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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-Q

(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2009ORo

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




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

New York

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

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


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

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



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

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

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

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


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

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

Class of Common Stock

Outstanding at
July 28, 2009$0.01 par value

77,153,015 shares




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TABLE OF CONTENTS



Item

Description

PagePART I

Financial Information1

Financial Statements (unaudited):Consolidated Balance Sheets


4Consolidated Statements of OperationsThree Months


5Consolidated Statements of OperationsSix Months


6Consolidated Statements of Stockholders' Equity and Comprehensive
Income


7Consolidated Statements of Cash Flows


8Notes to Consolidated Financial Statements


92

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


363

Quantitative and Qualitative Disclosures About Market
Risk


544

Controls and Procedures


55PART II

Other Information1

Legal Proceedings


571A

Risk Factors


572

Unregistered Sales of Equity Securities and Use of Proceeds


583

Defaults Upon Senior Securities


584

Submission of Matters to a Vote of Security Holders


585

Other Information


596

Exhibits


59Signatures


61


1

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Table of Contents

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

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

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



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



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

2

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Table of Contents

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

3

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Table of Contents

PART I

ITEM 1FINANCIAL STATEMENTS (Unaudited)

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

June 30,
2009

December 31,
2008(Unaudited)ASSETSInvestments:Fixed maturities available for sale, at fair value (amortized cost: 2009, $899,232; 2008, $1,075,078)

$
874,046

$
1,032,393Policy loans


47


22,274Other invested assets


1,687


1,649Total investments


875,780


1,056,316Cash and cash equivalents


331,832


511,032Accrued investment income


10,054


13,214Deferred policy acquisition costs


149,602


237,630Amounts due from reinsurers


755,533


220,986Due and unpaid premiums


289,952


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


179,205


192,742Goodwill and other indefinite lived intangible assets


530,031


530,031Income taxes receivable





38,032Deferred income tax asset


24,867


CMS contract deposit receivables


144,732


609,293Other Part D receivables


199,815


154,049Advances to agents


60,728


60,017Other assets


117,196


141,501Total assets

$
3,669,327

$
3,862,163LIABILITIES AND STOCKHOLDERS' EQUITYLIABILITIESPolicyholder account balances

$
369,559

$
396,700Reserves for future policy benefits


628,357


625,012Policy and contract claimslife


6,829


10,133Policy and contract claimshealth


631,576


729,070Advance premiums


11,912


7,183Loan payable


318,875


320,625Other long term debt


110,000


110,000Amounts due to reinsurers


12,086


22,091Income taxes payable


9,556


Deferred income tax liability





6,877Other Part D liabilities


104,438


149,523Other liabilities


153,857


168,865Total liabilities


2,357,045


2,546,079Commitments and contingencies (Note 11)STOCKHOLDERS' EQUITYPreferred stock (Authorized: 3 million shares):Series A (Designated: 300,000 shares, issued and outstanding: 2009, 42,105 shares, liquidation value $36,716; 2008, 42,105 shares, liquidation value
$37,137)


42


42Series B (Designated: 300,000 shares, issued and outstanding 2009, 0 shares; 2008, 0 shares)





Common stockvoting (Authorized: 200 million shares, issued and outstanding: 2009, 87.5 million shares; 2008, 87.4 million
shares)


875


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





Additional paid-in capital


876,863


870,520Accumulated other comprehensive loss


(26,062
)

(36,422
)Retained earnings


561,177


558,675Less: treasury stock (2009, 10.1 million shares; 2008, 7.2 million shares)


(100,613
)

(77,605
)Total stockholders' equity


1,312,282


1,316,084Total liabilities and stockholders' equity

$
3,669,327

$
3,862,163


See notes to unaudited consolidated financial statements.

4

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended June 30, 2009 and 2008

(Unaudited)

(in thousands, per share amounts in dollars)

2009

2008Revenues:Direct premium and policyholder fees earned

$
1,266,434

$
1,416,724Reinsurance premiums assumed


13,816


12,384Reinsurance premiums ceded


(44,174
)

(204,184
)Net premiums and policyholder fees earned


1,236,076


1,224,924Net investment income


12,487


19,476Fee and other income


4,980


10,926Realized lossTotal other-than-temporary impairment losses on securities


(8,265
)

(13,156
)Portion of loss recognized in other comprehensive income


3,742


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


(4,523
)

(13,156
)Realized loss, excluding other-than-temporary impairment on securities


(3,523
)

(129
)Net realized losses on investments


(8,046
)

(13,285
)Total revenues


1,245,497


1,242,041Benefits, Claims and Expenses:Claims and other benefits


1,055,413


1,045,160Change in reserves for future policy benefits


125


1,268Interest credited to policyholders





3,383Change in deferred acquisition costs


885


3,268Amortization of intangible assets


6,006


9,926Commissions


30,658


36,758Reinsurance commission and expense allowances


(6,911
)

(16,876
)Interest expense


4,806


5,793Loss on reinsurance and other related costs


7,624


Restructuring costs


4,727


Other operating costs and expenses


134,202


140,081Total benefits, claims and other deductions


1,237,535


1,228,761Income before equity in earnings of unconsolidated subsidiary


7,962


13,280Equity in earnings of unconsolidated subsidiary


8


15,281Income before income taxes


7,970


28,561Provision for income taxes


3,036


193Net income

$
4,934

$
28,368Earnings per common share:Basic (Note 6)

$
0.06

$
0.32Diluted

$
0.06

$
0.32Weighted average shares outstanding:Weighted average common shares outstanding


86,738


73,198Less weighted average treasury shares


(9,926
)

(3,249
)Basic weighted shares outstanding (Note 6)


76,812


69,949Weighted average common equivalent of preferred shares outstanding


4,211


17,500Effect of dilutive securities


334


291Diluted weighted shares outstanding


81,357


87,740


See notes to unaudited consolidated financial statements.

5

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Six Months Ended June 30, 2009 and 2008

(Unaudited)

(in thousands, per share amounts in dollars)

2009

2008Revenues:Direct premium and policyholder fees earned

$
2,639,110

$
2,849,535Reinsurance premiums assumed


27,498


23,833Reinsurance premiums ceded


(81,399
)

(430,793
)Net premiums and policyholder fees earned


2,585,209


2,442,575Net investment income


28,223


43,757Fee and other income


9,109


22,787Realized lossTotal other-than-temporary impairment losses on securities


(16,341
)

(42,955
)Portion of loss recognized in other comprehensive income


3,742


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


(12,599
)

(42,955
)Realized loss, excluding other-than-temporary impairment on securities


(2,669
)

662Net realized losses on investments


(15,268
)

(42,293
)Total revenues


2,607,273


2,466,826Benefits, Claims and Expenses:Claims and other benefits


2,244,889


2,158,681Change in reserves for future policy benefits


(44
)

3,632Interest credited to policyholders


4,284


7,522Change in deferred acquisition costs


8,583


10,799Amortization of intangible assets


11,899


11,826Commissions


62,363


76,014Reinsurance commission and expense allowances


(12,430
)

(34,626
)Interest expense


10,064


12,097Loss on reinsurance and other related costs


7,624


Restructuring costs


4,727


Other operating costs and expenses


277,992


278,966Total benefits, claims and other deductions


2,619,951


2,524,911Loss before equity in earnings of unconsolidated subsidiary


(12,678
)

(58,085
)Equity in earnings of unconsolidated subsidiary


105


31,333Loss before income taxes


(12,573
)

(26,752
)Benefit from income taxes


(4,359
)

(9,120
)Net loss

$
(8,214
)
$
(17,632
)Loss per common share:Basic (Note 6)

$
(0.10
)
$
(0.20
)Diluted

$
(0.10
)
$
(0.20
)Weighted average shares outstanding:Weighted average common shares outstanding


86,782


73,819Less weighted average treasury shares


(9,361
)

(1,875
)Basic weighted shares outstanding (Note 6)


77,421


71,944Weighted average common equivalent of preferred shares outstanding


4,211


17,500Effect of dilutive securities


383


536Diluted weighted shares outstanding


82,015


89,980


See notes to unaudited consolidated financial statements.

6

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  AND COMPREHENSIVE INCOME        For the Six Months Ended
June 30, 2009 and 2008        (Unaudited)        (in thousands)

Preferred
Stock
Series A

Preferred
Stock
Series B

Common
Stock

Additional
Paid-In
Capital

Accumulated
Other
Comprehensive
(Loss) Income

Retained
Earnings

Treasury
Stock

Total2008Balance, January 1, 2008

$
47

$
128

$
750

$
890,882

$
(66
)
$
463,583

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

















(17,632
)




(17,632
)Other comprehensive loss














(6,715
)







(6,715
)Comprehensive loss























(24,347
)Preferred stock conversion


(5
)

5

















Issuance of common stock








3


1,272











1,275Stock-based compensation











4,112











4,112Purchase price adjustment for acquisition of MemberHealth








(20
)

(34,521
)










(34,541
)Treasury shares purchased, at cost




















(50,067
)

(50,067
)Treasury shares reissued











(156
)







1,417


1,261Balance, June 30, 2008

$
42

$
133

$
733

$
861,589

$
(6,781
)
$
445,951

$
(52,908
)
$
1,248,7592009Balance, January 1, 2009

$
42

$


$
874

$
870,520

$
(36,422
)
$
558,675

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

















(8,214
)




(8,214
)Other comprehensive income














21,076








21,076Comprehensive loss























12,862FSP FAS 115-2 implementation adjustment














(10,716
)

10,716





Issuance of common stock








1


146











147Stock-based compensation











6,173











6,173Treasury shares purchased, at cost




















(27,156
)

(27,156
)Treasury shares reissued











24








4,148


4,172Balance, June 30, 2009

$
42

$


$
875

$
876,863

$
(26,062
)
$
561,177

$
(100,613
)
$
1,312,282


See notes to unaudited consolidated financial statements.

7

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        For the Six Months Ended June 30, 2009 and 2008    
(Unaudited)        (in thousands)

2009

2008Cash flows from operating activities:Net loss

$
(8,214
)
$
(17,632
)Adjustments to reconcile net loss to net cash used in operating activities, net of balances acquired:Equity in earnings of unconsolidated subsidiary


(105
)

(31,333
)Distribution from unconsolidated subsidiary


6,800


27,000Deferred income taxes


(37,323
)

(1,656
)Realized losses on investments


15,268


42,293Amortization of intangible assets


11,899


11,826Loss on reinsurance, net of tax


2,221


Net amortization of bond premium


1,219


898Changes in operating assets and liabilities:Deferred policy acquisition costs


8,583


10,799Reserves for future policy benefits


3,345


6,001Policy and contract claims payable


(100,798
)

60,197Reinsurance balances


(5,484
)

30,558Due and unpaid advance premium, net


(187,903
)

(272,475
)Income taxes payable/receivable


47,589


(28,207
)Other Part D receivables


(45,766
)

12,392Other Part D liabilities


(45,085
)

(16,896
)Other, net


24,123


(31,794
)Cash used in operating activities


(309,631
)

(198,029
)Cash flows from investing activities:Proceeds from sale or redemption of fixed maturity investments


558,616


223,190Cost of fixed maturity investments purchased


(382,956
)

(232,562
)Assets transferred on life reinsurance


(454,487
)

Return of purchase price





40,990Purchase of fixed assets


(14,063
)

(9,737
)Other investing activities


(1,860
)

621Cash (used in) provided by investing activities


(294,750
)

22,502Cash flows from financing activities:Net proceeds from issuance of common and preferred stock, net of tax effect


2,717


1,913Cost of treasury stock purchases


(27,156
)

(50,067
)Receipts from CMS contract deposits


1,837,979


1,583,804Withdrawals from CMS contract deposits


(1,373,418
)

(1,530,061
)Deposits and interest credited to policyholder account balances


4,357


8,690Surrenders and other withdrawals from policyholder account balances


(17,548
)

(26,970
)Principal repayment on loan payable and other long term debt


(1,750
)

(26,750
)Cash provided by (used in) financing activities


425,181


(39,441
)Net decrease in cash and cash equivalents


(179,200
)

(214,968
)Cash and cash equivalents at beginning of period


511,032


667,685Cash and cash equivalents at end of period

$
331,832

$
452,717


See notes to unaudited consolidated financial statements.

8

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

1. ORGANIZATION AND COMPANY BACKGROUND

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

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

2. BASIS OF PRESENTATION

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

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

9

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

related
to pharmacy claims, rebates, and revenue related to prior PDP years. Upon dissolution of PDMS in 2009, following the run-out of prior year PDP claims, the economic interest of PDMS
would be split equally between us and Caremark to match the 50% voting and ownership rights held by each entity (see Note 12Unconsolidated Subsidiary).

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

Reclassifications:We have made reclassifications to the December 31, 2008 balance sheet with respect to classification of
assets and
liabilities related to our Senior Managed CareMedicare Advantage business. These reclassifications increased due and unpaid premiums by $18.0 million, and reduced other assets
$26.5 million and amounts due to reinsurers $8.5 million. These reclassifications had no effect on net income or earnings per share as previously reported.

Significant Accounting Policies:For a description of significant accounting policies, see Note 2Summary of
Significant
Accounting Policies in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Recognition of Premium Revenues and Policy BenefitsMedicare Products:Medicare is a federal program that provides persons
age 65 and
over and some disabled persons under the age of 65 certain hospital and medical insurance benefits. Hospitalization benefits are provided under Part A, without the payment of any premium, for
up to 90 days per incident of illness plus a lifetime reserve aggregating 60 days. Eligible beneficiaries are required to pay an annually adjusted premium to the federal government to be
eligible for physician care and other services under Part B. Beneficiaries eligible for Part A and Part B coverage under traditional Medicare are still required to pay
out-of-pocket deductibles and coinsurance. Prescription drug benefits are provided under Part D. The Centers for Medicare and Medicaid Services, known as CMS, an agency
of the United States Department of Health and Human Services, administers the Medicare program. We contract with CMS under the Medicare Advantage program to provide a comprehensive array of health
insurance benefits including wellness programs to Medicare eligible persons under HMO, PPO, PFFS and stand-alone Part D plans in exchange for contractual payments received from CMS, usually a
fixed payment per member per month.

10

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

We
routinely monitor the collectability of specific accounts, the aging of receivables, historical retroactivity trends, as well as prevailing and anticipated economic conditions, and
reflect any required adjustments in the current period's revenue.

Premiums
received pursuant to Medicare Advantage contracts with CMS for Medicare enrollees are recorded as revenue in the month in which members are entitled to receive service. Premiums
collected in advance are deferred. Accounts receivable from CMS and health plan members for coordinating physician services and inpatient, outpatient and ancillary care are included in other assets
and are recorded net of estimated bad debts. It is the Company's practice to accrue revenue in addition to the premiums received from CMS based upon changes to hierarchical condition categories (HCC)
risk scores not then considered by CMS and based solely on the analysis of claims information and confirmed chart data that is in the possession of the Company. Certain commissions are deferred and
amortized in relation to the corresponding revenues which is no longer than a one-year period. Policies and contract claims include actual claims reported but not paid and estimates of
health care services incurred but not reported. The estimated claims incurred but not reported are based on historical data, current enrollment, health service utilization statistics and other related
information. Although considerable variability is inherent in such estimates, management believes that the liability is adequate. Changes in assumptions for medical costs caused by changes in actual
experience could cause these estimates to change in the near term.



CMS uses monthly rates per person for each county to determine the fixed monthly payments per member to pay to health benefit plans,
including our HMO, PFFS and PPO plans. CMS has implemented a risk adjustment model which apportions premiums paid to all health plans according to health severity. The risk adjustment model uses
health status indicators, or risk scores, to improve the accuracy of payment. The CMS risk adjustment model pays more for members with predictably higher costs. Under this risk adjustment methodology,
diagnosis data from inpatient and ambulatory treatment settings are used to calculate the risk adjusted premium payment to us. All health benefit organizations must capture, collect, and submit the
necessary diagnosis code information to CMS within prescribed deadlines. Accordingly, we collect, capture, and submit the necessary and available diagnosis data to CMS within prescribed deadlines. We
estimate risk adjustment revenues based upon the diagnosis data submitted to CMS and ultimately accepted by CMS. The risk adjustment revenues are periodically reconciled by CMS and the settlement
could result in adjustments to premium revenue. The stand-alone PDP payment methodology is based on the risk adjustment model. However, we do not have access to diagnosis data with respect to our
stand-alone PDP members. We are reliant on CMS to capture and collect the necessary diagnosis information for these members. Changes in revenues from CMS for our Medicare products resulting from the
periodic changes in risk adjustment scores for our membership are recognized when the amounts become determinable and the collectability is reasonably assured. Our monthly premium payment from CMS
could change materially, either favorably or unfavorably, as a result of changes in the risk scores for the underlying membership of our plans.

11

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)



We analyze the membership for our Medicare Part D, HMO, PFFS and PPO plans in our administrative system and reconcile to the
enrollment provided by CMS. Our revenues and claims expense are based on the enrollment information provided by CMS. There are timing differences between the addition of members to our administrative
system and the approval, or accretion, of the member by CMS before we are paid for that member by CMS. Additionally, the monthly payments from CMS include adjustments to reflect changes in membership
as a result of retroactive terminations, additions or other changes. Current period revenues are adjusted to reflect retroactive changes in membership.



We provide prescription drug coverage in accordance with Medicare Part D as a stand-alone benefit to Medicare-eligible
beneficiaries, known as Part D benefits, through our PDPs under multiple contracts with CMS. Our Medicare contracts with CMS renew annually.

In
general, prescription drug benefits under Part D PDPs may vary in terms of coverage levels and out-of-pocket costs for beneficiary premiums, deductibles
and co-insurance. However, all Part D PDPs must offer either "Standard Coverage" or its actuarial equivalent (with out-of-pocket threshold and deductible
amounts that do not exceed those of standard coverage). These defined "standard" benefits represent the minimum level of benefits mandated by Congress. We also offer other PDPs containing benefits in
excess of standard coverage limits for an additional beneficiary premium.

Our
PDPs receive monthly payments from CMS and members which generally represent our bid amount for providing insurance coverage. The payments from CMS reflect the health status of the
beneficiary and risk sharing provisions, as discussed below. We recognize premium revenue for providing this insurance coverage during each month in which members are entitled to benefits.



Our CMS payment is subject to risk sharing through the Medicare Part D risk corridor provisions. The risk corridor provisions
permit our PDPs and CMS to share the risk associated with the ultimate costs of the Part D benefit. The risk corridor provisions compare a plan's actual prescription drug costs to their
targeted costs, as reflected in their bids ("target amount') and could result in positive or negative adjustments to the CMS payment, that are reported through premium revenues. Variances exceeding,
or below, certain thresholds may result in CMS making additional payments to us, or requiring us to refund to CMS a portion of the payments we received. Actual prescription drug costs subject to risk
sharing with CMS are limited to the costs that are, or would have been, incurred under the CMS "Defined Standard" benefit plan. We estimate and recognize an adjustment to premium revenues related to
the risk corridor payment, at the contract level, based upon prescription drug claims experience to date, net of manufacturer rebates and other Part D revenues, at the end of each reporting
period. We record a receivable or payable in the consolidated balance sheets based on the expected settlement. The estimate of the settlement associated with risk corridor provisions requires us

12

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

to
consider factors that may not be certain, including, among others, member eligibility differences with CMS.

Our
CMS payments also include catastrophic reinsurance allowances and low income cost sharing subsidies (CMS contract deposits) for which we do not bear risk. These subsidies represent
reimbursements from CMS for claims we pay for which we assume little or no risk. A large percentage of claims paid above the out-of-pocket or catastrophic threshold for which
we are not at risk are reimbursed by CMS through the reinsurance subsidy. Low-income cost subsidies represent reimbursements from CMS for all or a portion of the deductible, the
coinsurance and co-payment amounts above the out-of-pocket threshold for low-income beneficiaries. Monthly prospective payments from CMS for reinsurance
and low-income cost subsidies are based on assumptions submitted with our annual bid. A reconciliation and related settlement of CMS's prospective subsidies against actual prescription
drug costs we paid is made after the end of the year. We account for these subsidies as deposits in our consolidated balance sheets and as a financing activity in our consolidated statements of cash
flows. We do not recognize premium revenues or claims expense for these subsidies. Receipt and payment activity is accumulated at the contract level and recorded in our consolidated balance sheets as
a CMS contract deposit account asset or liability depending on the net contract balance at the end of the reporting period.

Settlement
of the reinsurance and low-income cost subsidies as well as the risk corridor payment is based on a reconciliation made by CMS approximately 9 months after
the close of each calendar year. This reconciliation process requires us to submit claims data necessary for CMS to administer the program.

At
June 30, 2009 and December 31, 2008, the balance due from (to) CMS for the 2006 through 2009 Plan years were $281.4 million and $640.9 million,
respectively, broken down as follows:

June 30, 2009

December 31, 2008Plan Year

Reinsurance/
Low-income
Cost
Subsidy(1)

Risk
Corridor(2)

Total Due
from (to)
CMS(3)

Reinsurance/
Low-income
Cost
Subsidy(1)

Risk
Corridor(2)

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

$
(397,555
)
$
111,930

$
(285,625
)
$


$


$
2008


525,799


16,550


542,349


528,993


16,551


545,5442007


15,615


7,401


23,016


85,909


16,917


102,8262006


873


828


1,701


(5,609
)

(1,815
)

(7,424
)Total due from CMS

$
144,732

$
136,709

$
281,441

$
609,293

$
31,653

$
640,946


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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)



As
membership information continues to be reconciled and refined by CMS with respect to the enrollment of members among all plans participating in the Part D program, we have paid
Part D benefits for individuals who ultimately were determined to be members of other plans. Receivables for these claims are included in Other Part D receivables in the consolidated
balance sheets and totaled $17.8 million and $17.4 million at June 30, 2009 and December 31, 2008, respectively. We also established liabilities for our estimate of claims
paid by state Medicaid programs and other plans on behalf of members in our PDPs. These liabilities are included in Policy and contract claims-health in the consolidated balance sheets and totaled
$4.5 million and $6.2 million at June 30, 2009 and December 31, 2008, respectively. As these membership differences are resolved, it is likely that the membership data upon
which we based our results for prior plan years will change, with a corresponding change in the financial results for the segment. We are unable to precisely quantify the impact of any potential
change until the membership data is fully reconciled with CMS; however, we do not believe that any change from the amounts reported as of June 30, 2009 or December 31, 2008 is likely to
be material.

Recognition of Prior Plan Year Settlements under Medicare Part D and Private Fee-For-Service Plans:The Medicare
Part D prescription drug benefit program is detail-oriented and relatively complex. The amount due from CMS is impacted by: membership; risk scores; prescription drug events ("PDEs"); rebates;
deductibles; catastrophic reinsurance; and the risk corridor adjustment.

An
extended period of time after the close of the annual coverage period (December 31st) is required for the government to reconcile each member's PDEs and provide
back to each plan the information the plans need to finalize the accounting for this coverage. The federal government has a stated time schedule for providing information back to the plans for, among
other items, revenue adjustments based on risk scores, member eligibility by plan to reconcile the plan to plan reimbursements and the calculation of the final settlement with the federal government
for low-income cost subsidies, reinsurance and risk corridor payments. Reconciliation and related settlement of CMS's prospective subsidies, including reinsurance payments and
low-income cost subsidies, as well as the risk corridor is made after the end of each plan year. For the 2007 Plan year, we received risk score adjustment settlement data in the third
quarter of 2008, and reconciliation settlement data in the fourth quarter of 2008. We expect a similar timetable in 2009 related to the 2008 Plan year risk score and reconciliation settlement data.

The
reconciliation and settlement process with CMS for the Part D coverage within Medicare Advantage PFFS plans is similar to Medicare Part D plans with the two exceptions:
(1) PFFS plans are ineligible for aggregate risk corridor payments; and (2) prospective monthly catastrophic reinsurance payments to PFFS plans are based on CMS estimated average
reinsurance payments to other Medicare AdvantagePrescription Drug (MA-PD) plans for their Part D coverage. In the third quarter of 2008, we received notification from
CMS of an adjustment to our catastrophic reinsurance reimbursement for the Part D coverage within our PFFS plans for the 2007 Plan year that lowered the reimbursement by $4.5 million. We
expect a similar timetable in 2009 for 2008 plan year settlement data.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS

Fair Value Measurement and Other-than-Temporary Impairments:In April 2009, the Financial Accounting Standards Board, or
FASB, issued two FASB Staff Positions, or FSPs, to address concerns about (1) measuring the fair value of financial instruments when the markets become inactive and quoted prices may reflect
distressed transactions and (2) recording impairment charges on investments in debt securities. The FASB also issued a third FSP to require disclosures of fair values of certain financial
instruments in interim financial statements.

FSP
No. FAS 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly, provides additional guidance to highlight and expand on the factors that should be considered in estimating fair value when there
has been a significant decrease in market activity for a financial asset. This FSP also requires new disclosures relating to fair value measurement inputs and valuation techniques (including changes
in inputs and valuation techniques).

FSP
No. FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary
Impairments, replaces the requirement in FSP No. FAS 115-1 and FAS 124-1,The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"for management to assert that it has the ability and intent to hold an
impaired debt security until recovery with the requirement that management assert if it either has the intent to sell the debt security or if it is more likely than not the entity will be required to
sell the debt security before recovery of its amortized cost basis. If management intends to sell the debt security or it is more likely than not the entity will be required to sell the debt security
before recovery of its amortized cost basis, an other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the debt security's
amortized cost basis and its fair value at the balance sheet date. After recognition of the OTTI, the debt security is accounted for as if it had been purchased on the measurement date of the OTTI,
with an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings.

If
management does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before recovery of its amortized
cost basis, but the present value of the cash flows expected to be collected is less than the amortized cost basis of the debt security (referred to as the credit loss), an OTTI is considered to have
occurred. In this instance, FAS 115-2 requires the bifurcation of the total OTTI into the amount related to the credit loss, which is recognized in earnings, with the remaining
amount of the total OTTI attributed to other factors (referred to as the noncredit portion) and recognized as a separate component in other comprehensive loss. After the recognition of an OTTI, the
debt security is accounted for as if it had been purchased on the measurement date of the OTTI, with an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in
earnings. In addition, FAS 115-2 expands and increases the frequency of existing disclosures about OTTIs for debt and equity securities regarding expected cash flows, credit losses
and an aging of securities with unrealized losses.

FSP
No. FAS 107-1 and APB 28-1,Interim Disclosures about Fair Value of Financial Instruments,
increases the frequency of fair value disclosures from annual to quarterly to provide financial statement users with more timely information about the effects of current market conditions on their
financial instruments.

15

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS (Continued)

We
adopted the aforementioned FSPs effective April 1, 2009, as required. There was no impact from the adoption of FSP FAS 157-4 on our financial statements. The
effect of adoption of FSP-FAS 115-2 and FAS 124-2 was to increase the opening balance of retained earnings by $10.7 million, with a
corresponding increase to the accumulated other comprehensive loss on our consolidated statements of stockholders' equity and comprehensive income to reclassify the noncredit portion of previously
impaired debt securities held as of April 1, 2009.

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

Unrealized
OTTIIncrease in amortized cost

$
16,487Income Tax


(5,771
)Net cumulative effect adjustment

$
10,716


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

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

Subprime

$
15,689Non-agency RMBS


798$
16,487


In
addition, we have enhanced our financial statement presentation, as required under FAS FSP 115-2, to separately present the total OTTI recognized in realized loss,
with an offset for the amount of noncredit impairments recognized in accumulated other comprehensive loss, on the face of our consolidated statements of operations. The enhanced financial statement
disclosures required under FAS FSP 115-2 and FAS FSP 107-1 are included in notes 4 and 5.

Disclosures
about Derivative Instruments and Hedging ActivitiesOn January 1, 2009, we adopted SFAS No. 161, "Disclosures about Derivative Instruments and
Hedging Activities, an Amendment of FASB Statement No. 133" ("SFAS 161"). The adoption of SFAS 161 results in expanded disclosures related to derivative instruments and hedging
activities.

16

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS

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

June 30, 2009Classification

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Gross
Unrealized
OTTI

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

$
37,053

$
819

$
(11
)
$


$
37,861Government sponsored agencies


91,101


3,266


(37
)




94,330Other political subdivisions


9,994


227


(147
)




10,074Corporate debt securities


365,340


12,509


(8,655
)




369,194Foreign debt securities


22,022


1,044


(478
)




22,588Mortgage-backed and asset-backed securities


373,722


11,549


(19,152
)

(26,120
)

339,999$
899,232

$
29,414

$
(28,480
)
$
(26,120
)
$
874,046




December 31, 2008Classification

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Gross
Unrealized
OTTI

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

$
33,963

$
1,372

$


$


$
35,335Government sponsored agencies


90,030


4,999








95,029Other political subdivisions


9,993


133


(241
)




9,885Corporate debt securities


441,681


4,055


(25,453
)




420,283Foreign debt securities


32,779


41


(1,930
)




30,890Mortgage-backed and asset-backed securities


466,632


8,109


(33,770
)




440,971$
1,075,078

$
18,709

$
(61,394
)
$


$
1,032,393


At
June 30, 2009, gross unrealized losses of $45.3 million on mortgage-backed and asset-backed securities reflect unrealized losses of $37.0 million on subprime
residential mortgage loans, as discussed below, and $8.3 million related to obligations of commercial mortgage-backed securities and other asset-backed securities. The value of a majority of
these securities is depressed due to the deterioration of value in the mortgage-backed securities market and related businesses. Corporate debt securities have gross unrealized losses of
$8.7 million at June 30, 2009. These unrealized losses relate to corporate securities across all sectors, and reflect the general depressed market conditions that existed at
June 30, 2009. The majority of the unrealized losses on corporate debt securities are in the financial sector, which has gross unrealized losses of $5.7 million and where the average
market price of our holdings at June 30, 2009 was $92.6 per $100 of par value. Management and the Investment Committee have evaluated these holdings, with input from our investment managers,
and do not believe them to be other-than-temporarily impaired.

17

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

The
amortized cost and fair value of fixed maturity investments at June 30, 2009 by contractual maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized
Cost

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

$
41,186

$
42,113Due after 1 year through 5 years


355,681


368,866Due after 5 years through 10 years


99,237


98,775Due after 10 years


29,406


24,293Mortgage and asset-backed securities


373,722


339,999$
899,232

$
874,046


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

Less than 12 Months

12 Months or Longer

TotalJune 30, 2009

Fair
Value

Gross
Unrealized
Losses and
OTTI

Fair
Value

Gross
Unrealized
Losses and
OTTI

Fair
Value

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

$
4,079

$
(48
)
$
2,013

$
(147
)
$
6,092

$
(195
)Corporate debt securities


20,385


(395
)

55,377


(8,260
)

75,762


(8,655
)Foreign debt securities


25





2,034


(478
)

2,059


(478
)Mortgage-backed and asset-backed securities


24,037


(22,839
)

38,415


(22,433
)

62,452


(45,272
)Total fixed maturities at June 30, 2009

$
48,526

$
(23,282
)
$
97,839

$
(31,318
)
$
146,365

$
(54,600
)Total number of securities in an unrealized loss position


116


18

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

Less than 12 Months

12 Months or Longer

TotalDecember 31, 2008

Fair
Value

Gross
Unrealized
Losses and
OTTI

Fair
Value

Gross
Unrealized
Losses and
OTTI

Fair
Value

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

$
53

$


$


$


$
53

$
Corporate debt securities


183,289


(13,104
)

51,937


(12,590
)

235,226


(25,694
)Foreign debt securities


26,803


(1,318
)

1,872


(612
)

28,675


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


79,877


(9,748
)

57,370


(24,022
)

137,247


(33,770
)Total fixed maturities at December 31, 2008

$
290,022

$
(24,170
)
$
111,179

$
(37,224
)
$
401,201

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


209


Subprime Residential Mortgage Loans

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

As
of June 30, 2009, we held subprime securities with par values of $137.9 million, an amortized cost of $58.2 million and a market value of $21.2 million
representing approximately 1.8% of our cash and invested assets, with collateral comprised substantially of first lien mortgages. The majority of these securities are in senior or senior mezzanine
level tranches, which have preferential liquidation characteristics, and have an average rating of AA by Standard & Poors, a division of the McGraw Hill Companies, Inc., known as S&P, or
equivalent.

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

Vintage Year

Amortized
Cost

Fair
Value

Unrealized
Gain (Loss)(in thousands)2003

$
4,654

$
3,261

$
(1,393
)2004


2,624


1,998


(626
)2005


24,048


11,041


(13,007
)2006


21,465


3,400


(18,065
)2007


5,427


1,562


(3,865
)Totals

$
58,218

$
21,262

$
(36,956
)


19

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

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

The
following table summarizes, on a pre-tax basis, our other-than-temporary impairments recorded since the subprime deterioration began in 2007:

2009 Quarter Ended

Year Ended December 31,Cumulative

June 30

March 31

2008

2007(in thousands)Subprime

$
95,471

$
2,135

$
4,375

$
47,964

$
40,997Other structured


10,734


2,388


3,701


4,645


Corporate


7,177








7,177


$
113,382

$
4,523

$
8,076

$
59,786

$
40,997


During
the quarter ended June 30, 2009, we recognized an other-than temporary impairment on six previously impaired structured subprime securities. In
addition, we impaired three structured securities that had not been impaired in the past.

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

For the three months
ended June 30,

For the six months
ended June 30,2009

2008

2009

2008(in thousands)Realized gains:Fixed maturities

$
4,732

$
165

$
6,078

$
1,589Other


175





175


14,907


165


6,253


1,590Realized losses:Fixed maturities, excluding OTTI


(8,428
)

(19
)

(8,922
)

(653
)OTTI on fixed maturities


(4,523
)

(13,156
)

(12,599
)

(42,955
)Other





(275
)




(275
)(12,951
)

(13,450
)

(21,521
)

(43,883
)Net realized losses

$
(8,044
)
$
(13,285
)
$
(15,268
)
$
(42,293
)


20

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

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

Three months ended
June 30, 2009

Six months ended
June 30, 2009(in thousands)Balance, April 1, 2009 (implementation date)

$
390

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





With credit related impairments not previously recognized


3,508


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

$
3,898

$
3,898


In
addition, we recognized other-than-temporary impairments of approximately $1.0 million on securities for which the impairment was not split between
earnings and other comprehensive income.

5. FAIR VALUE MEASUREMENTS

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

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



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

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

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

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

21

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

The following table presents our assets and liabilities that are carried at fair value by SFAS 157 hierarchy levels, as of June 30, 2009 (in thousands):

Total

Level 1

Level 2

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

$
874,046

$


$
871,578

$
2,468Equity securities


490








490Total assets

$
874,536

$


$
871,578

$
2,958Liabilities:Interest rate swaps

$
15,072

$


$
15,072

$



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



The valuation methodologies used to determine the fair values of assets and liabilities under the "exit price" notion of
SFAS 157 reflect market participant objectives and are
based on the application of the fair value hierarchy that prioritizes observable market inputs over unobservable inputs. We determine the fair value of our financial assets and liabilities based upon
quoted market prices where available. Fair values of our interest rate swap liabilities reflect adjustments for counterparty credit quality, our credit standing, liquidity and, where appropriate, risk
margins on unobservable parameters. The following is a discussion of the methodologies used to determine fair values for the financial instruments listed in the above table.



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



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

22

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

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

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

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



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

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

23

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

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

Fixed
Maturities

Equity
Securities

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

$
3,944

$
490

$
4,434Net purchases and sales


(157
)




(157
)Net transfers out


(464
)




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


7





7Fair value as of March 31, 2009

$
3,330

$
490

$
3,820Net purchases and sales


(57
)




(57
)Net transfers out


(95
)




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


(710
)




(710
)Fair value as of June 30, 2009

$
2,468

$
490

$
2,958


---

6. EARNINGS PER COMMON SHARE COMPUTATION

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

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

Three months ended
June 30,

Six months ended
June 30,2009

2008

2009

2008(in thousands)Net income (loss) attributable to common stock

$
4,680

$
22,691

$
(7,794
)
$
(14,182
)Undistributed income (loss) allocated to participating preferred stock


254


5,677


(420
)

(3,450
)Net income (loss)

$
4,934

$
28,368

$
(8,214
)
$
(17,632
)


24

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. SHARE REPURCHASE PLAN

We have approved share repurchase plans that have authorized us to repurchase up to $125 million of shares of our common stock. Through June 30, 2009, we had repurchased
10.0 million shares of our common stock for an aggregate amount of $98.9 million, under these programs. Subsequent to quarter end, through July 28, 2009, we repurchased an
additional 0.2 million shares for $1.9 million. As of July 28, 2009, we have $24.2 million that remains available to repurchase additional shares under these plans. We are
not obligated to repurchase any specific number of shares under the programs or to make repurchases at any specific time or price.

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

For the six months ended June 30,2009

2008Shares

Amount

Weighted
Average
Cost Per
Share

Shares

Amount

Weighted
Average
Cost Per
ShareTreasury stock beginning of year


7,194,387

$
77,605

$
10.79


285,545

$
4,258

$
14.91Shares repurchased


3,257,174


27,116


8.32


4,446,955


50,067


11.26Shares distributed in the form of employee bonuses


(383,610
)

(4,108
)

10.71


(114,312
)

(1,417
)

12.39Treasury stock, end of period


10,067,951

$
100,613

$
9.99


4,618,188

$
52,908

$
11.46


8. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss are as follows:

June 30,
2009

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

$
934

$
(42,685
)Gross unrealized OTTI


(26,120
)

Deferred acquisition cost adjustment





6,617Foreign currency translation gains


162


332Fair value of cash flow swap on debt


(15,072
)

(20,298
)Deferred income taxes


14,034


19,612Total accumulated other comprehensive loss

$
(26,062
)
$
(36,422
)


25

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. ACCUMULATED OTHER COMPREHENSIVE LOSS (Continued)

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

Three months ended June 30,2009

2008Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount

Before Tax
Amount

Tax Expense
(Benefit)

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

$
40,108

$
14,038

$
26,070

$
(20,402
)
$
(7,141
)
$
(13,261
)Reclassification adjustment for (losses) gains included in net income


(8,046
)

(2,816
)

(5,230
)

13,285


4,650


8,635Net unrealized gain (loss)


32,062


11,222


20,840


(7,117
)

(2,491
)

(4,626
)Cash flow hedge


4,857


1,700


3,157


10,262


3,592


6,670Foreign currency translation adjustment


(144
)

(51
)

(93
)

29


10


19Other comprehensive gain

$
36,775

$
12,871

$
23,904

$
3,174

$
1,111

$
2,063




Six months ended June 30,2009

2008Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount

Before Tax
Amount

Tax Expense
(Benefit)

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

$
42,634

$
14,922

$
27,712

$
(52,419
)
$
(18,347
)
$
(34,072
)Reclassification adjustment for (losses) gains included in net income


(15,268
)

(5,344
)

(9,924
)

42,293


14,803


27,490Net unrealized gain (loss)


27,366


9,578


17,788


(10,126
)

(3,544
)

(6,582
)Cash flow hedge


5,226


1,829


3,397


(174
)

(60
)

(114
)Foreign currency translation adjustment


(168
)

(59
)

(109
)

(30
)

(11
)

(19
)Other comprehensive gain (loss)

$
32,424

$
11,348

$
21,076

$
(10,330
)
$
(3,615
)
$
(6,715
)


26

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. STOCK-BASED COMPENSATION

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



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

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

For options granted in:2009

2008 and PriorRisk free interest rates

1.28%  3.04%

1.33%  3.15%Dividend yields

0.0%

0.0%Expected volatility

40.61%  55.63%

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

3.5  3.8

3.5  5.0


The
weighted-average grant-date fair value was $3.93 for options granted during the first six months of 2009 and was $2.74 for options granted during the first six months of
2008.

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

A
summary of option activity for the six months ended June 30, 2009 is set forth below:

Options
(in thousands)

Weighted
Average
Exercise
PriceOutstanding, January 1, 2009


5,640

$
14.85Granted


1,017


10.07Exercised


(35
)

3.75Forfeited or expired


(297
)

16.29Outstanding, June 30, 2009


6,325

$
14.07Exercisable, June 30, 2009


3,653

$
12.44


The
total intrinsic value of options exercised during the first six months of 2009 was $0.2 million and the total intrinsic value of options exercised during the first six months
of 2008 was $3.5 million.

27

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. STOCK-BASED COMPENSATION (Continued)

As
of June 30, 2009, the total compensation cost related to non-vested awards not yet recognized was $13.0 million, which we expect to recognize over a weighted average
period of 1.2 years.

We
received cash of $0.1 million from the exercise of stock options during the first six months of 2009 and cash of $1.3 million from the exercise of stock options during
first six months of 2008. FAS 123-R also requires us to report the benefits of tax deductions in excess of recognized compensation cost as a financing cash flow, rather than as an
operating cash flow as required under the prior statement. We recognized less than $0.1 million of financing cash flows for these excess tax deductions for the six months ended June 30,
2009 and $1.1 million for the six months ended June 30, 2008.



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

Six Months Ended
June 30, 2009Non-vested Restricted Stock

Shares
(in thousands)

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


471

$
18.89Granted


397


10.29Vested


(94
)

15.50Forfeited


(42
)

17.64Non-vested at end of period


732

$
15.03


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

10. DERIVATIVE INSTRUMENTSCASH FLOW HEDGE

On December 4, 2007, we entered into two separate interest rate swap agreements, one with Citibank, N.A. and one with Calyon Corporate and Investment Bank to hedge the variability
of cash flows to be paid under our new credit facility described in Note 14Loan Payable in the Notes to the Consolidated Financial Statements in our Annual Report on
Form 10-K for the year ended December 31, 2008. Pursuant to the swap agreement with Citibank, we agreed to swap our floating rate interest payment based on the floating
three-month LIBOR base rate on a notional amount of $125 million in exchange for a fixed interest rate payment based on a 4.14% locked-in fixed rate. Pursuant to the swap agreement
with Calyon, we agreed to swap our floating rate interest payment

28

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. DERIVATIVE INSTRUMENTSCASH FLOW HEDGE (Continued)

based
on the floating three-month LIBOR base rate on a notional amount of $125 million in exchange for a fixed interest rate payment based on a 4.13% locked-in fixed rate. The swap
agreements provide a hedge against variability in interest payments on the a combined $250 million amount of the variable rate term loans under our new credit facility, which is due to changes
in the LIBOR base rate, through September 2012. We expect changes in the cash flows of the interest rate swap to exactly offset the changes in cash flows from interest rate payments attributable to
fluctuations in the LIBOR base rate on the $250 million portion of the variable rate term loan portion of our new credit facility. The combined fair value of these swaps was a
$15.1 million liability at June 30, 2009 and a $20.3 million liability at December 31, 2008. We have reflected this fair value in other liabilities. In connection with the
transaction executed with Citibank, N.A. we are required to post collateral when we are in a net liability position. The collateral amount required is based on the fair value of the swap including net
accrued interest less a $1 million threshold amount as determined by our credit rating of BB+. Should we be downgraded or cease to be rated by S&P or Moody's, the threshold amount would be
reduced to zero and we would need to post $1 million in additional collateral. This collateral is reflected in cash and cash equivalents and was $7.3 million as of June 30, 2009
and $9.3 million as of December 31, 2008. Based on the fact that, at inception, the critical terms of the hedging instrument and the hedged forecasted transaction were the same, we have
concluded that we expect changes in cash flows attributable to the risk being hedged to be completely offset by the hedging derivative, and have designated these swaps as cash flow hedges. As a
result, we reflected the unrealized loss on these hedges in accumulated other comprehensive loss. We will perform subsequent assessments of hedge effectiveness by verifying and documenting whether the
critical terms of the hedging instrument and the
forecasted transaction have changed during the period, rather than by quantifying the relevant changes in cash flows.

11. COMMITMENTS AND CONTINGENCIES



Plaintiff Arthur Tsutsui filed a shareholder derivative action on December 30, 2005, in the Supreme Court for New York State,
Westchester County. The defendants in Tsutsui v. Barasch, et al., index no. 05-22523, are officers Richard A. Barasch, Robert A. Waegelein and Gary W. Bryant, as well as all of the
directors sitting on our board of directors as of the time the complaint was filed. The Tsutsui action alleges that the same alleged misstatements that were the subject of earlier shareholder actions,
which have now all been dismissed or voluntarily withdrawn, constituted a breach of fiduciary duty by the officer defendants and the directors that caused the Company to sustain damages. The Tsutsui
action also seeks recovery of any proceeds derived by the officer and director defendants from the sale of our stock that the plaintiff claims was in breach of their fiduciary duties. The defendants
filed a motion to dismiss the complaint for failure to state a claim, as well as on other grounds. The court granted this motion, and the plaintiff has appealed the dismissal. On December 26,
2008, the plaintiff filed its appeal brief, the defendants filed their responsive brief on February 26, 2009, and the plaintiff filed its reply brief on March 9, 2009. Oral argument has
not yet been scheduled.



We have litigation in the ordinary course of our business asserting claims for medical, disability and life insurance benefits and
other matters. In some cases, plaintiffs seek punitive damages. We

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

11. COMMITMENTS AND CONTINGENCIES (Continued)

believe
that after liability insurance recoveries, none of these actions will have a material adverse effect on our results of operations or financial condition.



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

12. UNCONSOLIDATED SUBSIDIARY

During 2005, we entered into a strategic alliance with Caremark and created PDMS, which is 50%
owned by us and 50% owned by Caremark. PDMS principally performs marketing and risk management services on behalf of our Prescriba RxSM PDPs and Caremark, for which it receives fees and
other remuneration from our Prescriba RxSM PDPs and Caremark. We do not control PDMS and therefore PDMS is not consolidated in our financial statements. Our investment in PDMS is
accounted for on the equity basis and is included in other assets. Our investment in PDMS was $0.2 million at June 30, 2009 and $6.9 million at December 31, 2008. We
reflect our share in the income or loss of PDMS in equity in earnings of unconsolidated subsidiary. Our share in the net income of PDMS was $0.1 million and $31.3 million for the six
months ended June 30, 2009 and 2008, respectively. PDMS made distributions to its owners aggregating $13.6 million during the six months ended June 30, 2009. Our share of those
distributions was $6.8 million.

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

Three months ended
June 30,

Six months ended
June 30,2009

2008

2009

2008(in thousands)Total revenue

$
14

$
31,612

$
217

$
64,442Total expenses


(3
)

1,051


6


1,777Net income

$
17

$
30,561

$
211

$
62,665


On
February 13, 2008, the Company and Caremark announced that the strategic alliance would end as of December 31, 2008, subject to regulatory approval. On July 31,
2008, PDMS received approval from the Centers for Medicare and Medicaid Services (CMS) of the Novation Agreement for Change of Ownership of a Medicare Prescription Drug Plan (PDP) Line of Business. As
such, effective January 1, 2009, PDMS no longer manages the strategic alliance and does not earn revenue or incur expenses related to the 2009 PDP year. PDMS will continue to operate in 2009
solely to service the run-off activity related to pharmacy claims, rebates, and revenue related to prior PDP years. Upon dissolution of PDMS in 2009, following the run-out of
prior year PDP claims, the economic interest of PDMS would be split equally between the Company and Caremark to match the 50% voting and ownership rights held by each entity.

30

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

13. BUSINESS SEGMENT INFORMATION

Our business segments are based on product and consist of



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

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

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

Three months ended June 30,2009

2008Revenue

Income
(Loss)
Before
Income
Taxes

Revenue

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

$
661,222

$
28,965

$
623,150

$
33,365Medicare Part D


506,666


13,595


527,013


10,647Traditional Insurance


82,543


(10,407
)

113,608


2,151Senior Administrative Services


10,156


2,285


22,144


6,385Corporate


278


(18,422
)

1,435


(10,702
)Intersegment revenues


(7,314
)




(16,743
)

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


(8,046
)

(8,046
)

(13,285
)

(13,285
)Equity in earnings of unconsolidated subsidiary(2)


(8
)




(15,281
)

Total

$
1,245,497

$
7,970

$
1,242,041

$
28,561


31

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

13. BUSINESS SEGMENT INFORMATION (Continued)



Six months ended June 30,2009

2008Revenue

Income
(Loss)
Before
Income
Taxes

Revenue

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

$
1,307,468

$
75,207

$
1,189,869

$
33,736Medicare Part D


1,122,405


(22,269
)

1,100,176


(18,987
)Traditional Insurance


186,646


(25,896
)

235,577


3,169Senior Administrative Services


22,160


5,710


44,714


12,409Corporate


447


(30,057
)

2,104


(14,786
)Intersegment revenues


(16,480
)




(31,988
)

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


(15,268
)

(15,268
)

(42,293
)

(42,293
)Equity in earnings of unconsolidated subsidiary(2)


(105
)




(31,333
)

Total

$
2,607,273

$
(12,573
)
$
2,466,826

$
(26,752
)


---

14. OTHER DISCLOSURES

Income Taxes:Our effective tax rate was 38.1% for the second quarter of 2009, and 0.7% for the second quarter of 2008. The low
effective tax rate in
the second quarter of 2008 was due primarily to the release of a valuation allowance established in the first quarter of 2008, in connection with the investment impairment. For the six months ended
June 30, 2009, our effective tax rate was 34.7%, compared with 34.1% for the same period of 2008.

Life Insurance and Annuity Reinsurance Transaction:On April 24, 2009 we completed the closing of the previously announced
Life Insurance and
Annuity Reinsurance transaction with the Commonwealth Annuity and Life Insurance Company, known as Commonwealth, and the First Allmerica Financial Life Insurance Company, Goldman Sachs
Group, Inc. subsidiaries (NYSE:GS). Under this transaction, we reinsured substantially all of our in force life insurance and annuity business under a 100% coinsurance treaty. In accordance
with Statement of Financial Accounting Standards (SFAS) No. 113, "Accounting and Reporting of Short-Duration and Long-Duration Contracts" (SFAS 113), reinsurance recoverables
are to be reported as separate assets rather than as reductions of the related liabilities. Accordingly, we increased the amounts due from reinsurers by approximately $544 million as of the
effective date of the transaction, April 1, 2009, representing the GAAP basis

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14. OTHER DISCLOSURES (Continued)

liabilities
reinsured. We transferred approximately $454 million of cash, net of the ceding commission of $77 million, and $22 million of policy loans, related to the reinsured
policies, to the reinsurer. We had approximately $74 million of deferred acquisition costs and present value of future profits as of the effective date of the transaction that were reduced to
zero as a result of the recovery of such costs through the initial ceding commission.

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

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

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

Segment

January 1,
Balance

Charge to
Earnings

Cash
Paid

Non-Cash

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

Medicare Advantage

$


$
3,500

$


$


$
3,500Workforce reduction

Traditional





608


(293
)




315Facility consolidation

Traditional





619





(14
)

605Total



$


$
4,727

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


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

As
a result of recent regulatory changes, the PFFS product will no longer be available as of January 1, 2011, except in areas that have approved CMS network access requirements or
in certain designated rural areas. We have begun to develop provider network-based products in selected core markets to enable the migration of their PFFS membership to the new PPO products. Our PFFS
membership is dispersed and our distribution was developed to have a presence in these areas.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14. OTHER DISCLOSURES (Continued)

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

Reinsurance:We evaluate the financial condition of our reinsurers and monitor concentrations of credit risk to minimize our
exposure to significant
losses from reinsurer insolvencies. We are obligated to pay claims in the event that a reinsurer to whom we have ceded an insured claim fails to meet its obligations under the reinsurance agreement.
As of June 30, 2009, all of our primary reinsurers were rated "A" or better by A.M. Best. We do not know of any instances where any of our reinsurers have been unable to pay any policy
claims on any reinsured business.

In
connection with the termination of our strategic alliance with CVS/Caremark on December 31, 2008, the agreement to reinsure the Prescription PathwaySM PDPs
sponsored by our subsidiaries on a 50% coinsurance funds withheld basis to PharmaCare Re ended. Net premiums under this agreement in the second quarter of 2008 amounted to $76.1 million. For
the six months ended June 30, 2008, net premiums, net of reinsurance, under this agreement was $171.2 million.

On
July 1, 2008, the agreements to provide an insured drug benefit for the employees of the State of Connecticut and to reinsure the risk with PharmaCare Re under a 100%
quota-share contract was not renewed. Direct and ceded premium under this agreement in the second quarter of 2008 amounted to $86.2 million. For the six months ended June 30, 2008,
direct and ceded premium under this agreement was $171.8 million.

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

Six months ended
June 30,2009

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

$


$
(34,541
)


Statutory Financial Data:Effective September 30, 2009, the National Association of Insurance Commissioners, known as NAIC,
is requiring
adoption of SSAP No. 98, Treatment of Cash Flows When Quantifying Changes in Valuation and Impairments. SSAP No. 98 effectively changes the impairment trigger from an undiscounted cash
flow basis test to a fair value test. In addition, SSAP No. 98 changes the method of valuing the new cost basis of the impaired security from an undiscounted cash flow basis to a fair value
basis. Had we adopted SSAP No. 98 on June 30, 2009, we would have

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14. OTHER DISCLOSURES (Continued)

recognized
an additional $56.1 million of realized losses, pre-tax, for other-than-temporary impairments of investments on a statutory basis. Of this amount,
$49.9 million relates to securities with an NAIC rating of 6, which are, therefore, already marked to the lower of cost or market for statutory reporting purposes. Accordingly, the
implementation of SSAP No. 98 would have reduced surplus by $6.2 million had we adopted on June 30, 2009. However, the actual impairment recorded will depend upon conditions at
the measurement date.

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Table of Contents

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

Introduction

The following discussion and analysis presents a review of our financial condition as of June 30, 2009 and our results of
operations for the three and six months ended June 30, 2009 and 2008. You should read the following analysis of our consolidated results of operations and financial condition in conjunction
with the consolidated financial statements and related consolidated footnotes included elsewhere in this quarterly report on Form 10-Q as well as the consolidated financial
statements and related consolidated footnotes and the Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on
Form 10-K for the year ended December 31, 2008. You should also read the following analysis in conjunction with the Risk Factors contained in our annual report on
Form 10-K for the year ended December 31, 2008, as supplemented by the risk factors set forth in Part II, Item 1A "Risk Factors" below.

Significant Second Quarter Items



36

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Membership

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

As of June 30,Membership by Segment

2009

2008(in thousands)Medicare AdvantagePFFS


175


188Network-based (HMO and PPO)


63


54Total Medicare Advantage


238


242Part DCCRx


1,268


1,295PRx(1)


426


280Total Part D


1,694


1,575Total Membership


1,932


1,817






Critical Accounting Policies

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

Sensitivity Analysis

The following table illustrates the sensitivity of our accident and health IBNR payable at June 30, 2009 to identified
reasonably possible changes to the estimated weighted average completion factors and health care cost trend rates. However, it is possible that the actual completion factors and health

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care
cost trend rates will develop differently from our historical patterns and therefore could be outside of the ranges illustrated below.

Completion Factor(1):

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

Increase
(Decrease) in
Net Accident
& Health
IBNR

(Decrease)
Increase
in Factor

(Decrease)
Increase in
Net Accident
& Health
IBNR($ in thousands)(3
)%
$
1,813


(3
)%
$
(13,045
)(2
)%
$
1,205


(2
)%
$
(8,697
)(1
)%
$
602


(1
)%
$
(4,348
)1
%
$
(602
)

1
%
$
4,3622
%
$
(1,203
)

2
%
$
8,7233
%
$
(1,804
)

3
%
$
13,085






Results of OperationsConsolidated Overview

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

Three months ended
June 30,

Six Months ended
June 30,2009

2008

2009

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

$
28,965

$
33,365

$
75,207

$
33,736Medicare Part D(1)


13,595


10,647


(22,269
)

(18,987
)Traditional Insurance(1)


(10,407
)

2,151


(25,896
)

3,169Senior Administrative Services(1)


2,285


6,385


5,710


12,409Corporate(1)


(18,422
)

(10,702
)

(30,057
)

(14,786
)Net realized gains (losses) on investments


(8,046
)

(13,285
)

(15,268
)

(42,293
)Income (losses) before provision for income taxes(1)


7,970


28,561


(12,573
)

(26,752
)(Benefit) provision for income taxes


3,036


193


(4,359
)

(9,120
)Net income (loss)

$
4,934

$
28,368

$
(8,214
)
$
(17,632
)Earnings (loss) per common share (diluted)

$
0.06

$
0.32

$
(0.10
)
$
(0.20
)


---

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Net income for the three months ended June 30, 2009 was $4.9 million, or $0.06 per diluted share, compared to net income
of $28.4 million, or $0.32 per diluted share for the three months ended June 30, 2008. The net income for the second quarter of 2009 includes realized investment losses, net of taxes, of
$5.2 million, or $0.06 per diluted share, of which $2.9 million relates to the recognition of other-than-temporary impairments on investments. Net income for the
second quarter of 2008 includes realized investment losses, net of taxes, of $1.8 million, or $0.02 per diluted share, related primarily to the recognition of
other-than-temporary impairments on investments. Our effective tax rate was 38.1% for the second quarter of 2009, and 0.1% for the second quarter of 2008. The low effective tax
rate in the second quarter of 2008 was due primarily to release of a $10.4 million valuation allowance established in the first quarter of 2008 in connection with certain investment
impairments.

Our
Senior Managed CareMedicare Advantage segment generated income before taxes of $29.0 million in the three months ended June 30, 2009, a decrease of
$4.4 million compared to the three months ended June 30, 2008. The decrease in earnings was driven by certain restructuring costs incurred during the quarter, higher expenses to support
the continued investment in the development of provider networks of our expansion PPO markets and a 116 basis point increase in the benefit ratio from the prior year period.

Our
Medicare Part D income for the second quarter of 2009 increased by $2.9 million compared to the second quarter of 2008. The increase in Part D income was
primarily attributable to lower operating expenses which resulted from restructuring the Medicare Part D call center and other member services, as well as the elimination of certain third party
administrative fees as the respective services are being performed internally during 2009.

Results
for our Traditional Insurance segment decreased by $12.6 million compared to the three months ended June 30, 2008. The transaction with Commonwealth to reinsure
substantially all of the net retained life and annuity business resulted in a loss and other related costs of approximately $7.6 million. Additionally, a $1.2 million restructuring
charge was recorded as a result of re-alignment of operations with the lower level of net retained business. Excluding these impacts, the decrease to net income was primarily caused by a
$9.1 million decrease in net investment income caused by a lower average invested asset base due to the transfer of assets in conjunction with the reinsurance transaction noted above, offset by
a $4.4 million decline in net commissions and expenses due to a lower level of business in-force.

Segment
income before taxes for our Senior Administrative Services segment declined by $4.1 million, or 64%, to $2.3 million for the second quarter of 2009, as compared to
the same period of 2008. This decrease is primarily the result of a reduction in service fee revenues, net of a corresponding decrease in general expenses.

The
loss from our Corporate segment increased by $7.7 million, or 72%, for the second quarter of 2009 compared to the second quarter of 2008. This was due primarily to a
$6.3 million charge related to the proposed closing and restructuring of certain career sales offices in 2009, along with higher stock-based compensation costs for equity awards to employees
and directors as well as higher levels of expense, partially offset by lower borrowing costs.



Net loss for the six months ended June 30, 2009 was $8.2 million, or $0.10 per diluted share, compared to net loss of
$17.6 million, or $0.20 per diluted share for the six months ended June 30, 2008. The net loss for the first half of 2009 includes realized investment losses, net of taxes, of
$9.9 million, or $0.12 per diluted share, relating primarily to the recognition of other-than-temporary impairments on investments. Net income for the first half of 2008
includes realized investment losses,

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net
of taxes, of $27.5 million, or $0.31 per diluted share, also related primarily to the recognition of other-than-temporary impairments on investments. Our effective
tax rate was 34.7% for the first half of 2009, and 34.1% for the first half of 2008.

Our
Senior Managed CareMedicare Advantage segment generated income before taxes of $75.2 million for the six months ended June 30, 2009, an increase of
$41.5 million compared to the six months ended June 30, 2008. The increase in earnings was driven by higher medical operating income in our PFFS and HMO businesses partially offset by
the restructuring costs incurred during the second quarter and continued investment in the development of provider networks for our expansion PPO markets. The improvement in medical operating income
was driven by higher premiums and an improvement in the benefit ratio of 255 basis points.

Our
Medicare Part D loss for the six months ended June 30, 2009 increased by $3.3 million versus the comparable period in 2008. This increase was principally
attributable to a $9.1 million decline in investment and other income, largely offset by a decrease in operating expenses.

Results
for our Traditional Insurance segment decreased by $29.1 million compared to the six months ended June 30, 2008. The transaction with Commonwealth to reinsure
substantially all of the net retained life and annuity business resulted in a loss and other related costs of approximately $7.6 million. Additionally, a $1.2 million restructuring
charge was recorded as a result of re-alignment of operations with the lower level of net retained business. Excluding these
one-time impacts, the decrease to net income was primarily caused by a $16.2 million decrease of net investment income caused by lower average yields and a lower invested asset base
due to the transfer of assets in conjunction with the reinsurance transaction noted above.

Segment
income before taxes for our Senior Administrative Services segment declined by $6.7 million, or 54%, to $5.7 million for the six months ended June 30, 2009,
as compared to the same period of 2008. This decrease is primarily the result of expected reductions in service fee revenues, net of a corresponding decrease in general expenses.

The
loss from our Corporate segment increased by $15.3 million, or 103%, for the six months ended June 30, 2009 compared to the same period of 2008. This was due primarily
to a $6.3 million charge related to the proposed closing and restructuring of certain career sales offices in 2009, a significant non-recurring release of a bonus accrual in the
first quarter of 2008, higher stock-based compensation costs for equity awards to employees and directors, higher levels of expense and lower net investment income, partially offset by lower borrowing
costs.

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Segment ResultsSenior Managed CareMedicare Advantage

Three months ended
June 30,

Six months ended
June 30,2009

2008

2009

2008(in thousands)Net premiums

$
653,986

$
619,443

$
1,294,871

$
1,181,128Net investment and other income


7,236


3,707


12,597


8,741Total revenue


661,222


623,150


1,307,468


1,189,869Medical expenses


551,116


514,797


1,068,887


1,005,087Amortization of intangible assets


1,146


1,014


2,292


2,028Restructuring costs


3,500





3,500


Commissions and general expenses


76,495


73,974


157,582


149,018Total benefits, claims and other deductions


632,257


589,785


1,232,261


1,156,133Segment income before taxes

$
28,965

$
33,365

$
75,207

$
33,736


Our
Senior Managed CareMedicare Advantage segment includes the operations of our private fee-for-service business, known as PFFS, which offers
coverage to Medicare beneficiaries in approximately 3,100 counties across 47 states, and our Medicare coordinated care plans including PPOs and HMOs. Our HMOs offer coverage to Medicare beneficiaries
in southeastern Texas, north Texas, Oklahoma and Wisconsin. The PPO plans offer coverage in 15 markets in 9 states. These businesses provide managed care for seniors under a contract with CMS.

Membership.For a discussion of the accounting for Medicare Advantage policies, see Note 2 of the notes to the consolidated
financial
statements in our annual report on Form 10-K. There are timing differences between the addition of members to our administrative system and the approval, or accretion, of the member
by CMS before we are paid for the member by CMS. We analyze the membership in our administrative system and the enrollment provided by CMS. Although we are unable to precisely quantify the impact of
any potential member change from that used in our consolidated financial results, we do not believe that any change from the amounts reported as of June 30, 2009 is likely to be material.



Our Senior Managed CareMedicare Advantage segment generated income before taxes of $29.0 million in the three
months ended June 30, 2009, a decrease of $4.4 million compared to the three months ended June 30, 2008. The decrease in earnings was driven by certain restructuring costs
incurred during the quarter, higher expenses to support the continued investment in the development of provider networks of our expansion PPO markets and a 116 basis point increase in the benefit
ratio from the prior year period.

Revenues.Net premiums for the Senior Managed CareMedicare Advantage segment increased by $34.5 million compared to the
three
months ended June 30, 2008, primarily due to an increase in the amount of premium resulting from increased member premium rates as well as growth in HMO membership and higher net investment
income.

Benefits, Claims and Expenses.Medical expenses increased by $36.3 million compared to the second quarter of 2008, consistent with
the higher
level of earned premium. The Medicare Advantage medical benefit ratio increased to 84.3% for the second quarter of 2009 from 83.1% for the same period in 2008. Adjusting both periods' benefit ratio
for prior period development, the benefit ratio for the second quarter of 2009 was 85.9% compared to 86.9% in 2008, or an improvement of 100 bases points. In the second quarter of 2009 we recorded a
$3.5 million restructuring charge related to the

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in-sourcing
of billing and enrollment for our health plan business. The ratio of commissions and general expenses to premiums decreased 11.7% in the second quarter of 2009 from 11.9% in
second quarter of 2008 due to higher expenses to support the continued investment in the development of provider networks for our expansion PPO markets.



Our Senior Managed CareMedicare Advantage segment generated income before taxes of $75.2 million for the six months
ended June 30, 2009, an increase of $41.5 million compared to the six months ended June 30, 2008. The increase in earnings was driven by higher medical operating income generated
by an improvement in the medical benefit ratio of 255 basis points, partially offset by the restructuring costs incurred during the second quarter and continued investment in the development of
provider networks for our expansion PPO markets.

Revenues.Net premiums for the Senior Managed CareMedicare Advantage segment increased by $113.8 million compared to the six
months ended June 30, 2008, primarily due to an increase in the amount of premium from an increase higher overall premium rates per member and higher net investment income. Total membership in
our Medicare Advantage plans remains stable from prior year with gains in membership in our HMO plans being offset by lapses in our PFFS plans.

Benefits, Claims and Expenses.Medical expenses increased by $63.8 million compared to the six months ended June 30, 2008,
consistent
with the higher level of earned premium. The Medicare Advantage medical benefit ratio decreased to 82.5% for the six months ended June 30, 2009 from 85.1% for the same period in 2008. Adjusting
both periods' benefit ratio for prior period development, the benefit ratio for the first six months of 2009 was 84.0% compared to 85.3% in 2008, or an improvement of 125
bases points. Improvement in both periods adjusted medical benefit ratio was the result of positive prior year development recognized in the each period. In the second quarter of 2009 we recorded a
$3.5 million restructuring charge related to the in-sourcing of billing and enrollment for our health plan business. Commissions and general expenses increased by
$8.6 million compared to the first half of 2008 primarily as the result of an increase in commissions and general expenses related to higher expenses to support the continued investment in the
development of provider networks for our expansion PPO markets. However, the ratio of commissions and general expenses to premiums decreased to 12.1% for the six months ended June 30, 2009 from
12.6% in 2008.

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Segment ResultsMedicare Part D

Three months ended
June 30,

Six months ended
June 30,2009

2008

2009

2008(in thousands)Direct and assumed premium

$
511,605

$
530,615

$
1,008,274

$
1,054,157Risk corridor adjustment/government reinsurance


(6,046
)

56,613


111,683


182,924Direct and assumed premium after risk corridor adjustment


505,559


587,228


1,119,957


1,237,081Ceded premiums


155


(80,326
)

288


(179,413
)Net premiums


505,714


506,902


1,120,245


1,057,668Other Part D income (loss)PDMS


8


15,281


105


31,333Total Part D revenue


505,722


522,183


1,120,350


1,089,001Net investment and other income


944


4,830


2,055


11,175Total revenue


506,666


527,013


1,122,405


1,100,176Pharmacy benefits


445,208


455,144


1,038,993


999,595Amortization of intangibles


4,011


7,999


8,022


7,999Commissions and general expenses


43,852


53,223


97,659


111,569Total benefits, claims and other deductions


493,071


516,366


1,144,674


1,119,163Segment income (loss) before taxes

$
13,595

$
10,647

$
(22,269
)
$
(18,987
)


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

For
a discussion of the accounting for Part D see Notes 2 and 3 of the notes to the consolidated financial statements in our Annual Report on Form 10-K.
Our revenues and claims expense are based on earned premium and incurred pharmacy benefits for the reported enrolled membership. The membership information is subject to reconciliation and refinement
with CMS with respect to the allocation among all plans participating in the Part D program and is an on-going process. As a result of the on-going reconciliation
process, it is likely that the membership data upon which we based our results will change, with a corresponding change in the financial results for the segment. We are unable to precisely quantify
the impact of any potential change until the membership data for specific time periods is fully reconciled with CMS, however, based upon our past experience, we do not believe that the effect of any
change from the amounts reported as of June 30, 2009 is likely to be material.

Other
Part D incomePDMS represented our equity in the earnings of PDMS. We report this as revenue for segment reporting purposes in analyzing the ratio of net
pharmacy benefits incurred because the amount is incorporated in the calculation of the risk corridor adjustment. For consolidated reporting, we reflect this amount as a separate line following income
from continuing operations. See the reconciliation of segment revenues in Note 13 of the Notes to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Our
strategic alliance with CVS/Caremark was terminated effective December 31, 2008. Upon termination of this strategic alliance, CVS and Universal American were each assigned
responsibility for the drug benefit of specific Prescription Pathway's plan members in a manner to achieve an

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approximately
equal distribution of the value of business that had been generated by the strategic alliance. Universal American has continued to operate PDPs derived from this business under the name
PrescribaRx. Effective January 1, 2009, PDMS will no longer manage the strategic alliance and will not earn revenue or incur expenses related to the 2009 Medicare PDP year. The historical net
earnings of PDMS were not subject to any seasonality patterns during the year, and as such, we anticipate that the results of our Part D plan for 2009 will have more seasonality.

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



Our Medicare Part D income for the second quarter of 2009 increased by $2.9 million compared to the second quarter of
2008. The increase in Part D income was primarily attributable to lower operating expenses which resulted from restructuring the Medicare Part D call center and other member services,
and the elimination of certain third party administrative fees as the respective services are being performed internally during 2009.

Membership.At June 30, 2009, total membership for Medicare Part D, based on enrollment information provided by CMS, was
approximately
1,694,000 members compared to net retained membership of 1,575,000 members at June 30, 2008. Net retained membership at June 30, 2008 excludes members that were assigned to CVS/Caremark
upon termination of the strategic alliance effective December 31, 2008. The increase in membership is principally attributable to growth from open enrollment and dual eligible members
automatically assigned to our plans in 2009.

Revenues.Net premium for the second quarter of 2009 decreased by $1.2 million, or 0.2% versus the comparable period in 2008. The
decline in
net premium was primarily attributable to the government risk corridor adjustment which was a decrease in revenue of $6.0 million for the second quarter of 2009 compared to an increase in
revenue of $56.6 million for the second quarter of 2008. The change in the government risk corridor adjustment was attributable to the elimination of PDMS effective January 1, 2009, and
the improvement in pharmacy benefits which is described under "Benefits, Claims and Expenses" below. In addition, premium revenue for the second quarter of 2008 included approximately
$9.8 million in amortization of a below market contract liability that was recorded in connection with the MemberHealth acquisition (described in the Annual Report on Form 10K for the
year ended December 31, 2008). These declines were largely offset by growth in premium revenue attributable to an increase in net retained membership by approximately 119,000 members.

Other
Part D incomePDMS for the second quarter of 2009 decreased by $15.3 million versus the second quarter of 2008, as a result of the termination of our
strategic alliance with CVS/Caremark. Net investment and other income decreased by $3.9 million principally as a result of lower rates of return on investments and lower cash flow related to
timing.

Benefits, Claims and Expenses.Pharmacy benefits for the second quarter of 2009 decreased by $9.9 million or 2% compared to the
second quarter
of 2008, and the ratio of incurred prescription drug benefits to net premium was 88.0% and 89.8% for the second quarters of 2009 and 2008, respectively. The improvement in pharmacy benefits was
attributable to more competitive network rates available
through our 2009 claims processor, combined with higher rebates that resulted from the consolidation of our Medicare Part D contracts with pharmaceutical manufacturers. In addition, a lower
percentage of our total membership completed the deductible phase of the benefit design as of as of June 30, 2009 versus the comparable period in 2008. Medicare Part D plans do not incur
pharmacy benefits for a member until after they have completed the deductible phase.

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Commissions
and general expenses for the second quarter of 2009 decreased by $9.4 million versus the second quarter of 2008 and the decrease was largely attributable to the
restructuring of our Medicare Part D call center and other member services which began during 2008 and was completed in 2009. In addition, certain third party administrative fees decreased
versus the second quarter of 2008, as these services are being performed internally during 2009.



Our Medicare Part D loss for the six months ended June 30, 2009 increased by $3.3 million versus the comparable
period in 2008. This increase was principally attributable to a $9.1 million decline in investment and other income, largely offset by a decrease in operating expenses.

Revenues.Net premium increased by $62.6 million, or 6% for the six months ended June 30, 2009 versus the comparable period
in 2008.
The growth in premium revenue was attributable to an increase in Medicare Part D net retained membership by approximately 119,000 members, and was partially offset by a decrease in the
government risk corridor adjustment which was an addition to revenue of $111.7 million and $182.9 million for the six months ended June 30, 2009 and 2008, respectively. The change
in the government risk corridor adjustment was attributable to the elimination of PDMS effective January 1, 2009, and the improvement in pharmacy benefits which is described under "Benefits,
Claims and Expenses" below. In addition, premium revenue for the six months ended June 30, 2008 included approximately $19.8 million in amortization of a below market contract liability
that was recorded in connection with the MemberHealth acquisition (described in the Annual Report on Form 10K for the year ended December 31, 2008).

Other
Part D incomePDMS for the six months ended June 30, 2009 decreased by $31.2 million versus the comparable period in 2008, as a result of the
termination of our strategic
alliance with CVS/Caremark. Net investment and other income decreased by $9.1 million principally as a result of lower rates of return on investments and lower cash flow related to timing.

Benefits, Claims and Expenses.Pharmacy benefits for the six months ended June 30, 2009, increased by $39.4 million or 4%
compared to
the six months ended June 30, 2008, and the ratio of incurred prescription drug benefits to net premium was 92.7% and 94.5% for the six months ended June 30, 2009 and 2008, respectively.
The improvement in the ratio of incurred prescription drug benefits to net premium was attributable to more competitive network rates available through our 2009 claims processor, combined with higher
rebates that resulted from the consolidation of our Medicare Part D contracts with pharmaceutical manufacturers. In addition, a lower percentage of our total membership completed the deductible
phase of the benefit design as of June 30, 2009 versus the comparable period in 2008. Medicare Part D plans do not incur pharmacy benefits for a member until after they have completed
the deductible phase.

Commissions
and general expenses for the six months ended June 30, 2009 decreased by $13.9 million versus the comparable period in 2008 and the decrease was largely
attributable to our restructuring of the Medicare Part D call center and other member services which began during 2008 and was completed in 2009. In addition, third party administrative fees
decreased versus the six months ended June 30, 2008, as these services are being performed internally during 2009.

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Table of Contents

Segment ResultsTraditional Insurance

Three months ended
June 30,

Six months ended
June 30,2009

2008

2009

2008(In thousands)Premiums:Direct and assumed

$
118,137

$
218,631

$
243,516

$
445,742Ceded


(41,696
)

(120,051
)

(73,346
)

(241,953
)Net premiums


76,441


98,580


170,170


203,789Net investment income


5,652


14,767


14,953


31,189Other income


450


261


1,523


599Total revenue


82,543


113,608


186,646


235,577Policyholder benefits


59,275


76,489


137,039


157,642Interest credited to policyholders





3,382


4,284


7,522Change in deferred acquisition costs


884


3,268


8,583


10,799Amortization of intangible assets


796


811


1,480


1,615Loss on reinsurance and other related costs


7,624





7,624


Restructuring costs


1,228





1,228


Commissions and general expenses, net of allowances


23,143


27,507


52,304


54,830Total benefits, claims and other deductions


92,950


111,457


212,542


232,408Segment (losses) income before taxes

$
(10,407
)
$
2,151

$
(25,896
)
$
3,169




Results for our Traditional Insurance segment decreased by $12.6 million compared to the three months ended June 30,
2008. The transaction with Commonwealth to reinsure substantially all of the net retained life and annuity business resulted in a loss and other related costs of approximately $7.6 million.
Additionally, a $1.2 million restructuring charge was recorded as a result of re-alignment of operations with the lower level of net retained business. Excluding these impacts, the
decrease to net income was primarily caused by a $9.1 million decrease in net investment income caused by lower average yields and a lower average invested asset base due to the transfer of
assets in conjunction with the reinsurance transaction noted above, offset by a $4.4 million decline in net commissions and expenses due to a lower level of business in-force. The
following tables detail premium for the segment by major lines of business:

Premium

Three months ended June 30,2009

2008Gross

Ceded

Net

Gross

Ceded

Net(in thousands)Medicare supplement

$
80,700

$
(20,782
)
$
59,918

$
92,628

$
(24,844
)
$
67,784Specialty health


18,357


(2,872
)

15,485


106,682


(89,431
)

17,251Life insurance and annuity


19,080


(18,042
)

1,038


19,321


(5,776
)

13,545Total premium

$
118,137

$
(41,696
)
$
76,441

$
218,631

$
(120,051
)
$
98,580


Revenues.Net premium declined by $22.1 million, or 22.5%. As a result of the reinsurance transaction with Commonwealth, life and
annuity
premium ceded increased by $12.3 million. The continued effect of lapsation of our Medicare supplement in-force business resulted in a decrease of

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$7.9 million.
Gross and ceded premium for specialty health declined in the second quarter of 2009 compared to the same period of 2008 as the result of the termination of the reinsurance
arrangement with PharmaCare Re for the state of Connecticut employees.

Benefits, Claims and Expenses.Policyholder benefits incurred declined by $17.2 million, or 22.5%, compared to the second quarter
of 2008.
This decline was principally due to the reinsurance transaction with Commonwealth, which resulted in a decrease in net Life and Annuity benefits retained of $9.8 million, and a net reduction in
Medicare supplement benefits of $7.7 million. The reduction in Medicare supplement benefits is mainly a result of a decline in the business and a decrease in the loss ratio to 74.2% for the
second quarter of 2009 from 76.9% for the same period last year. Individual loss ratios for the three months ended June 30, 2009 were 74.2% for Medicare supplement, compared with 76.9% for the
same period last year, and 99.5% for specialty health, compared with 88.0% for the same period last year. The increase in the Specialty loss ratio was caused by an increase in frequency of long term
care claims. Interest credited to policyholders also declined $3.4 million or 100% due to the reinsurance transaction with Commonwealth. The change in deferred acquisition cost decreased
$2.4 million or 72.9%. This was primarily caused by the elimination of the deferred acquisition costs and the related amortization on the life and annuity business reinsured to Commonwealth.

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

Three months ended
June 30,2009

2008(in thousands)Commissions

$
13,461

$
15,678Other operating costs


17,824


20,399Reinsurance allowances


(8,142
)

(8,570
)Commissions and general expenses, net of allowances

$
23,143

$
27,507


Commissions
and general expenses, net of allowances, decreased by $4.4 million compared to the second quarter of 2008. The lower level of commissions is associated with the
continued aging of our in-force renewal premium and less new business production that has higher commission rates. Other operating costs decreased $2.6 million for the quarter ended
June 30, 2009, compared to the second quarter of 2008. This is primarily due to the lower levels of business in-force. Allowances received from reinsurers decreased
$0.4 million for the second quarter of 2009 from the second quarter of 2008, primarily due to the termination of the reinsurance arrangement with PharmaCare Re offset by an increase in
allowances received on life and annuity business reinsured to Commonwealth.



Results for our Traditional Insurance segment decreased by $29.1 million compared to the six months ended June 30, 2008.
The reinsurance transaction with Commonwealth to reinsure substantially all of the net retained life and annuity business resulted in a loss and other related costs of approximately
$7.6 million. Additionally, a $1.2 million restructuring charge was recorded as a result of re-alignment of operations with the lower level of net retained business.
Excluding these impacts, the decrease to net income was primarily caused by a $16.2 million decrease in net investment income caused by lower average yields and a lower invested asset base due
to the transfer of assets in conjunction with the reinsurance transaction noted above.

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

Premium

Six months ended June 30,2009

2008Gross

Ceded

Net

Gross

Ceded

Net(in thousands)Medicare supplement

$
167,874

$
(43,754
)
$
124,120

$
194,008

$
(52,344
)
$
141,664Specialty health


37,227


(5,692
)

31,535


212,871


(178,234
)

34,637Life insurance and annuity


38,415


(23,900
)

14,515


38,863


(11,375
)

27,488Total premium

$
243,516

$
(73,346
)
$
170,170

$
445,742

$
(241,953
)
$
203,789


Revenues.Net premium declined by $33.6 million, or 16.5%. As a result of the reinsurance transaction with Commonwealth, life and
annuity
premium ceded increased by $12.5 million. The continued effect of lapsation of our Medicare supplement in-force business resulted in a decrease of $17.5 million. Gross and
ceded premium for specialty health declined in the six months ended June 30, 2009 compared to the same period of 2008 as the result of the termination of the reinsurance arrangement with
PharmaCare Re for the state of Connecticut employees.

Benefits, Claims and Expenses.Policyholder benefits incurred declined by $20.6 million, or 13.1%, compared to the six months ended
June 30, 2008. This decline was principally due to the reinsurance transaction with Commonwealth, which resulted in a decrease in net life and annuity benefits retained of $7.2 million,
and a net reduction in Medicare supplement benefits of $13.3 million. The reduction in Medicare supplement benefits is mainly a result of a decline in the business. Individual loss ratios for
the six months ended June 30, 2009 were 76.6% for Medicare supplement, compared with 76.5% for the same period last year, and 99.0% for specialty health, compared with 90.3% for the same period
last year. The increase in the Specialty loss ratio was primarily caused by an increase in frequency of long term care claims. Interest credited to policyholders also declined $3.2 million or
43.0% due to the reinsurance transaction with Commonwealth during the second quarter of 2009. The change in deferred acquisition cost decreased $2.2 million or 20.5%. This was primarily caused
by the elimination of the deferred acquisition costs and the related amortization on the life and annuity business reinsured to Commonwealth.

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

Six months ended
June 30,2009

2008(in thousands)Commissions

$
28,772

$
32,732Other operating costs


38,340


39,528Reinsurance allowances


(14,808
)

(17,430
)Commissions and general expenses, net of allowances

$
52,304

$
54,830


Commissions
and general expenses, net of allowances, decreased by $2.5 million compared to the six months ended June 30, 2008. The lower level of commissions is associated
with the continued aging of our in-force renewal premium and less new business production that has higher commission rates. Other operating costs decreased $1.2 million for the six
months ended June 30, 2009, compared to the six months ended June 30, 2008. This is primarily due to the lower levels of business in-force. Allowances received from
reinsurers decreased $2.6 million for the six months ended June 30, 2009 from the six months ended June 30, 2008, primarily due to the termination of the reinsurance arrangement
with PharmaCare Re.

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Segment ResultsSenior Administrative Services

Three months ended
June 30,

Six months ended
June 30,2009

2008

2009

2008(in thousands)Affiliated fee revenueMedicare supplement

$
3,052

$
5,198

$
6,608

$
10,379Part D





6,995





14,021Long term care


1,031


582


2,132


1,127Life insurance


1,084


1,088


3,136


1,742Other


1,632


1,507


3,315


3,599Total affiliated revenue


6,799


15,370


15,191


30,868Unaffiliated fee revenueMedicare Advantage


1,010


3,675


1,995


7,213Medicare supplement


1,042


1,384


2,249


2,877Long term care


1,176


1,382


2,462


2,997Non-insurance products


112


226


225


478Part D





64





200Other


17


43


38


81Total unaffiliated revenue


3,357


6,774


6,969


13,846Total revenue


10,156


22,144


22,160


44,714Amortization of present value of future profits


52


101


104


183General expenses


7,819


15,658


16,346


32,122Total expenses


7,871


15,759


16,450


32,305Segment income before taxes

$
2,285

$
6,385

$
5,710

$
12,409


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



Segment income before taxes for our Senior Administrative Services segment declined by $4.1 million, or 64%, to
$2.3 million for the second quarter of 2009, as compared to the same period of 2008. This decrease is primarily the result of a reduction in service fee revenues, net of a corresponding
decrease in general expenses.

Revenue
declined by $12.0 million, or 54%, during the second quarter of 2009 compared to the second quarter of 2008. Affiliated service fee revenue decreased by
$8.6 million primarily as a result of the loss of fee income associated with the administration of our Part D business that is performed directly by the affiliated entities in 2009 as
well as a decrease in services performed for affiliated Medicare supplement business. Unaffiliated service fee revenue decreased by $3.4 million, due primarily to a decrease in services
performed for unaffiliated Medicare Advantage, long term care and Medicare supplement business. General expenses for the segment decreased by $7.8 million, or 50%, primarily due to the decline
in the business discussed above.



Segment income before taxes for our Senior Administrative Services segment declined by $6.7 million, or 54%, to
$5.7 million for the six months ended June 30, 2009, as compared to the same

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period
of 2008. This decrease is primarily the result of a reduction in service fee revenues, net of a corresponding decrease in general expenses.

Revenue
declined by $22.6 million, or 50%, during the six months ended June 30, 2009 compared to the same period of 2008. Affiliated service fee revenue decreased by
$15.7 million primarily as a result of the loss of fee income associated with the administration of our Part D business that is performed directly by the affiliated entities in 2009 as
well as a decrease in services performed for affiliated Medicare supplement business. Unaffiliated service fee revenue decreased by $6.9 million, due primarily to a decrease in services
performed for unaffiliated Medicare Advantage, long term care and Medicare supplement business. General expenses for the segment decreased by $15.8 million, or 49%, primarily due to the decline
in the business discussed above.

Segment ResultsCorporate

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

Three months ended
June 30,

Six months ended
June 30,2009

2008

2009

2008(in thousands)Interest expense

$
4,805

$
5,800

$
10,064

$
12,095Amortization of capitalized loan origination fees


262


262


524


524Stock-based compensation expense


2,450


1,632


4,214


3,237Other parent company expenses, net of revenues


10,905


3,008


15,255


(1,070
)Segment loss before taxes

$
18,422

$
10,702

$
30,057

$
14,786




The loss from our Corporate segment increased by $7.7 million, or 72%, for the second quarter of 2009 compared to the second
quarter of 2008. This was due primarily to a $6.3 million charge related to the proposed closing and restructuring of certain career sales offices in 2009, along with higher stock-based
compensation costs for equity awards to employees and directors as well as higher levels of expense, partially offset by lower borrowing costs.

The
decrease in interest expense of $1.0 million is due primarily to a reduction in the interest rates charged on the debt, as compared to the second quarter of 2008. The weighted
average interest rate on our loan payable was 3.9% for the second quarter of 2009 compared to 4.5% for the second quarter of
2008. The weighted average interest rate on our other long term debt was 6.3% for the second quarter of 2009 compared to 7.3% for the second quarter of 2008. See "Liquidity and Capital Resources" for
additional information regarding our loan payable and other long term debt.

The
increase in stock-based compensation expense resulted primarily from option and stock awards, in the second half of 2008 and the first half of 2009, to directors, officers and other
employees approved by the compensation committee.

Other
parent company expenses, net of revenues, increased $7.9 million. In the second quarter of 2009, primarily in relation to a management decision to close or restructure
under-performing field offices in connection with a company-wise cost reduction effort, we recorded a $6.3 million charge to earnings. The remaining variance was primarily due to
increased staffing and outside service costs. In addition, net investment income decreased $0.4 million as a result of lower invested assets as a lower rate.

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The loss from our Corporate segment increased by $15.3 million, or 103%, for the six months ended June 30, 2009 compared
to the same period of 2008. This was due primarily to a $6.3 million charge related to the proposed closing and restructuring of certain career sales offices in 2009, a significant
non-recurring release of a bonus accrual in the first quarter of 2008, higher stock-based compensation costs for equity awards to employees and directors, higher levels of expense and
lower net investment income, partially offset by lower borrowing costs.

The
decrease in interest expense of $2.0 million is due primarily to a reduction in the interest rates charged on the debt, as compared to the first half of 2008. The weighted
average interest rate on our loan payable was 4.0% for the first half of 2009 compared to 4.6% for the same period of 2008. The weighted average interest rate on our other long term debt was 6.5% for
the first half of 2009 compared to 7.5% for the same period of` 2008. See "Liquidity and Capital Resources" for additional information regarding our loan payable and other long term debt.

The
increase in stock-based compensation expense resulted primarily from option and stock awards, in the second half of 2008 and the first half of 2009, to directors, officers and other
employees approved by the compensation committee.

Other
parent company expenses, net of revenues, increased $16.3 million. In the second quarter of 2009, primarily in relation to a management decision to close or restructure
under-performing field offices in connection with a company-wise cost reduction effort, we recorded a $6.3 million charge to earnings. The remaining variance was primarily due to
the release in the first quarter of 2008 of a 2007 bonus accrual that was $5.6 million in excess of the final amounts approved by the compensation committee and paid in 2008, compared with a
$0.5 million release for similar reasons in the first quarter of 2009 as well as increased staffing and outside service costs. In addition, net investment income decreased $1.8 million
as a result of lower invested assets as a lower rate.



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

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

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



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

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Insurance subsidiaries and HMO affiliatesSurplus note, Dividends and Capital Contributions.Cash generated by our insurance
company
subsidiaries will be made available to our holding company, through dividends by American Exchange and payments of principal and interest on the surplus notes owed to our holding company by American
Exchange and Pyramid Life.

As
of June 30, 2009, American Exchange made $5.6 million in principal payments on the surplus note during the quarter ended June 30, 2009 resulting in the note being
paid in full. Prior to repayment, this note had bore interest at LIBOR plus 250 basis points.

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

Our
parent holding company did not make capital contributions to American Exchange and American Exchange did not make capital contributions to its subsidiaries during the six months
ended June 30, 2008 and 2009. Further, no dividends were declared nor paid to American Exchange from its subsidiaries during the first half of 2008 and 2009.

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

Debt principal and interestCredit Facility, Swaps and Other Long Term Debt.We currently have a credit facility consisting of a
$350 million term loan and a $150 million revolver. As of June 30, 2009, $318.9 million was outstanding under the term loan agreement. As of June 30, 2009, the
interest rate on the term loan portion of the credit facility was 1.56% and we pay a commitment fee on the unutilized revolving loan facility at an annualized rate of 10 basis points. We had not drawn
on the revolving loan facility as of the date of this report. We made regularly scheduled principal payments totaling $1.8 million and interest payments totaling $5.1 million during the
six months ended June 30, 2009.

On
December 4, 2007, we entered into two separate interest rate swap agreements on a total notional amount of $250 million, where we pay an average locked-in
fixed rate of 4.14% and receive a floating rate based on LIBOR. In the first half of 2009, we paid a net amount of $2.1 million in association with these swap agreements.

We
formed statutory business trusts, in order to issue a combined $125.0 million in thirty year trust preferred securities, with $110 million currently outstanding.
$60 million of these securities have floating interest rates based on LIBOR and are currently at an average rate of 4.99%. The remaining $50 million is fixed at 7.68% until March 2012.
We made interest payments on the trust preferred securities totaling $3.8 million during the first half of 2009.

Insurance subsidiaries and HMO affiliatesLiquidity.At June 30, 2009, we held cash and cash equivalents totaling
$249 million and fixed maturity securities that could readily be converted to cash with carrying values of $874 million. The net yields on our cash and invested assets decreased to 4.4%
for the six months ended June 30, 2009, from 5.4% for the six months ended June 30, 2008.

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

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

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

We
have recently adopted a more conservative approach to our investment portfolio, which focuses more on capital preservation than on generation of investment yield. As a result, as of
June 30, 2009, approximately 30% of our portfolio is in cash equivalents, largely in government money market funds, and, in the aggregate, approximately 57% of our portfolio is securities
backed by the US government or its agencies.

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

Effects of Recently Issued and Pending Accounting Pronouncements

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

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ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Investment Interest Rate Sensitivity

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

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

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

The
sensitivity analysis of interest rate risk assumes an instantaneous shift in a parallel fashion across the yield curve, with scenarios of interest rates increasing and decreasing 100
and 200 basis points from their levels as of June 30, 2009, and with all other variables held constant. The following table summarizes the impact of the assumed changes in market interest
rates.

Effect of Change in Market Interest Rates on Market Value
of Fixed Income Portfolio as of June 30, 2009June 30, 2009200 Basis
Point Decrease

100 Basis
Point Decrease

100 Basis
Point Increase

200 Basis
Point IncreaseMarket Value of
Fixed Income Portfolio(in millions)$874.0

$50.5

$26.6

$(26.6)

$(55.5)


Debt

We pay interest on our term loan and a portion of our trust preferred securities based on the London Inter Bank Offering Rate, known as
LIBOR, over one, two, three or six month interest periods. Due to the variable interest rate, we would be subject to higher interest costs if short-term interest rates rise. We have
attempted to mitigate our exposure to adverse interest rate movements by fixing the rate on $65.0 million of our trust preferred securities for a five year period through the contractual terms
of the security at inception, of which $15 million is currently based on a floating rate and $50 million remains at a fixed rate.

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

The
sensitivity analysis of interest rate risk assumes scenarios involving increases or decreases in LIBOR of 100 and 200 basis points from their levels as of and for the six months
ended June 30, 2009,

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and
with all other variables held constant. The following table summarizes the impact of changes in LIBOR.

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

Weighted
Average
Interest Rate

200 Basis
Point
Decrease(1)

100 Basis
Point
Decrease

100 Basis
Point
Increase

200 Basis
Point
Increase(in millions)Loan payable


1.48
%
$
70.2

$
0.2

$
0.2

$
(0.4
)
$
(0.7
)Other long term debt


5.47
%
$
60.0


0.4


0.3


(0.3
)

(0.6
)Total







$
0.6

$
0.5

$
(0.7
)
$
(1.3
)


---

As
noted above, we have fixed the interest rate on $300 million of our $429 million of total debt outstanding, leaving $129 million of the debt exposed to rising
interest rates, as of June 30, 2009. We had approximately $332 million of cash and cash equivalents as of June 30, 2009. We anticipate that any increase or decrease in the
interest cost of our debt as a result of an increase in interest rates will be mitigated by an increase or decrease in the net investment income from our cash and cash equivalents.

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

ITEM 4Controls and Procedures



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



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

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



We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2009. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2009, at a reasonable assurance level, to timely alert management to
material information required to be included in our periodic filings with the Securities and Exchange Commission.



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

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PART II

ITEM 1LEGAL PROCEEDINGS

For information relating to litigation affecting us, please see Note 11Commitments and Contingencies of the notes
to the consolidated financial statements in Part IItem 1 of this report, which is incorporated into this Part IIItem 1Legal
Proceedings by reference.

ITEM 1ARISK FACTORS

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

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

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

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

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

Although the new administration and U.S. Congress have expressed some support for measures intended to expand the number of citizens
covered by health insurance and other changes within the health care system, the costs of implementing any of these proposals could be financed, in part, by reductions in the payments made under
Medicare Advantage and other government programs. In addition, in February 2009, President Obama signed the American Recovery
and Reinvestment Act that provides funding for, among other things: state Medicaid programs; the modernization of health information technology systems and aid to states to help defray budget cuts.
Because of the unsettled nature of these initiatives and the numerous steps required to implement them we remain uncertain as to the ultimate impact they will have on our business.

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

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

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

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

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

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

Issuer Purchases of Equity Securities

Period

Total Number
of Shares
Purchased

Average
Price Paid
Per Share

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs

Approximate Dollar Value
of Shares That May Yet Be
Purchased Under the
Plans or Programs
(in Thousands)(1)April 1, 2009  April 30, 2009


445,295

$
9.12


445,295

$
2,215May 1, 2009  May 31, 2009











2,215June 1, 2009  June 30, 2009


137,600

$
8.22


137,600


26,084Total


582,895





582,895


---

Recent Sales of Unregistered Securities

None.

ITEM 3DEFAULTS UPON SENIOR SECURITIES

None.

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

We held our annual meeting of shareholders on June 4, 2009. The following describes the actions taken at the annual meeting.

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Election of Directors.At the annual meeting, our shareholders elected the fourteen nominees to serve as members of our board of
directors until our
2010 annual meeting of shareholders or until their successors are duly elected and qualified. The tabulation of votes for each of the nominees was as follows:

Number of VotesNominee

For

WithheldBarry W. Averill


82,852,967


412,321Richard A. Barasch


81,817,724


1,447,564Sally W. Crawford


82,401,224


864,064Matthew W. Etheridge


82,838,076


427,212Mark K. Gormley


81,961,182


1,304,106Mark M. Harmeling


82,637,302


627,986Linda H. Lamel


82,859,667


405,621Eric W. Leathers


81,918,008


1,347,280Patrick J. McLaughlin


82,637,585


627,703Richard C. Perry


82,852,867


412,421Thomas A. Scully


81,980,249


1,285,039Robert A. Spass


81,977,165


1,288,123Sean M. Traynor


81,980,249


1,285,039Robert F. Wright


82,203,933


1,061,355


Ratification of the Election of Independent Auditors.At our annual meeting our shareholders approved the proposal to ratify the
appointment of
Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2009. Tabulation of the votes for the proposal was as follows:

Number of
Votes For

Number of
Votes Against

Number of
Abstentions

Number of
Broker Non-Votes82,917,195

271,361

76,732




ITEM 5OTHER INFORMATION

None.

ITEM 6EXHIBITS

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

|    |  |                                                                                                                                                                                                                                                                                
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1 |  | Restated Certificate of Incorporation of Universal American Financial Corp. (filed as Exhibit 3.1 to Amendment No. 2 to the Registrant's Registration Statement on Form S-3 filed on July 11, 2001, and
incorporated by reference herein).                                     
|3.2 |  | Certificate of Amendment of the Certificate of Incorporation of Universal American Financial Corp. (filed as Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004, filed August 9, 2004, and incorporated by reference herein).
|3.3 |  | Amended and Restated By-Laws of Universal American Corp. (filed as Exhibit 3.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, filed on May 12, 2008, and
incorporated by reference herein).                                           

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|      |  |                                                                                                                                                                                                                                                                                  
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.4   |  | Certificate of Amendment to the Certificate of Incorporation of Universal American Financial Corp. for the Series A Preferred Stock (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed
May 11, 2007, and incorporated by reference herein).              
|3.5   |  | Certificate of Amendment of the Certificate of Incorporation of Universal American Financial Corp. for the Registrant's Series B Preferred Stock (filed as Exhibit 3.2 to the Registrant's Current Report on
Form 8-K filed May 11, 2007, and incorporated by reference herein). 
|3.6   |  | Certificate of Amendment to Certificate of Incorporation changing the name of Universal American Financial Corp. to Universal American Corp. (filed as Exhibit 99.1 to the Registrant's Current Report on
Form 8-K filed December 3, 2007, and incorporated by reference herein).
|31.1* |  | Certification of Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                                                                                                                                  
|31.2* |  | Certification of Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                                                                                                                                  
|32.1* |  | Certification of the Chief Executive Officer and Chief Financial Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.                                 

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SIGNATURES

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

UNIVERSAL AMERICAN CORP.July 30, 2009

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

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


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