent our estimate of other than temporary
declines in value and were included in net realized gains (losses) on
investments in our consolidated statements of operations.

EFFECTS OF ACCOUNTING PRONOUNCEMENTS

         In June, 2001, The Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill, and intangible assets deemed to have
indefinite lives, will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statement. Other intangible assets will
continue to be amortized over their useful lives.

         The Company applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of the Statement resulted in an increase in net
income of $0.2 million (less than $0.01 per diluted share) for the six months
ended June 30, 2002. The Company performed the first of the required impairment
tests of goodwill and indefinite lived intangible assets as of January 1, 2002
and has determined that, based on these tests, goodwill and indefinite lived
intangibles were not impaired.

         ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         In general, market risk relates to changes in the value of financial
instruments that arise from adverse movements in interest rates, equity prices
and foreign exchange rates. We are exposed principally to changes in interest
rates that affect the market prices of our fixed income securities.

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
insurance liabilities generally arise over relatively long periods of time,
which typically permits ample time to prepare for their settlement. To date, we
have not used various financial risk management tools on our investment
securities, such as interest rate swaps, forwards, futures and options to modify
our exposure to changes in interest rates. However, we may consider using them
in the future.

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



                                       31
<PAGE>

         The sensitivity analysis of interest rate risk assumes an instantaneous
shift in a parallel fashion across the yield curve, with scenarios of interest
rates increasing and decreasing 100 and 200 basis points from their levels as of
June 30, 2002, and with all other variables held constant. A 100 basis point
increase in market interest rates would result in a pre-tax decrease in the
market value of our fixed income investments of $51.7 million and a 200 basis
point increase would result in a $100.1 million decrease. Similarly, a 100 basis
point decrease in market interest rates would result in a pre-tax increase in
the market value of our fixed income investments of $54.2 million and a 200
basis point decrease would result in a $111.5 million increase.

Currency Exchange Rate Sensitivity

         Portions of our operations are transacted using the Canadian dollar as
the functional currency. As of and for the three months ended June 30, 2002,
approximately 13% of our assets, 18% of our revenues and 36% of our operating
income before taxes were derived from our Canadian operations. As of and for the
three months ended June 30, 2001, approximately 14% of our assets, 19% of our
revenues and 35% of our operating income before taxes were derived from our
Canadian operations. Accordingly, our earnings and shareholders' equity are
affected by fluctuations in the value of the U.S. dollar as compared to the
Canadian dollar. Although this risk is somewhat mitigated by the fact that both
the assets and liabilities for our foreign operations are denominated in
Canadian dollars, we are still subject to translation losses.

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

         A 10% strengthening of the U.S. dollar relative to the Canadian dollar
would result in a decrease in our operating income before taxes for the six
months ended June 30, 2002 of approximately $0.5 million and a decrease in
shareholders' equity as of June 30, 2002 of approximately $2.5 million. Our
sensitivity analysis of the effects of changes in currency exchange rates does
not factor in any potential change in sales levels, local prices or any other
variable.

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

                           PART II - OTHER INFORMATION

         ITEM 1.  LEGAL PROCEEDINGS

         A lawsuit has been commenced against Universal American, its subsidiary
American Progressive Life & Health Insurance Company, and Richard Barasch, by
Marvin Barasch, the former Chairman of American Progressive. The suit primarily
arises out of Marvin Barasch's employment with American Progressive and includes
other personal claims against Richard Barasch. The Company and Richard Barasch
believe that the allegations are totally without merit. It is the opinion of
counsel that the likelihood of material recovery by the plaintiff is remote.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS
                     None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
                     None



                                       32
<PAGE>



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

        a.     The annual meeting of Stockholders of Universal American
               Financial Corp. was held on May 29, 2002.

        b.     All director nominees were elected.

        c.     Certain matters voted upon at the meeting and votes cast with
               respect to such matters are as follows:

               ELECTION OF DIRECTORS:
                                                  VOTES              VOTES
                          DIRECTOR               RECEIVED           WITHHELD
                          --------               --------           --------
               Richard A. Barasch               46,778,776         1,485,357
               Bradley E. Cooper                48,103,245           160,888
               Susan S. Fleming                 48,103,245           160,888
               Mark M. Harmeling                47,394,624           869,509
               Bertram Harnett                  47,394,624           869,509
               Patrick J. McLaughlin            48,103,245           160,888
               Robert A. Spass                  48,103,245           160,888
               Francis S. Wilson                48,103,245           160,888
               Robert F. Wright                 48,103,245           160,888

ITEM 5. OTHER INFORMATION
                 None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
                 a.  Exhibits

                     Exhibit 11.    Computation of Per Share Earnings
                                    Data required by Statement of Financial
                                    Accounting Standards No. 128, Earnings Per
                                    Share, is provided in Note 3 to the
                                    Consolidated Financial Statements in this
                                    report

                     Exhibit 99.1   Certification pursuant to 18 U.S.C.
                                    Section 1350, as adopted pursuant to Section
                                    906 of the Sarbanes-Oxley Act of 2002.

                     Exhibit 99.2   Certification pursuant to 18 U.S.C. Section
                                    1350, as adopted pursuant to Section 906 of
                                    the Sarbanes-Oxley Act of 2002.

                 b.  Reports on Form 8-K during the quarter ended June 30, 2002
                          None

SIGNATURE

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


                                        UNIVERSAL AMERICAN FINANCIAL CORP.

                                        By: /S/ Robert A. Waegelein
                                            ---------------------------
                                            Robert A. Waegelein
                                            Executive Vice President
                                            Chief Financial Officer

Date: August 14, 2002



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