Table of Contents



UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-Q

(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2010ORo

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




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

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

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


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

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



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

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

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

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


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

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

Class of Common Stock

Outstanding at
October 29, 2010$0.01 par value

75,626,714 shares




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TABLE OF CONTENTS



Item

Description

PagePART I

Financial Information1

Financial Statements:Consolidated Balance Sheets


3Consolidated Statements of OperationsThree Months


4Consolidated Statements of OperationsNine Months


5Consolidated Statements of Stockholders' Equity and Comprehensive Income


6Consolidated Statements of Cash Flows


7Notes to Consolidated Financial Statements


82

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


303

Quantitative and Qualitative Disclosures About Market Risk


484

Controls and Procedures


49PART II

Other Information1

Legal Proceedings


511A

Risk Factors


512

Unregistered Sales of Equity Securities and Use of Proceeds


533

Defaults Upon Senior Securities


544

Other Information


545

Exhibits


54Signatures


55


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

This report, including, without limitation, the information set forth or incorporated by reference under Part II, Item 1A
"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 executive officers contains
"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.
Statements in this report that are not historical facts are hereby identified as forward-looking statements and are intended to be covered by the safe harbor provisions of the PSLRA. They can be
identified by the use of the words "believe," "expect," "predict," "project," "potential," "estimate," "anticipate," "project," "should," "intend," "may," "will," and similar expressions or variations
of such words, or by discussion of future financial results and events, strategy or risks and uncertainties, trends and conditions in the Company's business and competitive strengths, all of which
involve risks and uncertainties.

Where,
in any forward-looking statement, we or our management expresses an expectation or belief as to future results or actions, there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. Our actual results may differ materially from our expectations, plans or projections. We warn you that forward-looking statements are
only predictions and estimates, which 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. We give no assurance that we will achieve our expectations and we do not assume responsibility for the accuracy and completeness of the forward-looking statements. Future events and
actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements as a result of many factors, including the risk factors described in
Part II, Item 1A of this report. We caution readers not to place undue reliance on these forward-looking statements that speak only as of the date made.

We
undertake no obligation, other than as may be required under the federal securities laws, to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Although we believe that the expectations reflected in these forward-looking statements are reasonable at the time made, any or all of the forward-looking
statements contained in this report and in any other public statements that are made may prove to be incorrect. This may occur as a result of inaccurate assumptions as a consequence of known or
unknown risks and uncertainties. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under the caption "Risk Factors" under Part II,
Item 1A of this report. We caution that these risk factors may not be exhaustive. We operate in a continually changing business environment that is highly complicated, regulated and competitive
and new risk factors emerge from time to time. We cannot predict these new risk factors, nor can we assess the impact, if any, of the new risk factors on our business or the extent to which any factor
or combination of factors may cause actual results to differ materially from those expressed or implied by any forward-looking statement. In light of these risks, uncertainties and assumptions, the
forward-looking statements discussed in this report might not occur. You should carefully read this report and the documents that we incorporate by reference in this report in its entirety. It
contains information that you should consider in making any investment decision in any of our securities.

2

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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)

September 30,
2010

December 31,
2009(Unaudited)ASSETSInvestments:Fixed maturities available for sale, at fair value (amortized cost: 2010, $1,290,938; 2009, $961,265)

$
1,320,214

$
964,553Other invested assets


1,356


1,276Total investments


1,321,570


965,829Cash and cash equivalents


531,789


856,958Accrued investment income


10,913


9,005Deferred policy acquisition costs


146,871


150,398Reinsurance recoverableslife


563,533


622,547Reinsurance recoverableshealth


129,749


126,524Due and unpaid premiums


30,241


35,466Present value of future profits and other amortizing intangible assets


150,084


167,545Goodwill and other indefinite lived intangible assets


525,673


530,031Income taxes receivable


10,015


3,441Other Part D receivables


217,688


168,159Advances to agents


62,790


66,418Other assets


136,162


112,535Total assets

$
3,837,078

$
3,814,856LIABILITIES AND STOCKHOLDERS' EQUITYLIABILITIESReserves and other policy liabilitieslife

$
559,193

$
599,442Reserves for future policy benefitshealth


401,185


408,625Policy and contract claimshealth


435,253


380,519Premiums received in advance


19,332


12,535Loan payable


233,528


313,758Other long term debt


110,000


110,000Amounts due to reinsurers


5,996


7,078Deferred income tax liability


62,730


31,564CMS contract deposit liabilities


271,662


169,169Other Part D liabilities


87,218


163,332Other liabilities


243,024


169,370Total liabilities


2,429,121


2,365,392STOCKHOLDERS' EQUITYPreferred Stock (Authorized: 3 million shares):Series A Preferred Stock (Authorized: 300,000 shares, issued and outstanding: 42,105 shares, liquidation value 2010, $62,105; 2009, $49,263)


42


42Series B Preferred Stock (Authorized: 300,000 shares)





Common stockvoting (Authorized: 200 million shares, issued and outstanding: 2010, 78.5 million shares; 2009, 87.9 million
shares)


785


879Common stocknon-voting (Authorized 30 million shares)





Additional paid-in capital


794,828


880,709Accumulated other comprehensive income (loss)


8,580


(7,915
)Retained earnings


633,346


709,695Less: Treasury Stock (2010, 2.8 million shares; 2009, 13.5 million shares)


(29,624
)

(133,946
)Total stockholders' equity


1,407,957


1,449,464Total liabilities and stockholders' equity

$
3,837,078

$
3,814,856


See Notes to unaudited Consolidated Financial Statements.

3

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended September 30, 2010 and 2009

(Unaudited)

(in thousands, per share amounts in dollars)

2010

2009Net premium and policyholder fees earned

$
1,322,750

$
1,138,282Net investment income


10,585


10,630Fee and other income


1,466


5,576Realized gain (loss):Total other-than-temporary impairment losses on securities


(1,495
)

(788
)Portion of loss recognized in other comprehensive income


969


53Net other-than-temporary impairment losses on securities recognized in earnings


(526
)

(735
)Realized gain (loss), excluding other-than-temporary impairment losses on securities


6,000


(4,048
)Net realized gain (loss) on investments


5,474


(4,783
)Total revenues


1,340,275


1,149,705Benefits, claims and expenses:Claims and other benefits


1,082,384


901,580Change in deferred acquisition costs


412


(603
)Amortization of present value of future profits


5,800


5,752Commissions


31,233


28,039Reinsurance commissions and expense allowances


(4,232
)

(6,509
)Interest expense


5,011


4,877Other operating costs and expenses


135,666


128,852Total benefits, claims and expenses


1,256,274


1,061,988Income before equity in earnings of unconsolidated subsidiary


84,001


87,717Equity in earnings of unconsolidated subsidiary





5Income before taxes


84,001


87,722Provision for income taxes


23,257


27,976Net income

$
60,744

$
59,746Earnings per common share:Basic

$
0.78

$
0.74Diluted

$
0.77

$
0.74Weighted average shares outstanding:Weighted average common shares outstanding


76,594


87,093Less weighted average treasury shares


(2,769
)

(10,566
)Basic weighted shares outstanding


73,825


76,527Weighted average common equivalent of preferred shares outstanding


4,211


4,211Effect of dilutive securities


777


205Diluted weighted shares outstanding


78,813


80,943Cash dividends per common share

$
2.00

$



See
Notes to unaudited Consolidated Financial Statements.

4

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        For the Nine Months Ended
September 30, 2010 and 2009        (Unaudited)        (in thousands, per share amounts in dollars)

2010

2009Net premium and policyholder fees earned

$
4,264,790

$
3,723,492Net investment income


32,366


38,853Fee and other income


7,192


14,684Realized gain (loss):Total other-than-temporary impairment losses on securities


(1,915
)

(17,129
)Portion of loss recognized in other comprehensive income


1,100


3,795Net other-than-temporary impairment losses on securities recognized in earnings


(815
)

(13,334
)Realized gain (loss), excluding other-than-temporary impairment losses on securities


6,111


(6,716
)Net realized gain (loss) on investments


5,296


(20,050
)Total revenues


4,309,644


3,756,979Benefits, claims and expenses:Claims and other benefits


3,671,567


3,150,708Change in deferred acquisition costs


3,527


7,980Amortization of present value of future profits


17,500


17,652Commissions


96,531


90,402Reinsurance commissions and expense allowances


(13,768
)

(18,939
)Interest expense


15,100


14,942Loss on reinsurance and other related costs





7,624Restructuring costs





4,727Other operating costs and expenses


405,489


406,845Total benefits, claims and expenses


4,195,946


3,681,941Income before equity in earnings of unconsolidated subsidiary


113,698


75,038Equity in earnings of unconsolidated subsidiary





111Income before taxes


113,698


75,149Provision for income taxes


30,544


23,617Net income

$
83,154

$
51,532Earnings per common share:Basic

$
1.07

$
0.63Diluted

$
1.06

$
0.63Weighted average shares outstanding:Weighted average common shares outstanding


79,316


87,005Less weighted average treasury shares


(5,558
)

(9,898
)Basic weighted shares outstanding


73,758


77,107Weighted average common equivalent of preferred shares outstanding


4,211


4,211Effect of dilutive securities


521


205Diluted weighted shares outstanding


78,490


81,523Cash dividends per common share

$
2.00

$



See
Notes to unaudited Consolidated Financial Statements.

5

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  AND COMPREHENSIVE INCOME    
For the Nine Months Ended September 30, 2010 and 2009        (Unaudited)        (in thousands)

Preferred
Stock
Series A

Common
Stock

Additional
Paid-In
Capital

Accumulated
Other
Comprehensive
(Loss) Income

Retained
Earnings

Treasury
Stock

Total2009Balance at January 1, 2009

$
42

$
874

$
870,520

$
(36,422
)
$
558,675

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














51,532





51,532Other comprehensive income











35,750








35,750Comprehensive income




















87,282ASC 320-10-65 implementation adjustment











(10,716
)

10,716





Issuance of common stock





5


1,603











1,608Stock-based compensation








7,893











7,893Treasury shares purchasedat cost

















(37,350
)

(37,350
)Treasury shares reissued








23








3,849


3,872Balance at September 30, 2009

$
42

$
879

$
880,039

$
(11,388
)
$
620,923

$
(111,106
)
$
1,379,3892010Balance at January 1, 2010

$
42

$
879

$
880,709

$
(7,915
)
$
709,695

$
(133,946
)
$
1,449,464Net income














83,154





83,154Other comprehensive income











16,495








16,495Comprehensive income




















99,649Issuance of common stock





6


3,773











3,779Stock-based compensation








4,394











4,394Retired treasury stock





(100
)

(98,959
)







99,059


Treasury shares purchased at cost

















(4,182
)

(4,182
)Treasury shares reissued








4,911








9,445


14,356Dividends














(159,503
)




(159,503
)Balance at September 30, 2010

$
42

$
785

$
794,828

$
8,580

$
633,346

$
(29,624
)
$
1,407,957


See Notes to unaudited Consolidated Financial Statements.

6

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        For the Nine Months Ended September 30,
2010 and 2009        (Unaudited)        (in thousands)

2010

2009Cash flows from operating activities:Net income

$
83,154

$
51,532Adjustments to reconcile net income to cash provided by (used in) operating activities, net of balances sold:Equity in earnings of unconsolidated subsidiary





(111
)Distribution from unconsolidated subsidiary





6,800Deferred income taxes


21,518


(15,437
)Realized (gains) losses on investments


(5,296
)

20,050Amortization of intangible assets


17,500


17,652Loss on reinsurance, net of tax





2,221Net amortization of bond premium


3,872


1,767Changes in operating assets and liabilities:Deferred policy acquisition costs


3,527


7,980Reserves for future policy benefits


(43,389
)

2,835Policy and contract claims payable


50,434


(209,464
)Reinsurance balances


51,682


(1,452
)Due and unpaid/advance premium, net


12,022


46,741Income taxes payable/receivable


(6,574
)

22,314Other Part D (payables)/receivables


(125,643
)

(65,135
)Other, net


71,643


35,241Cash provided by (used in) operating activities


134,450


(76,466
)Cash flows from investing activities:Proceeds from sale or redemption of fixed maturity investments


717,423


639,251Cost of fixed maturity investments purchased


(1,045,617
)

(539,813
)Assets transferred on life reinsurance





(454,487
)Proceeds from sale of CHCS, net of cash sold


6,492


Purchase of fixed assets


(8,437
)

(13,093
)Other investing activities


3,038


99Cash used in investing activities


(327,101
)

(368,043
)Cash flows from financing activities:Net proceeds from issuance of common stock, net of tax effect


5,389


4,234Cost of treasury stock purchases


(4,182
)

(37,350
)Dividends paid to shareholders


(155,988
)

Receipts from CMS contract deposits


2,997,266


2,729,669Withdrawals from CMS contract deposits


(2,894,773
)

(2,332,691
)Deposits and interest credited to policyholder account balances





4,357Surrenders and other withdrawals from policyholder account balances





(17,548
)Principal repayment on loan payable and other long term debt


(80,230
)

(2,625
)Cash (used in) provided by financing activities


(132,518
)

348,046Net decrease in cash and cash equivalents


(325,169
)

(96,463
)Cash and cash equivalents at beginning of period


856,958


511,032Cash and cash equivalents at end of period

$
531,789

$
414,569


See
Notes to unaudited Consolidated Financial Statements.

7

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Table of Contents



UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION AND COMPANY BACKGROUND

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

On
June 9, 2010, we sold the outstanding common stock of CHCS Services, Inc., our administrative services company, to Patni Americas, Inc, a wholly-owned subsidiary of
Patni Computer Systems Limited (NYSE: PTI), with an effective date of April 1, 2010. The operations of CHCS are included in consolidated results up to the effective date of the sale. This
transaction is discussed in more detail under "Sale of CHCS" in Note 14 of the Notes to Consolidated Financial Statements.

On
April 24, 2009 we entered in to an agreement with the Commonwealth Annuity and Life Insurance Company and the First Allmerica Financial Life Insurance Company, Goldman Sachs
Group, Inc. subsidiaries (NYSE:GS), collectively known as Commonwealth, to reinsure substantially all of our in-force life insurance and annuity business as of April 1, 2009,
under a 100% coinsurance treaty. This transaction is discussed in more detail under "Life Insurance and Annuity Reinsurance Transaction" in Note 14 of the Notes to 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 U.S. GAAP 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, 2009, that was filed with the Securities and Exchange Commission, or the SEC, on March 1, 2010. The results of operations for
the three and nine months ended September 30, 2010 and 2009 are not necessarily indicative of the results to be expected for the full year.

Use of Estimates:The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates
and assumptions that
affect the amounts reported by us in our Consolidated Financial Statements and the accompanying Notes. Critical accounting policies require significant subjective or complex judgments, often as a
result of the need to make estimates about the

8

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

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 the revisions 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.

Significant Accounting Policies:For a description of existing significant accounting policies, see Note 2Summary of
Significant
Accounting Policies in the Notes to Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2009.

3. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS

Deferred Acquisition Costs:On September 29, 2010, ASU 2010-26,Accounting for Costs Associated
with Acquiring or Renewing Insurance Contractswas ratified by the FASB. The ASU amendsFASB ASC Topic944, Financial
ServicesInsurance.This guidance changes the accounting for costs associated with acquiring or renewing insurance contracts in
response to diversity in practice in the capitalization of those costs. Under the new guidance, deferrable costs will be limited to incremental direct costs of a successful contract acquisition
incurred with independent third parties and the portion of the total employee compensation and payroll-related fringe benefits related to time spent performing specified acquisition activities
(e.g., underwriting, policy issuance and processing) for successful acquisition efforts. Companies will have a choice between prospective and retrospective adoption; the election must be made
at the reporting entity level. The new guidance will be effective for fiscal years beginning after December 15, 2011. Management has not yet determined the impact of adoption of this new
guidance on our consolidated financial position or results of operations.

Subsequent Events Disclosure:On February 24, 2010, the FASB issued an update to address certain implementation issues
related to Accounting
Standards Codification, or ASC, 855-10-50,Subsequent EventsDisclosure, regarding an entity's requirement to
perform and disclose subsequent events procedures. Effective upon its issuance, the update exempts Securities and Exchange Commission registrants from disclosing the date through which subsequent
events have been evaluated. This update affected disclosure only and had no impact on our consolidated financial position or results of operations.

Fair Value Disclosures:In January 2010, the FASB issued ASC Update No. 2010-06,Fair Value
Measurements and Disclosures, which updates ASC 820-10-20,Fair Value Measurements and Disclosures.The
new literature requires disclosures about transfers into and
out of Levels 1 and 2 fair value measurements and clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair
value. These new rules impact disclosures only and had no impact on our consolidated financial position or results of operations. The new rules also require additional disclosures regarding
Level 3 fair value measurements which are effective for reporting periods beginning after December 15, 2010.

9

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS (Continued)

Variable Interest Entities:In December 2009, the FASB issued ASC Update No. 2009-17,Improvements
to Financial Reporting by Enterprises Involved with Variable Interest Entities, which updates ASC 810-10, Consolidations.ASU 2009-17 clarifies the definition of a variable
interest entity and updates the definition of the primary
beneficiary of a variable interest entity. The Company adopted ASU 2009-17 as of January 1, 2010, and the adoption had no impact on our consolidated financial position or
results of operations.

4. INVESTMENTS

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

September 30, 2010Classification

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Gross
Unrealized
OTTI(1)

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

$
180,335

$
1,366

$


$


$
181,701Government sponsored agencies


45,400


3,315








48,715Other political subdivisions


151,708


511


(612
)




151,607Corporate debt securities


525,964


19,943


(214
)




545,693Foreign debt securities


100,374


1,723


(111
)




101,986Mortgage-backed and asset-backed securities


287,157


13,399


(3,647
)

(6,397
)

290,512$
1,290,938

$
40,257

$
(4,584
)
$
(6,397
)
$
1,320,214




December 31, 2009Classification

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Gross
Unrealized
OTTI(1)

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

$
35,572

$
554

$
(4
)
$


$
36,122Government sponsored agencies


137,839


3,051


(59
)




140,831Other political subdivisions


10,020


223


(229
)




10,014Corporate debt securities


312,225


16,826


(1,206
)




327,845Foreign debt securities


19,465


1,259








20,724Mortgage-backed and asset-backed securities


446,144


14,588


(13,598
)

(18,117
)

429,017$
961,265

$
36,501

$
(15,096
)
$
(18,117
)
$
964,553


(1)Other-than-temporary
impairments.


At
September 30, 2010, gross unrealized losses on mortgage-backed and asset-backed securities totaled $10.0 million, consisting of unrealized losses of $8.8 million
on subprime residential mortgage loans, as discussed below, and $1.2 million related to obligations of commercial mortgage-backed

10

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

securities.
The fair value of a majority of these securities is depressed due to the deterioration of value in the mortgage-backed securities market and related businesses. Management and the
Investment Committee have evaluated these holdings, with input from our investment managers, and do not believe further other-than-temporarily impairment to be warranted.

The
amortized cost and fair value of fixed maturity investments at September 30, 2010 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

$
100,141

$
101,175Due after 1 year through 5 years


730,109


749,688Due after 5 years through 10 years


143,397


148,275Due after 10 years


30,134


30,564Mortgage and asset-backed securities


287,157


290,512$
1,290,938

$
1,320,214


The
fair value and unrealized loss as of September 30, 2010 and December 31, 2009 for fixed maturities, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, are shown below:

Less than 12 Months

12 Months or Longer

TotalSeptember 30, 2010

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

$


$


$


$


$


$
Government sponsored agencies

















Other political subdivisions


121,337


(612
)







121,337


(612
)Corporate debt securities


32,646


(156
)

1,047


(58
)

33,693


(214
)Foreign debt securities


11,516


(111
)







11,516


(111
)Mortgage-backed and asset-backed securities


30,367


(41
)

15,252


(10,003
)

45,619


(10,044
)Total fixed maturities

$
195,866

$
(920
)
$
16,299

$
(10,061
)
$
212,165

$
(10,981
)Total number of securities in an unrealized loss position

















76


11

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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, 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

$


$


$
48

$
(4
)
$
48

$
(4
)Government sponsored agencies


52,666


(59
)







52,666


(59
)Other political subdivisions


25





1,771


(229
)

1,796


(229
)Corporate debt securities


7,409


(366
)

11,373


(840
)

18,782


(1,206
)Foreign debt securities


25











25


Mortgage-backed and asset-backed securities


100,339


(5,668
)

28,643


(26,047
)

128,982


(31,715
)Total fixed maturities

$
160,464

$
(6,093
)
$
41,835

$
(27,120
)
$
202,299

$
(33,213
)Total number of securities in an unrealized loss position

















64


Subprime Residential Mortgage Loans

We hold securities with exposure to subprime residential mortgages, or mortgage loans to borrowers with weak credit profiles. The
significant decline in U.S. housing prices and relaxed underwriting standards by some subprime loan originators have led to higher delinquency and loss rates, resulting in a significant reduction in
the market valuation of these securities sector wide.

In
the third quarter of 2010, we sold subprime holdings with par values of approximately $29.9 million, realizing net pre-tax losses totaling $10.2 million. As
of September 30, 2010, we held subprime securities with par values of $22.1 million, an amortized cost of $21.6 million and a fair value of $12.8 million representing
approximately 0.7% of our cash and invested assets, with collateral comprised substantially of first lien mortgages in senior or senior mezzanine level tranches, with an average Standard &
Poor's, or equivalent, rating of A+.

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

Vintage Year

Amortized
Cost

Fair
Value

Gross
Unrealized
Losses & OTTI(in thousands)2003

$
190

$
75

$
(115
)2004


219


96


(123
)2005


14,173


11,001


(3,172
)2006


7,000


1,654


(5,346
)Totals

$
21,582

$
12,826

$
(8,756
)


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

12

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

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. Based on the analysis of the remaining subprime holdings at September 30,
2010, we do not believe these holdings are other-than-temporarily impaired.

The
following table summarizes, on a pre-tax basis, our other-than-temporary impairments on fixed maturity investments recorded in our Consolidated
Statements of Operations since the subprime deterioration began in 2007:

2010 Quarter End

Year EndedCumulative

September 30

June 30

March 31

2009

2008

2007(in thousands)Subprime

$
99,747

$


$
158

$
131

$
10,497

$
47,964

$
40,997Other structured


11,569


526








6,398


4,645


Corporate


7,177














7,177


$
118,493

$
526

$
158

$
131

$
16,895

$
59,786

$
40,997


During
the quarter ended September 30, 2010, we recognized other-than-temporary impairment on two structured securities, one of which had not been
previously impaired.

Gross
realized gains and gross realized losses included in the Consolidated Statements of Operations are as follows:

For the three months
ended September 30,

For the nine months
ended September 30,2010

2009

2010

2009(in thousands)

(in thousands)Realized gains:Fixed maturities

$
19,185

$
1,119

$
20,126

$
7,197Other


87





109


17519,272


1,119


20,235


7,372Realized losses:Fixed maturities, excluding OTTI


(11,637
)

(5,167
)

(12,448
)

(14,089
)OTTI on fixed securities


(526
)

(254
)

(815
)

(12,852
)OTTI on equity securities





(481
)




(481
)Interest rate swap


(1,610
)




(1,610
)

Other


(25
)




(66
)

(13,798
)

(5,902
)

(14,939
)

(27,422
)Net realized gains (losses)

$
5,474

$
(4,783
)
$
5,296

$
(20,050
)


13

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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 accumulated other comprehensive income (loss) are as follows:

Three months ended
September 30, 2010

Nine months ended
September 30, 2010(in thousands)

(in thousands)Balance, beginning of period

$
8,004

$
7,846Credit-related impairments recognized in current period earnings on securities:With credit-related impairments previously recognized





With credit-related impairments not previously recognized


239


397Cumulative credit-related impairments as of September 30, 2010

$
8,243

$
8,243


In
addition, during the three and nine months ended September 30, 2010, we recognized other-than-temporary impairments of approximately
$0.3 million and $0.4 million, respectively, on securities for which the impairment was not split between earnings and other comprehensive income (loss).

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 ofFair Value Measurements and Disclosures
Topic, ASC 820-10.



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

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

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

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

14

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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 hierarchy levels, as of September 30, 2010 (in thousands):

Total

Level 1

Level 2

Level 3Assets:Fixed maturties, available for sale

$
1,320,214

$


$
1,314,788

$
5,426Liabilities:Interest rate swaps

$
16,447

$


$
16,447

$



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



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



Based
on the typical trading volumes and the lack of quoted market prices for fixed maturities, third party pricing services will normally derive the security prices through recent
reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information as outlined above. If there are no recent reported
trades, the third party pricing services may use matrix or model processes to develop a security price where the pricing services develop future cash flow expectations based upon collateral
performance, discounted at an

15

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

estimated
market rate. The pricing for mortgage-backed and asset-backed securities reflects estimates of the rate of future prepayments of principal over the remaining life of the securities. The
pricing services derive these estimates based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying
collateral.

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

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.



Interest rate swaps are reported at fair value as other liabilities in our Consolidated Balance Sheets. Their fair value is based on
the present value of cash flows as determined by the London Inter Bank Offering Rate, known as LIBOR, forward rate curve and credit spreads, including our own credit.

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

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

Fixed
Maturities

Equity
Securities

Total(in thousands)Fair value as of December 31, 2009

$
1,563

$
9

$
1,572Net purchases and sales


(97
)




(97
)Net transfers out


(50
)




(50
)Unrealized losses included in AOCI (1),(2)


17





17Fair value as of March 31, 2010


1,433


9


1,442Net transfers in (3)


2,143





2,143Unrealized losses included in AOCI (1),(2)


85





85Fair value as of June 30, 2010


3,661


9


3,670Net purchases and sales


(12
)

(9
)

(21
)Net transfers in (4)


1,779





1,779Unrealized losses included in AOCI (1),(2)


(2
)




(2
)Fair value as of September 30, 2010

$
5,426

$


$
5,426


(1)AOCI:
Accumulated other comprehensive income


16

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

(2)Unrealized
gains/losses represent losses from changes in values of Level 3 financial instruments only for the periods in which the instruments are
classified as Level 3.(3)Transfer
of one security from Level 2 to Level 3 due to lack of observable inputs.(4)Two
private placement securities acquired during the third quarter, with lack of observable inputs, net of transfer of one security from Level 3 to
Level 2.


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 three and nine months ended
September 30, 2010 and 2009, we allocated earnings between common and participating preferred stock as follows:

Three months ended
September 30,

Nine months ended
September 30,2010

2009

2010

2009(in thousands)Net income attributable to common stock

$
57,465

$
56,627

$
78,664

$
48,864Undistributed income allocated to participating preferred stock


3,279


3,119


4,490


2,668Net income

$
60,744

$
59,746

$
83,154

$
51,532


7. SHARE REPURCHASE PLAN

We have approved share repurchase plans that have authorized us to repurchase up to $175 million of shares of our common stock. Through December 31, 2009, we had
repurchased 13.4 million shares of our common stock for an aggregate amount of $132.7 million, under these programs. There have been no share repurchases since December 31, 2009
under these programs. As of September 30, 2010, we have $42.3 million that remains available to repurchase additional shares under these plans. However, share repurchases are also
limited by the remaining available restricted payments under our 2007 Credit Facility, which, giving effect to the July 27, 2010 Amendment, limits share repurchases, dividends and other
restricted payments to an aggregate of $300 million (see "Credit Facility Amendment" in Note 14Other Disclosures in the Notes to Consolidated Financial Statements).
Currently, we have $11.3 million remaining available under this restricted payment limit. We are not obligated to repurchase any specific number of shares under the programs or to make
repurchases at any specific time or price.

17

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. SHARE REPURCHASE PLAN (Continued)

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

For the nine months ended September 30,2010

2009Shares

Amount

Weighted
Average
Cost Per
Share

Shares

Amount

Weighted
Average
Cost Per
ShareTreasury stock, beginning of period


13,538,081

$
133,946

$
9.89


7,194,387

$
77,605

$
10.79Retirement of treasury stock


(10,000,000
)

(99,059
)

9.91Shares repurchased


283,978


4,182


14.73


4,390,057


37,350


8.51Shares distributed in the form of employee bonuses


(987,619
)

(9,445
)

9.56


(356,164
)

(3,849
)

10.80Treasury stock, end of period


2,834,440

$
29,624

$
10.45


11,228,280

$
111,106

$
9.90


As
a result of our share repurchase program we had accumulated 13.5 million shares of common stock in treasury as of December 31, 2009. We retired 10 million shares
on March 15, 2010, reducing treasury stock and additional paid-in-capital by approximately $99 million, with no impact on total consolidated stockholders' equity.

8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of accumulated other comprehensive income (loss) are as follows:

September 30,
2010

December 31,
2009(in thousands)Net unrealized gains on investments

$
35,673

$
21,405Gross unrealized OTTI


(6,397
)

(18,117
)Fair value of cash flow swap on debt


(16,076
)

(15,465
)Deferred income tax (expense) benefit on the above


(4,620
)

4,262Total accumulated other comprehensive income (loss)

$
8,580

$
(7,915
)


18

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued)

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

Three months ended September 30,2010

2009Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount

Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount(in thousands)Net unrealized gain arising during the period

$
2,894

$
1,012

$
1,882

$
29,113

$
10,190

$
18,923Reclassification adjustment for gains (losses) included in income


5,474


1,916


3,558


(4,783
)

(1,674
)

(3,109
)Net unrealized gain arising during the period


8,368


2,928


5,440


24,330


8,516


15,814Cash flow hedge


1,266


444


822


(1,749
)

(612
)

(1,137
)Foreign currency translation adjustment











(5
)

(2
)

(3
)Other comprehensive income

$
9,634

$
3,372

$
6,262

$
22,576

$
7,902

$
14,674




Nine months ended September 30,2010

2009Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount

Before Tax
Amount

Tax Expense
(Benefit)

Net of Tax
Amount(in thousands)Net unrealized gain arising during the period

$
20,692

$
7,242

$
13,450

$
55,263

$
19,342

$
35,921Reclassification adjustment for gains (losses) included in income


5,296


1,853


3,443


(20,050
)

(7,017
)

(13,033
)Net unrealized gain arising during the period


25,988


9,095


16,893


35,213


12,325


22,888Cash flow hedge


(611
)

(213
)

(398
)

3,477


1,217


2,260Foreign currency translation adjustment











(176
)

(62
)

(114
)Other comprehensive income

$
25,377

$
8,882

$
16,495

$
38,514

$
13,480

$
25,034


9. STOCK-BASED COMPENSATION

We have various stock-based incentive plans for our employees, non-employee directors and agents. We issue shares upon the exercise of options granted under these plans.
Detailed
information for activity in our stock-based incentive plans can be found in Note 22Stock-Based Compensation in the Notes to Consolidated Financial Statements in our annual report
on Form 10-K for the year ended December 31, 2009.

19

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. STOCK-BASED COMPENSATION (Continued)

The
compensation expense that has been included in other operating costs and expenses for these plans and the related tax benefit were as follows:

Three Months Ended
September 30,2010

2009(in thousands)Stock-based compensation expense by type:Stock options

$
1,544

$
1,663Restricted stock awards


1,988


1,027Total stock-based compensation expense


3,532


2,690Tax benefit recognized


1,251


942Stock-based compensation expense, net of tax

$
2,281

$
1,748




Nine Months Ended
September 30,2010

2009(in thousands)Stock-based compensation expense by type:Stock options (1)

$
2,784

$
5,267Restricted stock awards


6,044


3,590Total stock-based compensation expense


8,828


8,857Tax benefit recognized


2,791


3,100Stock-based compensation expense, net of tax

$
6,037

$
5,757


(1)Stock-based
compensation expensestock options for the nine months ended September 30, 2010 reflects a $2.0 million reduction
related to the true-up of our forfeiture rate estimate for options that had non-vested terminations that was recorded in the second quarter of 2010.




We recognize 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 in accordance with the provisions ofCompensation-Stock Compensation Topic,ASC 718-10. We use the Black-Scholes valuation model to value employee stock options.

20

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. STOCK-BASED COMPENSATION (Continued)

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:2010

2009Weighted-average grant date fair value

$5.58

$3.92Risk free interest rates

1.08%-2.26%

1.28%-3.05%Dividend yields

0.0%

0.0%Expected volatility

48.96%-55.79%

40.61%-55.63%Expected lives of options (in years)

3.3-3.8

3.5-3.8


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 value of such awards.

A
summary of option activity for the nine months ended September 30, 2010 is set forth below:

Options

Shares
(in thousands)

Weighted
Average
Exercise
Price(1)Outstanding, January 1, 2010


5,351

$
14.55Granted


1,065


13.84Exercised


(468
)

6.79Forfeited or expired


(301
)

17.21Outstanding, September 30, 2010


5,647

$
13.01Exercisable, September 30, 2010


3,556

$
13.01


(1)The
decline in the weighted average exercise price at September 30, 2010, compared with January 1, 2010 reflects a $2.00 reduction in the
exercise price made in connection with the special dividend paid in August 2010 (see "Special Dividend" in Note 14Other Disclosures in the Notes to Consolidated Financial
Statements),


The
total intrinsic value of options exercised during the first nine months of 2010 was $3.8 million and the total intrinsic value of options exercised during the first nine
months of 2009 was $2.9 million. As of September 30, 2010, the total compensation cost related to non-vested awards not yet recognized was $9.5 million, which we
expect to recognize over a weighted average period of 1.1 years.

We
received proceeds of $3.2 million from the exercise of stock options during the first nine months of 2010 and proceeds of $1.6 million from the exercise of stock
options during the first nine months of 2009. ASC 718-10 also requires us to report the benefits of tax deductions in excess of recognized compensation cost as a financing cash
flow. We recognized $1.6 million of financing cash flows for these excess tax deductions for the nine months ended September 30, 2010 and $2.6 million for the nine months ended
September 30, 2009.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. STOCK-BASED COMPENSATION (Continued)



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:

Non-vested Restricted Stock

Shares
(in thousands)

Weighted
Average
Grant-Date
Fair ValueNon-vested at January 1, 2010


609

$
13.32Granted


568


13.76Vested


(162
)

11.35Forfeited


(51
)

12.83Non-vested at September 30, 2010


964

$
13.94


The
total fair value of shares of restricted stock vested during the nine months ended September 30, 2010 was $2.5 million and the total fair value of shares of restricted
stock vested during the nine months ended September 30, 2009 was $0.8 million.

During
2009, the Board of Directors approved a performance share award program for certain of our officers. In general, the performance shares vest at the end of a three-year
period. The actual number of shares earned at the conclusion of the vesting period can vary from 0% to 150% of the target award, based on our total shareholder return relative to a group of peer
companies that were selected prior to the award. Compensation expense is recognized on a straight line basis over the vesting period. Prior to vesting, previously recognized compensation expense may
be reversed in the event a grantee resigns, however, once the vesting date is reached, previously recognized expense may not be changed, even if the actual award varies from the target. In connection
with this program, we awarded 449,900 performance shares to officers during 2010 and 373,000 shares in 2009.

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. MEDICARE PART D

The following table provides balances due from (to) CMS by Plan year:

September 30, 2010

December 31, 2009Plan Year

Reinsurance/
Low-income
Cost
Subsidy(1)

Risk
Corridor(2)

Total
Due from (to)
CMS

Reinsurance/
Low-income
Cost
Subsidy(1)

Risk
Corridor(2)

Total
Due from (to)
CMS(in thousands)2010

$
(92,377
)
$
24,705

$
(67,672
)
$


$


$
2009(3)


(204,750
)

(36,578
)

(241,328
)

(194,062
)

(35,957
)

(230,019
)2008


2,227


122


2,349








2007(4)


20,983


12,536


33,519


21,433


12,536


33,9692006


2,255


1,595


3,850


3,460


1,595


5,055Total due (to) from CMS

$
(271,662
)
$
2,380

$
(269,282
)
$
(169,169
)
$
(21,826
)
$
(190,995
)


(1)Amounts
reported in CMS contract deposit liabilities in the Consolidated Balance Sheets.(2)Amounts
reported in Due and unpaid premiums in the Consolidated Balance Sheets.(3)We
expect to pay the amount due to CMS for the 2009 Plan year during the fourth quarter of 2010.(4)For
the 2007 Plan year, reconciliation data was received from CMS and amounts were preliminarily settled during the fourth quarter of 2008.
Subsequent to this preliminary settlement, the Company requested a reopening of the 2007 Plan year and received an $80 million interim payment on January 2, 2009, as part of this
request.


11. DERIVATIVE INSTRUMENTSCASH FLOW HEDGE

On December 4, 2007, we entered into two separate interest rate swap agreements, one with Citibank, N.A. and one with Calyon Corporate and Investment Bank, 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 to hedge the variability of cash flows to be paid under our
credit facility. At inception, we determined that the critical terms of the hedging instrument and the hedged forecasted transaction were the same and we designated these swaps as cash flow hedges,
with changes in the fair value reflected in other comprehensive income and the unrealized loss on these hedges in accumulated other comprehensive income. We perform periodic 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.

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

11. DERIVATIVE INSTRUMENTSCASH FLOW HEDGE (Continued)

Due primarily to the $78 million debt prepayment made in the third quarter of 2010 (see "Credit Facility Amendment" in Note 14Other Disclosures in the Notes to
Consolidated Financial Statements), the outstanding principal balance on the hedged Credit Facility was reduced to $233.5 million at September 30, 2010, $16.5 million lower than
the $250 million notional amounts on the swaps. As a result, this portion of the swaps was deemed ineffective and the notional amount on one of the swaps was decreased by $16.5 million
to $108.5 million, which resulted in a realized loss of $1.2 million. In addition, we evaluated the likelihood of additional debt paydowns prior to the scheduled maturity of the Credit
Facility and the related interest rate swaps in September 2012, and identified an additional $5.2 million of the swaps that would be considered ineffective as hedges. As a result, we realized
an additional loss of $0.4 million on this ineffective portion of the swap, resulting in total realized losses on the cash flow hedge of $1.6 million in the third quarter of 2010.

The
unrealized loss on the effective portion of the swap totaling $16.1 million is reflected in accumulated other comprehensive income. The combined fair value of these swaps was
a $16.4 million liability at September 30, 2010 and a $15.5 million liability at December 31, 2009. We have reflected this fair value in other liabilities.

In
connection with the swap 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
$7.2 million as of September 30, 2010 and $8.1 million as of December 31, 2009. The swap agreements and our credit facility are described in more detail in
Note 16Derivative InstrumentsCash Flow Hedges and Note 14Loan Payable in the Notes to Consolidated Financial Statements in our annual report on
Form 10-K for the year ended December 31, 2009.

12. COMMITMENTS AND CONTINGENCIES



Plaintiff Arthur Tsutsui filed a shareholder derivative action (the "Tsutsui Action") on December 30, 2005, in the Supreme Court
for New York State, Westchester County. The remaining defendants in Tsutsui v. Barasch, et al., index no. 05-22523, are officers Richard A. Barasch and Robert A.
Waegelein, former officer Gary W. Bryant, as well as the three directors affiliated with Capital Z Partners who were 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 in a decision and order dated May 16, 2008, and the plaintiff appealed the dismissal. On appeal, the Appellate Division for the Second
Department issued a decision dated November 17, 2009 affirming the dismissal with respect to one count of the complaint concerning alleged false statements, but reversing with respect to the
two remaining counts concerning stock sales both by the officer defendants and by Capital Z Partners that the complaint alleges should be

24

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

12. COMMITMENTS AND CONTINGENCIES (Continued)

attributed
to the three directors described above. Proceedings have now resumed in the lower court, and discovery is scheduled to be completed by December 16, 2010.

We
are subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including claims for medical, disability, life insurance and other benefits. In
some cases, plaintiffs seek punitive damages. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material
adverse effect on our consolidated financial position, results of operations, or cash flows.



In July 2009 and March 2010, we received subpoenas from the Department of Health and Human Services, Office of Inspector General, known
as HHS-OIG, requesting documents related to marketing, sales and enrollment practices for our Today's Health Medicare HMO Plans which are offered in the State of Wisconsin. We are
cooperating with HHS-OIG in connection with their investigation

Laws
and regulations governing Medicare and other state and federal healthcare and insurance programs are complex and subject to significant interpretation. As part of the recent
healthcare reform legislation, CMS has been exercising increased oversight and regulatory authority over our Medicare businesses. Compliance with such laws and regulations is subject to CMS audit,
other governmental review and investigation and significant interpretation. There can be no assurance that we will be found to be in compliance with all such laws and regulations in connection with
these audits, reviews and investigations. Failure to be in compliance can subject us to significant regulatory action including significant fines, penalties or operating restrictions on our business,
including, without limitation, suspension of our ability to market to and enroll new members in our Medicare plans and exclusion from Medicare and other state and federal healthcare programs. CMS is
currently conducting its annual compliance and operations audit with respect to our Medicare businesses and recently informed us that our Medicare Part D plans will not receive the
one-time auto-assignment of new dual-eligible members on January 1, 2011. This action does not impact dual-eligible members currently enrolled in our
Part D plans.

13. BUSINESS SEGMENT INFORMATION



Our
remaining segment, Corporate & Other, includes the activities of our holding company, along with the operations formerly reported in the Senior Administrative Services
segment.

We
closed the sale of CHCS during the second quarter of 2010 (see "Sale of CHCS" in Note 14 of Notes to Consolidated Financial Statements). The sale eliminated substantially all
of the business operations of our Senior Administrative Services segment. As a result, beginning with our June 30, 2010 quarterly report on Form 10-Q, we began to report
current and historical results of our former Senior Administrative Services and Corporate segments in one segment called Corporate & Other.

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

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

13. BUSINESS SEGMENT INFORMATION (Continued)

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 Corporate & Other segment for our other segments and interest on notes payable or receivable between the Corporate &
Other 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 U.S. generally
accepted accounting principles is as follows:

Three months ended September 30,2010

2009Revenues

Income(Loss)
Before
Income
Taxes

Revenues

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

$
800,558

$
36,884

$
660,809

$
45,686Medicare Part D


458,269


50,484


409,292


53,233Traditional Insurance


75,279


3,511


79,398


3,659Corporate & Other


695


(12,352
)

10,250


(10,073
)Intersegment revenues








(5,256
)

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


5,474


5,474


(4,783
)

(4,783
)Equity in earnings of unconsolidated subsidiary(2)








(5
)

Total

$
1,340,275

$
84,001

$
1,149,705

$
87,722




Nine months ended September 30,2010

2009Revenues

Income(Loss)
Before
Income
Taxes

Revenues

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

$
2,381,947

$
136,108

$
1,968,276

$
120,893Medicare Part D


1,684,840


4,051


1,531,698


30,965Traditional Insurance


232,936


1,669


266,043


(22,238
)Corporate & Other


10,582


(33,426
)

32,845


(34,421
)Intersegment revenues


(5,957
)




(21,722
)

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


5,296


5,296


(20,050
)

(20,050
)Equity in earnings of unconsolidated subsidiary(2)








(111
)

Total

$
4,309,644

$
113,698

$
3,756,979

$
75,149


(1)We
evaluate the results of operations of our segments based on income before realized gains and losses and income taxes. We believe that realized gains and
losses are not indicative of overall operating trends.


26

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

13. BUSINESS SEGMENT INFORMATION (Continued)

(2)We
reported the equity in the earnings of unconsolidated subsidiary as revenue for our Medicare Part D segment as the amount is incorporated in the
calculation of the risk corridor adjustment. For consolidated reporting, we included this amount as a separate line following income from operations.


14. OTHER DISCLOSURES

Income Taxes:Our effective tax rate was 27.7% for the third quarter of 2010, compared to 31.9% for the third quarter
of 2009. For the
nine months ended September 30, 2010, our effective tax rate was 26.9%, compared with 31.4% for the same period of 2009.

The
decrease in the effective rate for the three months ended September 30, 2010 compared with the same period in 2009 is attributable to $7.8 million of
non-recurring tax benefits recognized during 2010, compared with $5.0 million recognized in 2009. The 2010 benefits related primarily to impact of tax law changes on
our insurance companies. The 2009 benefits resulted from the settlement of the Internal Revenue Service examination of 2005 primarily related to the treatment of a controlled foreign
corporation.

The
decrease in the effective rate for the nine months ended September 30, 2010 compared with the same period in 2009 is attributable to $11.6 million of
non-recurring tax benefits recognized during 2010, compared with $5.0 million recognized in 2009. In addition to the third quarter benefits discussed above, the
year-to-date 2010 tax benefits also include benefits that were recognized upon the completion of examinations by the Internal Revenue Service and primarily are attributable to
pre-acquisition tax returns of MemberHealth, Inc.

Reinsurance:We evaluate the financial condition of our reinsurers and monitor concentrations of credit risk to minimize our
exposure to significant
losses from reinsurer insolvencies. We are obligated to pay claims in the event that a reinsurer to whom we have ceded an insured claim fails to meet its obligations under the reinsurance agreement.
As of September 30, 2010, all of our primary reinsurers were rated "A-" (Excellent) or better by A.M. Best. We do not know of any instances where any of our reinsurers have
been unable to pay any policy claims on any reinsured business.

Sale of CHCS:On April 26, 2010, we entered into an agreement to sell the outstanding common stock of CHCS, our
administrative services
company, to Patni Americas, Inc, a wholly-owned subsidiary of Patni Computer Systems Limited (NYSE: PTI), for $6.0 million in cash, subject to an adjustment for any net working capital
remaining at CHCS on the closing date. The transaction closed on June 9, 2010, with an effective date of April 1, 2010. The operations of CHCS are included in consolidated results up to
the effective date of the sale. The total consideration was approximately $7.5 million. Our carrying value of the assets disposed of in connection with the sale of CHCS was approximately
$7.2 million, including $4.4 million of goodwill. We recognized an immaterial loss on the disposition after consideration of transaction costs of approximately $0.3 million.

Life Insurance and Annuity Reinsurance Transaction:On April 24, 2009 we entered into an agreement with Commonwealth to
reinsure substantially
all of our in-force life insurance and annuity business as of April 1, 2009, under 100% coinsurance. In accordance with ASC 944,Financial Services-Insurance
Topic,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

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14. OTHER DISCLOSURES (Continued)

GAAP
basis 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, which was recognized during the second quarter of 2009.

Restructuring Charges:In 2009, we undertook 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. We engaged a
consultant and began a comprehensive review of our ongoing business with an emphasis on potential operating cost reductions. These efforts took on additional significance, in light of the reinsurance
of the Life and Annuity business and the planned reductions in funding of Medicare Advantage Plans announced during the first quarter of 2009. As a result of this review, in the second quarter of
2009, we committed to a plan to reduce costs, including the in-sourcing of billing and enrollment for our HMO business, workforce reduction and consolidation of facilities. This plan was
substantially completed at December 31, 2009.

We
incurred total restructuring charges of $4.9 million during the year ended December 31, 2009. Substantially all of these charges were included in restructuring costs in
our Consolidated Statements of Operations for the second quarter of 2009. A summary of our restructuring liability balance as of September 30, 2010 and 2009 is as follows:

Segment

January 1,
Balance

Charge to
Earnings

Cash Paid

Non-cash

September 30,
Balance(in thousands)2010Contract termination costs

Medicare Advantage

$


$


$


$


$
Workforce reduction

Traditional


147





(147
)




Facility consolidation

Traditional


697








(112
)

585Total



$
844

$


$
(147
)
$
(112
)
$
5852009Contract termination costs

Medicare Advantage

$


$
3,500

$
(3,500
)
$


$
Workforce reduction

Traditional





608


(360
)




248Facility consolidation

Traditional





619





(57
)

562Total



$


$
4,727

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


Reverse Repurchase Agreements:Beginning in the second quarter of 2010, we began to enter into
tri-party reverse repurchase agreements, as a means of enhancing investment yield. We carry these securities at fair value, with unrealized gains and losses reflected in accumulated other
comprehensive income. Interest received on the reverse repurchase agreements is recorded in interest income at the contractually specified rate.

28

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14. OTHER DISCLOSURES (Continued)

Our
policy is to require all such agreements to be adequately collateralized, with daily mark-to-market funding requirements to protect us against counterparty
credit exposure.

At
September 30, 2010, we had $50.0 million of reverse repurchase agreements outstanding, which are reflected in cash and cash equivalents on the Consolidated Balance
Sheets.

Credit Facility Amendment:On July 27, 2010, we amended our 2007 Credit Facility (the "July 2010 Amendment") to provide us
with the ability to
make an additional $100 million of restricted payments (which includes purchases of company stock and payment of dividends) up to a total of $300 million. As part of the July 2010
Amendment, among other things, we agreed to prepay term loan debt principal at a rate of 50% of all restricted payments above the $125 million restricted payment limit in the original credit
agreement. In addition, we agreed to an increase in the LIBOR based spread by up to 25 basis points depending on our consolidated leverage ratio, and based on our current consolidated leverage
ratio, by 12.5 basis points from LIBOR plus 100 basis points to LIBOR plus 112.5 basis points. In connection with the 2010 Amendment, we paid upfront fees totaling
$0.8 million, which will be amortized over the remaining term of the Credit Facility.

Special Dividend:On July 28, 2010, the Board of Directors of the Company approved the payment of a special cash dividend of
$2.00 per share
to each holder of the Company's outstanding common stock and Series A Preferred Stock. This special cash dividend was paid on August 19, 2010 to the stockholders of record as of the
close of business on August 5, 2010. On the payment date, as required under the terms of the 2007 Credit Facility, we made an additional principal payment on our term loan equal to 50% of the
dividend payment. The cumulative dividend payment was $156.0 million and the principal payment was $78.0 million. In addition, pursuant to the terms of our 1998 Incentive Compensation
Plan, we were required to reduce the exercise price on unexercised options by the amount of the dividend, $2.00. We also established a dividend payable liability to hold amounts expected to be paid in
the future to holders of our restricted stock and performance shares as such shares vest. This liability is approximately $3.5 million at September 30, 2010. As these future payments
are made, we will also make additional payments on our term loan at the rate of 50% of dividends paid.

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Table of Contents

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

Introduction

The following discussion and analysis presents a review of our financial condition as of September 30, 2010 and our results of
operations for the three and nine months ended September 30, 2010 and 2009. 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, 2009. 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, 2009 and subsequent quarterly reports on Form 10-Q, as supplemented by the risk factors set forth in
Part II, Item 1A "Risk Factors" below.

Significant Third Quarter 2010 Items



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Table of Contents

Membership

The following table presents our membership in Medicare Advantage and Part D segments as of September 30, 2010 and 2009.

As of
September 30,Membership by Segment

2010

2009(in thousands)Medicare AdvantagePFFS


198


177Network-based (HMO and PPO)


94


64Total Medicare Advantage


292


241Total Part D


1,906


1,698Total Membership


2,198


1,939


Healthcare Reform

In March 2010, President Obama signed the Patient Protection and Affordable Care Act and the Health Care and Education Affordability
Reconciliation Act legislating broad-based changes to the U.S. health care system. Provisions of the health reform legislation become effective at various dates over the next several years. The
Department of Health and Human Services, the National Association of Insurance Commissioners, the Department of Labor and the Treasury Department have yet to issue necessary enabling regulations and
guidance with respect to the health reform legislation. Due to the complexity of the health reform legislation, including yet to be promulgated implementing regulations, lack of interpretive guidance
and gradual implementation, the impact of the health reform legislation is difficult to predict and not yet fully known. However, we will need to dedicate significant resources and expenses to
complying with these new rules and there is a
possibility that this new legislation could have a material adverse effect on our business, financial position and results of operations.

The
provisions of these new laws include the following key points, which are discussed further below:



Most
of the provisions of the new healthcare reform legislation are not scheduled to go into effect immediately and may be delayed for several years. During this time, the new healthcare
reform legislation may be subject to further adjustments. Because of the unsettled nature of these reforms and numerous steps required to implement and monitor them, we cannot predict what additional
health

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Table of Contents

insurance
reforms will be implemented at the federal or state level, the effect that any future legislation or regulation will have on our business or how CMS will review our future bid submissions
and ultimately, the overall impact of the new healthcare reform legislation on our business.

For
additional information on the impact of healthcare reform on our business, see Part IIItem 1A Risk Factors in our quarterly report on
Form 10-Q for the period ended June 30, 2010.

Results of OperationsConsolidated Overview

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

Three months ended
September 30,

Nine months ended
September 30,2010

2009

2010

2009(in thousands)

(in thousands)Senior Managed CareMedicare Advantage

$
36,884

$
45,686

$
136,108

$
120,893Medicare Part D


50,484


53,233


4,051


30,965Traditional Insurance


3,511


3,659


1,669


(22,238
)Corporate & Other


(12,352
)

(10,073
)

(33,426
)

(34,421
)Net realized gains (losses) on investments


5,474


(4,783
)

5,296


(20,050
)Income before provision for income taxes


84,001


87,722


113,698


75,149Provision for income taxes


23,257


27,976


30,544


23,617Net income(1)

$
60,744

$
59,746

$
83,154

$
51,532Earnings per common share (diluted)

$
0.77

$
0.74

$
1.06

$
0.63


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




Net income for the three months ended September 30, 2010 was $60.7 million, or $0.77 per diluted share, compared to net
income of $59.7 million, or $0.74 per diluted share for the three months ended September 30, 2009. The net income for the third quarter of 2010 includes realized investment gains, net of
taxes, of $3.6 million, or $0.05 per diluted share, including a loss of $0.3 million, after tax, related to the recognition of other-than-temporary impairments on
investments. Net income for the third quarter of 2009 includes realized investment losses, net of taxes, of $3.1 million, or $0.04 per diluted share, of which $0.2 million, after tax,
relates to the recognition of other-than-temporary impairments on investments. Our effective tax rate was 27.7% for the third quarter of 2010, and 31.9% for the third quarter
of 2009. The decrease in the effective rate for the three months ended September 30, 2010 compared with the same period in 2009 is attributable to $7.8 million of
non-recurring tax benefits recognized during 2010, compared with $5.0 million recognized in 2009. The 2010 benefits related primarily to the impact of tax law changes on our
insurance companies. The 2009 benefits resulted from the settlement of the Internal Revenue Service examination of 2005 primarily related to the treatment of a controlled foreign corporation. . As is
customary in our business, during the third quarter of 2010 CMS settled with our Medicare Advantage and Part D plans certain amounts related to the 2009 plan year. See discussion below for
additional information.

Our
Senior Managed CareMedicare Advantage segment generated income before taxes of $36.9 million for the three months ended September 30, 2010, a decrease of
$8.8 million compared to

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the
three months ended September 30, 2009. The decrease in earnings was driven by a 281 basis point increase in the medical expense ratio due to $3.9 million in favorable development
from the prior periods in the quarter ended September 30, 2010, compared with $11.7 million of favorable development in the same period of 2009. This was partially offset by a 24%
increase in the member months for the three months ended September 30, 2010 compared to the three months ended September 30, 2009.

Our
Medicare Part D segment generated income before taxes of $50.5 million for the third quarter of 2010, compared to $53.2 million for the third quarter of 2009, a
decrease of $2.7 million. The impact of our 2010 bidding strategy described below (in the segment results discussion on Part D) and higher drug costs accounted for this decrease and were
partially offset by growth in membership and by positive prior period development of $9.7 million in the third quarter of 2010, compared to $5.9 million in the third quarter of 2009.

Income
before taxes for our Traditional Insurance segment decreased by $0.1 million compared to the three months ended September 30, 2009.

The
loss before taxes from our Corporate & Other segment increased $2.3 million, or 23%, for the third quarter of 2010 compared to the third quarter of 2009. This was due
primarily to the loss of Senior Administrative Services' profits of $1.6 million due to the sale of CHCS along with increased stock-based compensation expense and slight increases in
debt-related expenses (interest and loan fee amortization).



Net income for the nine months ended September 30, 2010 was $83.2 million, or $1.06 per diluted share, compared to net
income of $51.5 million, or $0.63 per diluted share for the nine months ended September 30, 2009. Net income for the nine months ended September 30, 2010 includes realized
investment gains, net of taxes, of $3.4 million, or $0.04 per diluted share, including a loss of $0.5 million, after tax, related to the recognition of
other-than-temporary impairments on investments. The net loss for the nine months ended September 30, 2009 includes realized investment losses, net of taxes, of
$13.0 million, or $0.16 per diluted share, relating primarily to the recognition of other-than-temporary impairments on investments. For the nine months ended
September 30, 2010, our effective tax rate was 26.9%, compared with 31.4% for the same period of 2009. The decrease in the effective rate for the nine months ended September 30, 2010
compared with the same period in 2009 is attributable to $11.6 million of non-recurring tax benefits recognized during 2010, compared with $5.0 million recognized in 2009. In
addition to the third quarter benefits discussed above, the year-to-date 2010 tax benefits also include benefits that were recognized upon the completion of examinations by the
Internal Revenue Service and primarily are attributable to pre-acquisition tax returns of MemberHealth, Inc.

Our
Senior Managed CareMedicare Advantage segment generated income before taxes of $136.1 million for the nine months ended September 30, 2010, an increase of
$15.2 million compared to the nine months ended September 30, 2009. The increase in earnings was driven principally by higher prior period development in 2010 compared to 2009 and by
more members in all products that resulted in a 24% increase in member months for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. These
improvements were partially offset by an increase in the medical expense ratio of 100 basis points from 2009. For the nine months ended September 30, 2010, there was $34.0 million of net
favorable prior year development compared to $22.9 million for the nine months ended September 30, 2009. 2009 also included a $3.5 million restructuring charge related to the
in-sourcing of billing and enrollment for our HMO business.

Our
Medicare Part D segment generated income before taxes of $4.1 million for the nine months ended September 30, 2010 compared to income before taxes of
$31.0 million, for the nine months ended September 30, 2009. Approximately $23.7 million of the $26.9 million decrease in segment

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income
was attributable to our 2010 bidding strategy described below (in the segment results discussion on Part D) and higher drug costs, partially offset by growth in membership. The remaining
$3.2 million of the decrease was attributable to $3.4 million of positive prior year development recorded during the nine months ended September 30, 2009, compared with
$0.2 million in the same period in 2010.

Results
for our Traditional Insurance segment for the nine months ended September 30, 2010 improved by $23.9 million compared to the nine months ended September 30,
2009. The transaction with Commonwealth in April 2009, 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 during the prior year period, as well as a $1.2 million restructuring charge, recorded as a result of re-alignment of operations with the lower level of net
retained business. Additionally the net amortization of deferred acquisition costs declined $4.4 million and commissions and general expenses, net of allowances, decreased $11.9 million
over the same period in the prior year primarily due to the Commonwealth transaction and a lower level of business in-force.

The
loss before taxes from our Corporate & Other segment improved by $1.0 million, or 3%, for the nine months ended September 30, 2010 compared to the same period of
2009. This was due primarily to a $6.3 million charge to income before taxes in 2009, related to the closing and restructuring of certain career sales offices, which was substantially offset by
the loss of Senior Administrative Services' profits of $4.1 million due to the sale of CHCS effective April 1, 2010 as well as $2.1 million lower profitability of CHCS prior to
its sale, due to anticipated reductions in service fee revenues, and a corresponding decrease in general expenses. In addition, during 2010 we recorded a $2.0 million benefit related to the
true-up of the forfeiture rate estimate on stock option expense.

Segment ResultsSenior Managed CareMedicare Advantage

Three months ended
September 30,

Nine months ended
September 30,2010

2009

2010

2009(in thousands)

(in thousands)Net premiums

$
793,966

$
654,246

$
2,361,606

$
1,949,117Net investment and other income


6,592


6,563


20,341


19,159Total revenue


800,558


660,809


2,381,947


1,968,276Medical expenses


672,606


535,834


1,967,976


1,604,721Amortization of intangible assets


1,016


1,146


3,256


3,438Restructuring costs











3,500Commissions and general expenses


90,052


78,143


274,607


235,724Total benefits, claims and expenses


763,674


615,123


2,245,839


1,847,383Segment income before taxes

$
36,884

$
45,686

$
136,108

$
120,893


Our
Senior Managed CareMedicare Advantage segment includes the operations of our Medicare coordinated care Plans including PPOs and HMOs as well as our PFFS business, which
offers coverage to Medicare beneficiaries in 45 states. Our HMOs offer coverage to Medicare beneficiaries primarily in Southeastern Texas and the area surrounding Dallas/Ft. Worth, 15 counties in
Oklahoma and 4 counties in Wisconsin. In January 2010, we expanded our PPO products to 114 counties in 17 states. As a result of the passage of the Medicare Improvements for Patients and Providers Act
of 2008, known as MIPPA, the PFFS product will no longer be available as of January 1, 2011, except in areas that have met approved CMS network access requirements or in certain designated
rural areas. We have developed products meeting CMS network access requirements in selected core markets to enable the retention of our PFFS membership in these areas. These businesses provide managed
care for persons with Medicare under contracts with CMS. We expect to lose approximately 60,000 PFFS members as of January 1, 2011, due to MIPPA.

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Our Senior Managed CareMedicare Advantage segment generated income before taxes of $36.9 million for the three
months ended September 30, 2010, a decrease of $8.8 million compared to the three months ended September 30, 2009. The decrease in earnings was driven by a 281 basis point
increase in the medical expense ratio due to $3.9 million in favorable development from the prior periods in the quarter ended September 30, 2010, compared with $11.7 million of
favorable development in the same period of 2009. This was partially offset by a 24% increase in the member months for the three months ended September 30, 2010 compared to the three months
ended September 30, 2009.

Revenue.Net premiums for the Senior Managed CareMedicare Advantage segment increased by $139.7 million compared to the
three
months ended September 30, 2009, primarily due to an increase in the amount of premium resulting from growth in membership in all products. During the third quarters of 2010 and 2009, CMS
performed its annual final risk adjusted premium reconciliation for the prior year plan year that resulted in an additional $10.4 million in risk adjusted premium received in 2010 for the 2009
plan year and $13.5 million in revenue received in 2009 for the 2008 plan
year. In addition during the third quarter of 2010, we received $7.0 million in revenue from CMS for 2009 member reconciliations, compared with a negative adjustment of $3.2 million in
2009.

Medical expenses.Medical expenses increased by $136.8 million compared to the third quarter of 2009, as a result of the higher
level of net
premiums and an increase in member months over 2009. The medical expense ratio increased to 84.7% for the third quarter of 2010 from 81.9% for the same period in 2009. During the third quarter of
2010, there were $14.7 million net unfavorable items related to prior periods compared to $0.5 million of favorable development in the third quarter of 2009. The 2010 unfavorable
development included $7.4 million related to prior years and $7.3 million unfavorable development related to the prior quarters of 2010. Adjusting for the prior period items, the benefit
ratio for the third quarter of 2010 was 84.8%.

Commissions and general expenses.Commissions and general expenses for the three months ended September 30, 2010 increased
$11.9 million compared to the three months ended September 30, 2009, primarily as the result of the increased level of membership. The ratio of commissions and general expenses to net
premiums decreased to 11.3% in the third quarter of 2010 compared to 11.9% in third quarter of 2009.



Our Senior Managed CareMedicare Advantage segment generated income before taxes of $136.1 million for the nine
months ended September 30, 2010, an increase of $15.2 million compared to the nine months ended September 30, 2009. The increase in earnings was driven principally by higher prior
period development in 2010 compared to 2009 and by more members in all products that resulted in a 24% increase in member months for the nine months ended September 30, 2010 compared to the
nine months ended September 30, 2009. These improvements were partially offset by an increase in the medical expense ratio of 100 basis points from 2009. For the nine months ended
September 30, 2010, there was $34.0 million of net favorable prior year development compared to $22.9 million for the nine months ended September 30, 2009. 2009 also
included a $3.5 million restructuring charge related to the in-sourcing of billing and enrollment for our HMO business.

Revenue.Net premiums for the Senior Managed CareMedicare Advantage segment increased by $412.5 million compared to the nine
months ended September 30, 2009, primarily due to the higher member months in all plans. During the third quarters of 2010 and 2009, CMS performed its annual final risk adjusted premium
reconciliation for the prior year plan year that resulted in an additional $10.4 million in risk adjusted premium received in 2010 for the 2009 plan year and $13.5 million in

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revenue
received in 2009 for the 2008 plan year. During the first quarter, our ongoing chart review process resulted in a $13.4 million favorable premium adjustment in the first quarter 2010
related to 2009 risk scores compared to an $8.0 million favorable adjustment of 2008 risk scores recorded during the first quarter 2009. In addition during 2010, we received
$11.1 million in revenue from CMS for 2009 member reconciliations.

Medical Expenses.Medical expenses increased by $363.3 million compared to the nine months ended September 30, 2009,
consistent with
the higher level of net premium. The medical expense ratio increased to 83.3% for the nine months ended September 30, 2010 from 82.3% for the same period in 2009. For the nine months ended
September 30, 2010, there was $4.4 million in unfavorable benefit adjustments primarily related to claims incurred on members reconciled with CMS offsetting some of the revenue noted
above. Adjusting for the prior year items discussed above, the benefit ratio for the first nine months of 2010 was 84.5%.

Commissions and general expenses.Commissions and general expenses for the nine months ended September 30, 2010 increased by
$38.9 million compared to the nine months ended September 30, 2009 primarily related to the growth in member months and higher expenses to support the continued investment in the
development of provider networks for our expansion in PPO and network based PFFS markets. However, the ratio of commissions and general expenses to premiums decreased to 11.6% for the nine months
ended September 30, 2010 from 12.1% in 2009.

2009
also included a $3.5 million restructuring charge related to the in-sourcing of billing and enrollment for our HMO business.

Segment ResultsMedicare Part D

Three months ended
September 30,

Nine months ended
September 30,2010

2009

2010

2009(in thousands)

(in thousands)Net premium, excluding risk corridor

$
563,778

$
511,942

$
1,658,224

$
1,520,504Risk corridor adjustment/government reinsurance


(106,208
)

(103,508
)

24,242


8,175Net premiums


457,570


408,434


1,682,466


1,528,679Other Part D incomePDMS





5





111Total Part D revenue


457,570


408,439


1,682,466


1,528,790Net investment and other income


699


853


2,374


2,908Total revenue


458,269


409,292


1,684,840


1,531,698Pharmacy benefits


358,561


308,039


1,536,360


1,347,031Amortization of intangibles


4,012


4,012


12,035


12,035Commissions and general expenses


45,212


44,008


132,394


141,667Total benefits, claims and expenses


407,785


356,059


1,680,789


1,500,733Segment income before taxes

$
50,484

$
53,233

$
4,051

$
30,965


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

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the
year, with a break-even point during the third quarter and most of the segment's net income earned during the fourth quarter resulting in a pattern of increasing reported net income.

As
a result of changes made by the federal government to the standard benefit design in 2010 and due to the more conservative way in which we bid our business for the 2010 plan year,
which resulted in a lower target margin, we expect to experience a greater degree of seasonality in our Medicare Part D segment throughout 2010 as compared to 2009, with higher losses expected
in the first half of the year and higher profitability expected for the second half of the year, namely in the fourth quarter. For a discussion of the accounting for our Medicare Part D
segmentsee Note 3 of the Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2009.



Our Medicare Part D segment generated income before taxes of $50.5 million for the third quarter of 2010, compared to
$53.2 million for the third quarter of 2009, a decrease of $2.7 million. The impact of our 2010 bidding strategy described above and higher drug costs accounted for this decrease and
were partially offset by growth in membership and by positive prior period development of $9.7 million in the third quarter of 2010, compared to $5.9 million in positive prior period
development with respect to the third quarter of 2009.

Net Premiums.Net premiums, excluding risk corridor for the third quarter of 2010, increased by $51.8 million, or 10.1%, versus the
third
quarter of 2009. The increase in net premiums, excluding risk corridor was primarily attributable to growth in membership by 208,000 members, and was partially offset by decreases in member premium
rates and risk-adjusted direct subsidy rates paid by CMS. The decrease in member premium rates was attributable to the bids submitted for the 2010 Plan year that contained lower rates,
which contributed to the growth in membership. In addition, a larger portion of our 2010 membership enrolled in standard plans which have lower member premium rates than enhanced plans.
Risk-adjusted direct subsidy rates decreased as a result of an
improvement in our members' health status in 2010, as determined by CMS. Risk-adjusted rates are determined by CMS based upon the member's health status and are described in further detail
in Note 3 of the Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2009. In addition, net premiums,
excluding risk corridor for the third quarters of 2010 and 2009, included risk adjustment revenue totaling $13.9 million and $12.3 million for our 2009 and 2008 membership, respectively.

The
risk corridor adjustment calculation compares the target amount of prescription drug costs (limited to costs under the standard coverage as defined by CMS) less rebates in our annual
Plan bid to actual experience. The $2.7 million decrease in risk corridor adjustment for the third quarter of 2010 versus the comparable period in 2009 was expected, primarily due to the way we
bid our business for the 2010 plan year. See further discussion of the risk corridor adjustment under "Critical Accounting Policies" in our annual report on Form 10-K for the year
ended December 31, 2009.

Pharmacy Benefits.Pharmacy benefits for the third quarter of 2010, increased by $50.5 million, or 16.4%, compared to the third
quarter of
2009, and the ratio of pharmacy benefits to net premium after risk corridor adjustment was 78.4% and 75.4% for the third quarters of 2010 and 2009, respectively. Pharmacy benefits increased as a
percentage of net premiums due to the combination of lower member premium and direct subsidy rates (previously described) and higher drug costs. Higher drug costs were attributable to price increases
imposed by pharmaceutical manufacturers which are customary and were consistent with historical experience. These increases were partially offset by $8.0 million in negative adjustments related
to prior periods recorded in the third quarter of 2009.

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Commissions and general expenses.Commissions and general expenses for the third quarter of 2010 totaled $45.2 million, or 8.0% of
net
premium, excluding risk corridor compared to $44.0 million, or 8.6%, in the comparable period in 2009. The improvement in the ratio of commissions and general expenses to net premium, excluding
risk corridor was attributable to continued operating efficiencies and increased scale.



Our Medicare Part D segment generated income before taxes of $4.1 million for the nine months ended September 30,
2010 compared to income before taxes of $31.0 million, for the nine months ended September 30, 2009. Approximately 23.7 million of the $26.9 million decrease in segment
income was attributable to our 2010 bidding strategy described above and higher drug costs, partially offset by growth in membership. The remaining $3.2 million of the decrease was attributable
to $3.4 million of positive prior year development recorded during the nine months ended September 30, 2009, compared with $0.2 million in the same period in 2010.

Net Premiums.Net premiums, excluding risk corridor for the nine months ended September 30, 2010, increased by $137.7 million,
or 9.1%,
versus the nine months ended September 30, 2009. The increase in net premiums, excluding risk corridor was primarily attributable to growth in membership by 208,000 members, and was partially
offset by decreases in member premium rates and risk-adjusted direct subsidy rates paid by CMS. The decrease in member premium rates was attributable to the bids submitted for the 2010
Plan year that contained lower rates in 2010, which contributed to the growth in membership. In addition, a larger portion of our 2010 membership enrolled in standard plans which have lower member
premium rates than enhanced plans. Risk-adjusted direct subsidy rates decreased as a result of an improvement in our members' health status in 2010, as determined by CMS.
Risk-adjusted rates are determined by CMS based upon the member's health status and are described in further detail in Note 3 of the Notes to Consolidated Financial Statements in
our annual report on Form 10-K for the year ended December 31, 2009. In addition, net premiums, excluding risk corridor for the nine months ended September 30, 2010
and 2009 included risk adjustment revenue totaling $13.9 million and $12.3 million for our 2009 and 2008 membership, respectively.

The
risk corridor adjustment calculation compares the target amount of prescription drug costs (limited to costs under the standard coverage as defined by CMS) less rebates in our annual
Plan bid to actual experience. The $16.1 million increase in risk corridor adjustment for the nine months ended September 30, 2010 versus the comparable period in 2009 was expected,
primarily due to the way we bid our business for the 2010 plan year. See further discussion of the risk corridor adjustment under "Critical Accounting Policies" in our annual report on
Form 10-K for the year ended December 31, 2009.

Pharmacy Benefits.Pharmacy benefits for the nine months ended September 30, 2010, increased by $189.3 million, or 14.1%,
compared to
the nine months ended September 30, 2009, and the ratio of pharmacy benefits to net premium, after risk corridor adjustment, was 91.3% and 88.1% for the nine months ended September 30,
2010 and 2009, respectively. Pharmacy benefits increased as a percentage of net premiums due to the combination of lower member premium and direct subsidy rates (previously described), and higher drug
costs. Higher drug costs were attributable to price increases imposed by
pharmaceutical manufacturers which are customary and were consistent with historical experience. In addition, the nine months ended September 30, 2010 included $9.4 million of net
negative development related principally to prior period pharmacy benefits (incurred primarily during the second quarter of 2010), compared to $10.5 million of net negative development during
the nine months ended September 30, 2009. These increases were partially offset by a lower utilization of drugs by our members, which is consistent with the aforementioned improvement in our
members' health status.

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Commissions and general expenses.Commissions and general expenses for the nine months ended September 30, 2010 decreased by
$9.3 million, or 6.5%, versus the comparable period in 2009. This decrease was attributable to our continuing efforts to reduce general expenses, as well as the restructuring of the
Part D call center and other member services which were completed during 2009. The ratio of commissions and general expenses to net premium, excluding risk corridor improved to 8.0% for the
nine months ended September 30, 2010 from 9.3% in the comparable period of 2009. This improvement was attributable to continued operating efficiencies and increased scale.

Segment ResultsTraditional Insurance

Three months ended
September 30,

Nine months ended
September 30,2010

2009

2010

2009(in thousands)

(in thousands)Net premiums

$
71,149

$
75,541

$
220,669

$
245,711Net investment income


3,676


4,077


10,953


19,030Other income


454


(220
)

1,314


1,302Total revenue


75,279


79,398


232,936


266,043Policyholder benefits


51,193


57,649


167,223


198,972Change in deferred acquisition costs


412


(603
)

3,527


7,980Amortization of intangible assets


704


543


2,003


2,023Loss on reinsuance and other related costs











7,624Restructuring costs











1,227Commissions and general expenses, net of allowances


19,459


18,150


58,514


70,455Total benefits, claims and expenses


71,768


75,739


231,267


288,281Segment income (loss) before taxes

$
3,511

$
3,659

$
1,669

$
(22,238
)




Income before taxes for our Traditional Insurance segment decreased by $0.1 million compared to the three months ended
September 30, 2009.

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

Premium

Three months ended September 30,2010

2009Gross

Ceded

Net

Gross

Ceded

Net(in thousands)Senior market

$
70,417

$
(16,972
)
$
53,445

$
78,650

$
(20,029
)
$
58,621Specialty health


16,404


(2,530
)

13,874


17,670


(2,736
)

14,934Life insurance and annuity


17,979


(14,149
)

3,830


19,114


(17,128
)

1,986Total premium

$
104,800

$
(33,651
)
$
71,149

$
115,434

$
(39,893
)
$
75,541


Revenue.Net premium declined by $4.4 million or 5.8% from the third quarter of 2009. This is primarily the result of the
continued effect of
lapsation on our Medicare supplement and specialty health in-force business, offset partially by the increase in our retained senior life block of business

Policyholder benefits.Policyholder benefits declined by $6.5 million, or 11.2%, compared to the third quarter of 2009. This
decline was
principally due to the overall decline of insurance in-force in

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the
senior market and specialty health lines of business, as well as a decrease in the policyholder benefit ratios in the third quarter of 2010 from the same period last year. For the three months
ended September 30, 2010, the policyholder benefit ratio for senior market was 70.2%, compared with 71.7% for the same period last year, and 85.3% for specialty health, compared with 97.1% for
the same period last year. The improvements are primarily the result of more aggressive rate management in the senior market lines combined with a higher frequency of large dollar closed claims in the
specialty health lines of business. Additionally, the net amortization of deferred acquisition costs increased $1.0 million, driven by the continued lapsation of the blocks of business
discussed above.

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

Three months ended
September 30,2010

2009(in thousands)Commissions

$
11,761

$
12,833Other operating costs


12,467


14,215Reinsurance allowances


(4,769
)

(8,898
)Commissions and general expenses, net of allowances

$
19,459

$
18,150


Total
commissions and general expenses, net of allowances, increased by $1.3 million compared to the third quarter of 2009. Commission expense decreased $1.1 million
compared to the same period in the prior year, due to the continued aging of our in-force renewal premium which pays lower commissions as the duration of the policies increase and decline
in the amount of business in force. Other operating costs decreased $1.7 million for the quarter ended September 30, 2010, compared to the third quarter of 2009. This is primarily due to
savings associated with the outsourcing of certain administrative services previously provided by our CHCS subsidiary that was sold during the second quarter of 2010, as well as cost reductions
implemented to align with the lower levels of business in-force. Allowances received from reinsurers decreased $4.1 million for the third quarter of 2010 from the third quarter of
2009. This is primarily due to the fact that, as of the fourth quarter of 2009, Commonwealth began performing the administration for the majority of the life insurance and annuity business. We
therefore no longer receive the related expense allowances from third party reinsurers and allowances paid by Commonwealth to reimburse costs incurred from the effective date of the transaction until
the administration of the blocks was transferred to them.



Results for our Traditional Insurance segment for the nine months ended September 30, 2010 improved by $23.9 million
compared to the nine months ended September 30, 2009. The transaction with Commonwealth in April 2009, 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 during the prior year period, as well as a $1.2 million restructuring charge, recorded as a result of re-alignment
of operations with the lower level of net retained business. Additionally the net amortization of deferred acquisition costs declined $4.4 million and commissions and general expenses, net of
allowances, decreased $11.9 million over the same period in the prior year primarily due to the Commonwealth transaction and a lower level of business in-force.

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

Premium

Nine months ended September 30,2010

2009Gross

Ceded

Net

Gross

Ceded

Net(in thousands)Senior market

$
222,577

$
(54,359
)
$
168,218

$
246,524

$
(63,782
)
$
182,742Specialty health


50,256


(7,732
)

42,524


54,897


(8,429
)

46,468Life insurance and annuity


53,187


(43,260
)

9,927


57,529


(41,028
)

16,501Total premium

$
326,020

$
(105,351
)
$
220,669

$
358,950

$
(113,239
)
$
245,711


Revenue.Net premium declined by $25.0 million, or 10.2%. The continued effect of lapsation on our senior market health and
specialty health
in-force business resulted in a decrease of $18.5 million. Additionally, as a result of the reinsurance transaction with Commonwealth, net life insurance and annuity premium
decreased $6.6 million over the nine months ended September 30, 2009.

Policyholder Benefits.Policyholder benefits incurred declined by $31.7 million, or 16.0%, compared to the nine months ended
September 30, 2009. This decline was principally due to the overall decline of insurance in-force in the senior market and specialty health lines of business, as well as a decrease
in the policyholder benefit ratios for the nine months ended September 30, 2010 from the same period last year. The policyholder benefit ratio for senior market health was 73.2%, compared with
75.0% for the same period last year, and 91.0% for specialty health, compared with 98.4% for the same period last year. Additionally, the reinsurance transaction with Commonwealth in April 2009
resulted in a decrease in life insurance and annuity policyholder benefits retained during the nine months ended September 30, 2010 compared to the same period last year. The net amortization
of deferred acquisition costs decreased $4.4 million or 55.8%. This was primarily caused by the elimination of the deferred acquisition costs and the related amortization on the life insurance
and annuity business reinsured to Commonwealth.

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

Nine months ended
September 30,2010

2009(in thousands)Commissions

$
35,083

$
41,605Other operating costs


38,725


52,555Reinsurance allowances


(15,294
)

(23,705
)Commissions and general expenses, net of allowances

$
58,514

$
70,455


Commissions
and general expenses, net of allowances, decreased by $11.9 million compared to the nine months ended September 30, 2009. The lower level of commissions is
associated with the continued aging of our in-force renewal premium which pays lower commissions as the duration of the policies increase and decline in the amount of business in force.
Other operating costs decreased $13.8 million for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009. This is primarily due to cost
reductions implemented to align with the lower levels of business in-force as well as savings associated with the outsourcing of certain administrative services previously provided by our
CHCS subsidiary that was sold during the second quarter of 2010. Allowances received from reinsurers decreased $8.4 million for the nine months ending September 2010

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from
the same period in the prior year. This is primarily due to the fact that, as of the fourth quarter of 2009, Commonwealth began performing the administration for the majority of the life
insurance and annuity business. We therefore no longer receive the related expense allowances from third party reinsurers and allowances paid by Commonwealth to reimburse costs incurred from the
effective date of the transaction until the administration of the blocks was transferred to them.

Segment ResultsCorporate & Other

The following table presents the primary components comprising the loss before taxes for the segment:

Three months ended
September 30,

Nine months ended
September 30,2010

2009

2010

2009(in thousands)

(in thousands)Interest expense

$
5,011

$
4,877

$
15,100

$
14,942Amortization of capitalized loan origination fees


473


315


1,302


944Stock-based compensation expense


3,532


2,690


8,828


8,857Other parent company expense, net of revenue


3,147


3,601


9,086


16,799Net loss (income)Senior Administrative Services


189


(1,410
)

(890
)

(7,121
)Segment loss before taxes

$
12,352

$
10,073

$
33,426

$
34,421


The
sale of CHCS during the second quarter of 2010 (for further discussion, see"Sale of CHCS" in Note14 of Notes to Consolidated
Financial Statements), eliminated substantially all of the business operations of our former Senior Administrative Services segment. As a result, beginning with the June 30, 2010 quarterly
report on Form 10-Q, we began to report current and historical results of the former Senior Administrative Services and Corporate segments in one segment called Corporate &
Other.



The loss before taxes from our Corporate & Other segment increased by $2.3 million, or 23%, for the third quarter of 2010
compared to the third quarter of 2009. This was due primarily to the loss of Senior Administrative Services' profits of $1.6 million due to the sale of CHCS along with increased stock-based
compensation expense and slight increases in debt-related expenses (interest and loan fee amortization).

The
increase in interest expense of $0.1 million is due primarily to a weighted average increase in the interest rates charged on the debt, which was driven by the July 2010 and
November 2009 credit facility amendments, partially offset by the lower average principal balance outstanding, as compared to the third quarter of 2010. See "Liquidity and Capital Resources" for
additional information regarding our loan payable and other long term debt.

Amortization
of capitalized loan origination fees was $0.2 million higher in the third quarter of 2010, compared with the same period in 2009 due to additional amortization
related to the costs associated with the amendment of our credit facility in July 2010 and November 2009.

The
$0.8 million increase in stock-based compensation expense resulted primarily from additional awards issued in 2010.

Other
parent company expenses, net of revenues, improved slightly by $0.5 million due primarily to lower outside service costs in 2010 compared with the same period in 2009.

The
net loss (income) on Senior Administrative Services declined by $1.6 million as the result of the sale of CHCS, which was effective April 1, 2010.

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The loss before taxes from our Corporate & Other segment improved by $1.0 million, or 3%, for the nine months ended
September 30, 2010 compared to the same period of 2009. This was due primarily to a $6.3 million charge to income before taxes in 2009, related to the closing and restructuring of
certain career sales offices, which was substantially offset by a $4.1 million decline in Senior Administrative Services profitability due to the sale of CHCS effective April 1, 2010 as
well as $2.1 million lower profitability of CHCS prior to its sale, due to anticipated reductions in service fee revenues, and a corresponding decrease in general expenses. In addition, during
2010 we recorded a $2.0 million benefit related to the true-up of the forfeiture rate estimate on stock option expense.

Amortization
of capitalized loan origination fees was $0.4 million higher in 2010, compared with the same period in 2009 due to additional amortization related to the costs
associated with the amendment of our credit facility in July 2010 and November 2009.

Stock-based
compensation expense was virtually flat in the nine months ended September 30, 2010, compared with the same period in 2009. This was due to a $2.0 million
true-up of our forfeiture rate estimate related to options that terminate non-vested, which was completed in the second quarter of 2010 and was generally offset by an increase
in stock compensation expense related to new awards made in the first quarters of 2009 and 2010.

Other
parent company expenses, net of revenue, decreased $7.7 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-wide cost reduction effort, we recorded a $6.3 million charge to income before taxes. The remaining variance was
primarily due to lower outside service costs in 2010 compared with the same period in 2009.

The
net loss (income) on Senior Administrative Services declined by $6.2 million, $4.1 million was the result of the sale of CHCS which was effective April 1, 2010.
The remaining $2.1 million variance was due to lower profitability of CHCS prior to its sale, due to anticipated reductions in service fee revenues, along with a corresponding decrease in
general expenses.

Prior
to the sale, CHCS' revenue declined by $2.9 million, or 24%, during the first quarter of 2010 compared to the first quarter of 2009. Affiliated service fee revenue decreased
by $2.7 million primarily as a result of a reduction in fee levels and lower policies in-force for our affiliated Medicare supplement business as well as a reduction in service
levels on our affiliated life insurance business as a result of the reinsurance of substantially all of this business to Commonwealth in April 2009. Unaffiliated service fee revenue remained
relatively flat in the first quarter of 2010 compared to the same period of 2009. General expenses for the segment decreased by $0.8 million, or 10%, primarily due to the decline in the
business discussed above.

Liquidity and Capital Resources

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

We require cash at our parent company to support the growth of our insurance and HMO subsidiaries, 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 primarily from the following:



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Insurance and HMO subsidiariesSurplus Note, Dividends and Capital Contributions.We require cash at our insurance and HMO
subsidiaries
to meet our policy-related obligations and to pay operating expenses, including the cost of administration of the policies, and to maintain adequate capital levels. Excess capital can be used by the
insurance and HMO subsidiaries to make dividend payments to their respective holding companies, subject to certain restrictions, and from there to our parent company.

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

At
September 30, 2010, we held cash and cash equivalents totaling $467 million and fixed maturity securities that could readily be converted to cash with carrying values of
$1,320 million at our insurance companies and HMO subsidiaries. We believe that this level of liquidity is sufficient to meet our obligations and pay expenses.

In
2007, our wholly-owned subsidiary, The Pyramid Life Insurance Company issued $60.0 million of surplus notes payable to our parent company, which bear 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. At December 31, 2009, Pyramid's risk-based capital ratio was below 450%, and therefore no payments of principal or interest has been made or accrued to
date.

Capital
contributions to and dividends from our Insurance subsidiaries are made through our unregulated holding company, UAC Holding, Inc. ("UACH"). UACH did not make capital
contributions to the insurance subsidiaries during the first nine months of 2010. In May 2010, two of our wholly-owned subsidiaries, Pennsylvania Life Insurance Company and American Progressive
Life & Health Insurance Company of New York, declared and paid to UACH a dividend of $119 million and $12 million, respectively. We used these dividends and other cash to pay a
special cash dividend to our shareholders, and pay down debt in August 2010. (see "Special Dividend" in Note 14Other Disclosures in the Notes to Consolidated Financial Statements),

Capital
contributions to and dividends from our HMO subsidiaries are made through our managed care holding company, Heritage Health Systems, Inc.("HHSI"). During the first nine
months of 2010, HHSI made a capital contribution of $25,000 to SelectCare of Oklahoma, Inc. in May 2010 and a capital contribution of $2.4 million to SelectCare HealthPlans, Inc.
in August 2010. No dividends were declared by or paid to HHSI from its subsidiaries during the first nine months of 2010.

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

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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 (the "2007 Credit Facility"). This Credit Facility has customary covenants and requirements including a leverage ratio test, minimum
risk based capital requirements for our insurance companies and, under certain conditions, the ability to pose limitations on certain investments, dispositions and our ability to make restricted
payments. We are in compliance with all covenants in the Credit Agreement.

In
November 2009, we amended the 2007 Credit Facility (the "November 2009 Amendment") which provided us with the ability to make $75 million of restricted payments, in addition to
the $125 million provided for in the original agreement for a total of $200 million, in exchange for prepayments of Term Loan principal and increases in borrowing spreads and fees. In
July 2010, we further amended the 2007 Credit Facility (the "July 2010 Amendment") which provided us with the ability to make an additional $100 million of restricted payments, for a total of
$300 million, in exchange for prepayments of Term Loan principal and increases in borrowing spreads. In August 2010, we announced and paid a special cash dividend totaling $156 million
and, per the terms of the July 2010 Amendment, made prepayments of term loan principal of $78 million. As of September 30, 2010, $233.5 million was outstanding under the term loan
agreement and the weighted average interest rate on the term loan portion of the credit facility was 1.63%. All $233.5 million of the term loan outstanding has been swapped from a LIBOR-based
floating rate to an average fixed rate of 4.14% (see Note 11Derivative InstrumentsCash Flow Hedgesand the ensuing paragraph),
resulting in a total blended interest rate of 5.26% as of September 30, 2010. We pay a commitment fee on the unutilized revolving loan facility at an annualized rate of 25 basis points. We had
not drawn on the revolving loan facility as of the date of this report. We made regularly scheduled principal payments totaling $2.2 million, and interest payments totaling $3.0 million
during the nine months ended September 30, 2010.

On
December 4, 2007, we entered into two separate interest rate swap agreements on a total notional amount of $250 million, where we pay an average locked-in
fixed rate of 4.14% and receive a floating rate based on LIBOR. In the first nine months of 2010, we paid a net amount of $7.6 million in association with these swap agreements. Due primarily
to the $78 million debt prepayment made in the third quarter of 2010 discussed above, the outstanding principal balance on the hedged Credit Facility was reduced to $233.5 million at
September 30, 2010; $16.5 million lower than the $250 million notional amounts on the swaps. As a result, this portion of the swaps was deemed ineffective and the notional amount
on one of the swaps was decreased by $16.5 million to $108.5 million, which resulted in a realized loss of $1.2 million. In addition, we evaluated the likelihood of additional
debt paydowns prior to the scheduled maturity of the Credit Facility and the related interest rate swaps in September 2012, and identified an additional $5.2 million of the swaps that would be
considered ineffective as hedges. As a result, we realized an additional loss of $0.4 million on this ineffective portion of the swap, resulting in total realized losses on the cash flow hedge
of $1.6 million in the third quarter of 2010. No other terms of the swaps were changed.

In
2003 and 2007, 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 4.47%. The remaining $50 million is fixed at 7.68% until
March 2012. We made interest payments on the trust preferred securities totaling $4.9 million during the nine months ended September 30, 2010.

Investments

We invest primarily in fixed maturity securities of the U.S. Government and its agencies, mortgage-backed securities and in corporate
fixed maturity securities with investment grade ratings of BBB- or higher by S&P or Baa3 or higher by Moody's Investor Service. As of September 30, 2010,

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approximately
99% of our fixed maturity investments had investment grade ratings from S&P or Moody's.

We
have recently begun investing a portion of our cash in medium duration securities and in non-Government short term investments. As a result, as of September 30,
2010, approximately 32% of our portfolio is in cash equivalents, of which approximately 60% is invested in U.S. government short term securities, as compared with 47% in cash equivalents at
December 31, 2009. In the aggregate, approximately 43% of our cash and invested assets are in securities backed by the U.S. government or its agencies, as compared with 82% at
December 31, 2009.

The
net yields on our cash and invested assets decreased to 2.3% for the nine months ended September 30, 2010, from 4.1% for the nine months ended September 30, 2009. The
overall drop in yield is primarily due to a drop in the yield on our fixed maturity portfolio after our de-risking efforts that commenced in the second quarter of 2009 and ongoing
prepayments on our higher yielding RMBS portfolio due to the low interest rate environment, coupled with a continued drop in yield on our short-term portfolio.

For
additional information on Liquidity and Capital Resources, please refer to our annual report on form 10-K for the year ended December 31, 2009.

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 Consolidated Financial Statements included in our annual report on Form 10-K for
the year ended December 31, 2009.



The following table presents the components of the change in our liability for policy and contract claimshealth for the
nine months ended September 30, 2010:

September 30,
2010(in thousands)Balance at beginning of year

$
380,519Less reinsurance recoverable


(17,923
)Net balance at beginning of year


362,596Incurred related to:Current year


3,662,780Prior year development


8,271Total incurred


3,671,051Paid related to:Current year


3,291,250Prior year


329,073Total paid


3,620,323Net balance at end of period


413,324Plus reinsurance recoverable


21,929Balance at end of period

$
435,253


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Policy and contract claimshealth increased by $54.7 million at September 30, 2010 from December 31, 2009. This increase was
primarily attributable to the combination of the lengthening of the average period between the date of service and date of payment for claims incurred under our Medicare Advantage contracts and growth
in our Medicare Advantage membership offset, in part by a decrease in our Part D claims payable related to the seasonality of the Medicare Part D business. Due to the nature of the plan
design, the Medicare Part D business generally incurs lower claims experience in the last two quarters of the year when proportionately more beneficiaries are in the coverage gap and
catastrophic phases of the benefit design.

The
medical cost amount, noted as "prior year development" in the table above, represents unfavorable adjustments as a result of prior year claim estimates being settled for amounts that
are different than originally anticipated. This prior year development occurs due to differences between the actual medical utilization and other components of medical cost trends, and actual claim
processing and payment patterns compared to the assumptions for claims trend and completion factors used to estimate our claim liabilities.

During
the nine months ended September 30, 2010, claim reserves settled for $8.3 million more than estimated at December 31, 2009. Prior period development
represents 0.2% of the incurred claims recorded in 2009.

Sensitivity Analysis

The following table illustrates the sensitivity of our accident and health IBNR payable at September 30, 2010 to identified
reasonably possible changes to the estimated weighted average completion factors and health care cost trend rates. However, it is possible that the actual completion factors and health care cost trend
rates will develop differently from our historical patterns and therefore could be outside of the ranges illustrated below.

Completion Factor(1):

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

Increase
(Decrease) in
Net Health
IBNR

(Decrease)
Increase
in Factor

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

$
1,159


-3%

$
(16,150
)-2%

$
773


-2%

$
(10,766
)-1%

$
386


-1%

$
(5,383
)1%

$
(386
)

1%

$
5,3832%

$
(772
)

2%

$
10,7663%

$
(1,158
)

3%

$
16,150


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


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. 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 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. In periods of declining interest rates, individuals may refinance higher rate mortgages to take
advantage of the lower rates then available. We monitor and adjust our investment portfolio mix to mitigate this risk.

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

The
sensitivity analysis of interest rate risk assumes an instantaneous shift in a parallel fashion across the yield curve, with scenarios of interest rates increasing and decreasing 100
and 200 basis points from their levels as of September 30, 2010, 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 Fair Value
of Fixed Income Portfolio as of September 30, 2010September 30, 2010200 Basis
Point Decrease

100 Basis
Point Decrease

100 Basis
Point Increase

200 Basis
Point IncreaseFair Value of
Fixed Income Portfolio(in millions)$1,320.2

$58.5

$38.0

$(33.2)

$(60.2)


Debt

We pay interest on our term loan and a portion of our trust preferred securities based on LIBOR over one, two, three or six month
interest periods. Due to the variable interest rate, we would be subject to higher interest costs if short-term interest rates rise. We have attempted to mitigate our exposure to adverse
interest rate movements by fixing the rate on a portion of our loan payable through the use of cash flow swaps and our trust preferred securities through the contractual terms of the security at
inception. At September 30, 2010, we have fixed the rate on a total of $283.5 million, or 83%, of our debt, including all $233.5 million of our loan payable balance and
$50 million of our trust preferred securities.

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

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

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September 30,
2010, and with all other variables held constant. The following table summarizes the impact of changes in LIBOR.

Effect of Change in LIBOR on Pre-tax Income
for the nine months ended September 30, 2010Weighted
Average
Balance
OutstandingDescription of Floating Rate Debt

Weighted
Average
Interest Rate

200 Basis
Point
Decrease(1)

100 Basis
Point
Decrease(1)

100 Basis
Point
Increase

200 Basis
Point
Increase(in millions)Other long term debt


4.40
%
$
60.0

$
0.2

$
0.2

$
(0.5
)
$
(0.9
)


(1)During
the first nine months of 2010, the LIBOR rate on our other long term debt has increased to approximately 42 basis points as of September 30,
2010. As a result, for the purposes of this illustration, decreases in monthly rates over this period have been limited to the year to date average of 34 basis points on our other long term debt.


As
noted above, we have fixed the interest rate on $283.5 million of our $343.5 million of total debt outstanding, leaving $60 million of the debt exposed to rising
interest rates, as of September 30, 2010. We had approximately $532 million of cash and cash equivalents as of September 30, 2010. 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 an 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 potential future conditions. Projections of any evaluation of the effectiveness of
controls to future

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



We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2010. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2010, at a reasonable assurance level, to timely alert management to
material information required to be included in our periodic filings with the Securities and Exchange Commission.



There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II

ITEM 1LEGAL PROCEEDINGS

For information relating to litigation affecting us, please see Note 12Commitments and Contingencies of the Notes
to 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 year ended December 31, 2009 and in the Company's quarterly reports on Form 10-Q for the quarters ended March 31, 2010
and June 30, 2010, filed with the SEC. You should carefully consider these risks and uncertainties, which could materially affect our business, financial position and results of operations.

There
have been no material changes in our risk factors from those set forth in those SEC reports, except as set forth below:

Recently enacted health care legislation and subsequent rules promulgated by CMS could have a material adverse effect on our opportunities for growth and our financial
results.

In March 2010, President Obama signed the Patient Protection and Affordable Care Act and the Health Care and Education Affordability
Reconciliation Act legislating broad-based changes to the U.S. health care system. Provisions of the health reform legislation become effective at various dates over the next several years. The
Department of Health and Human Services, the National Association of Insurance Commissioners, the Department of Labor and the Treasury Department have yet to issue necessary enabling regulations and
guidance with respect to the health reform legislation. Due to the complexity of the health reform legislation, including yet to be promulgated implementing regulations, lack of interpretive guidance
and gradual implementation, the impact of the health reform legislation is difficult to predict and not yet fully known. However, we will need to dedicate significant resources and expense to
complying with these new rules and there is a possibility that this new legislation could have a material adverse effect on our business, financial position and results of operations.

Laws
and regulations governing Medicare and other state and federal healthcare and insurance programs are complex and subject to significant interpretation. As part of the recent
healthcare reform legislation, CMS has been exercising increased oversight and regulatory authority over our Medicare businesses. Compliance with such laws and regulations is subject to CMS audit,
other governmental review and investigation and significant interpretation. There can be no assurance that we will be found to be in compliance with all such laws and regulations in connection with
these audits, reviews and investigations. Failure to be in compliance can subject us to significant regulatory action including significant fines, penalties or operating restrictions on our business,
including, without limitation, suspension of our ability to market to and enroll new members in our Medicare plans and exclusion from Medicare and other state and federal healthcare programs. CMS is
currently conducting its annual compliance and operations audit with respect to our Medicare businesses and recently informed
us that our Medicare Part D plans will not receive the one-time auto-assignment of new dual-eligible members on January 1, 2011. This action does not
impact dual-eligible members currently enrolled in our Part D plans.

The
provisions of these new laws include the following key points, which are discussed further below:



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Gradual closing of the Part D donut holeIn 2010, a rebate of $250 will be provided by CMS for beneficiaries reaching the "coverage gap"
(i.e., the dollar threshold at which an individual has to pay full price for his or her medications). Then, on a gradual basis, the coverage gap is closed by 2020, with beneficiaries retaining
a 25% co-pay. In addition, there is a 50% discount on brand-name drugs. While this change ultimately results in increased insurance coverage, such improved benefits could
result in changes in member behavior with respect to drug utilization. Such actions could also impact the cost structure of our Part D programs.

Reduced Medicare Advantage reimbursement ratesBeginning in 2012, the Medicare Advantage "benchmark" rates transition to target Medicare
fee-for-service cost benchmarks of 95%; 100%, 107.5% or 115% of the calculated Medicare fee-for-service costs. The transition period will be 3, 5 or
7 years depending upon the applicable county in which services are provided. The counties are divided into quartiles based on each county's fee-for-service Medicare
costs. For counties in the highest cost quartile, the Medicare Advantage benchmark rate will equal 95% of the calculated Medicare fee-for-service costs. We estimate that
approximately 36% of our current membership resides in the highest cost quartile counties, with 31% having a 7-year transition period. Under the new law, the premiums for such members will
be transitioned to 95% of Medicare fee-for-service costs beginning in 2012. This follows the freezing of Medicare Advantage reimbursement rates in 2011 based on our 2010
levels. To address these rate freezes/reductions, we may have to reduce benefits, charge or increase member premiums, reduce profit margin expectations, or implement some combination of these actions.
Such actions could adversely impact our membership growth, revenue expectations, and our operating margins.

Implementation of quality bonus for Star RatingsCMS currently rates Medicare Advantage and PDP plans on certain quality metrics using a
five-star rating system. Beginning in 2012, Medicare Advantage plans with a rating of four or five stars will be eligible for a "quality bonus" in their basic premium rates (1.5% in 2012,
growing to 5% in 2014). In addition, also beginning in 2012, a Medicare Advantage and PDP plan's star ratings will affect the rebate percentage available for such plan to provide additional member
benefits. Such plans with quality ratings of 3.5 stars or below will have their rebate percentage reduced to 50% by 2014. Notwithstanding concerted efforts to improve our star ratings and other
quality measures prior to 2012, there can be no assurances that we will be successful in doing so. Accordingly, our plans may not be eligible for full level quality bonuses or increased rebates, which
could adversely affect the benefits such plans can offer, reduce membership, and reduce profit margins.

Stipulated Minimum MLRsBeginning in 2014, the new healthcare reform legislation will stipulate a minimum medical loss ratio, or MLR, of 85%.
Financial and other penalties may result from failing to achieve the minimum MLR ratio. For the year ended December 31, 2009, our reported Medicare Advantage MLR was 82.4%. The methodology for
defining medical costs and for calculating MLRs has not yet been defined. Complying with such minimum ratio by increasing our medical expenditures or refunding any shortfalls to the federal government
could have a material adverse affect on our operating margins, results of operations, and our statutory required capital.

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Shortened annual enrollment periodMedicare beneficiaries generally have a limited annual enrollment period during which they can choose to
participate in a Medicare Advantage plan rather than receive benefits under the traditional fee-for-service Medicare program. After the annual enrollment period, most Medicare
beneficiaries are not permitted to change their Medicare benefits.

Beginning
with the 2011 selling season, the new laws shorten the time in which we can sell our Medicare Advantage and Part D products. Also, beginning in 2011, the new laws
mandate that persons enrolled in Medicare Advantage may withdraw their enrollment at any time during the first 45 days of the year only to enroll in traditional Medicare
fee-for-service, not another Medicare Advantage plan. Prior law allowed a member to withdraw enrollment during this period to enroll in another Medicare Advantage plan. There
can be no assurance that these changes will not restrict our member growth, limit our ability to enter new service areas, limit the viability of our sales force, or otherwise adversely affect our
ability to market to or enroll new members in our established service areas.

Non-deductible federal premium taxesBeginning in 2014, the new healthcare reform legislation will impose an annual aggregate
non-deductible tax of $8.0 billion (increasing incrementally to $14.3 billion by 2018) on health insurance premiums, including Medicare Advantage premiums. Our share of the
new tax will be based on our pro rata percentage of premiums compared to the industry as a whole, calculated annually. Although there is time to take into account this new tax in adjusting our
business model and in designing future years' plan bids, there can be no assurance that such tax will not result in reduced member benefits, reduced profits, or both which could have a material
adverse effect on our results of operations.

Coding intensity adjustmentsUnder the new healthcare reform legislation, the coding intensity adjustment instituted in 2010 became permanent,
resulting in mandated minimum reductions in risk scores of 4.71% in 2014 increasing to 5.7% for 2019 and beyond. These coding adjustments may adversely affect the level of payments from CMS to our
Medicare Advantage and PDP plans.

Limitation on the federal tax deductibility of compensation earned by individualsBeginning in 2013, with respect to services performed after 2009,
the federal tax deductibility of compensation under Section 162(m)(6) of the Internal Revenue Code for health insurance companies is limited to $500,000 per individual. This limitation
increased our effective tax rate, beginning in the second quarter of 2010.

Established a de-minimus allowance for Medicare Part D Benchmark bid cut-offsBeginning with the bids for the 2011 plan
year, submitted in 2010, Medicare Part D plans can continue to participate in the auto assignment of dual eligibles when the plan's bid is over the Low Income Subsidy benchmark by a
de-minimus amount, as defined by CMS, as long as the difference between the bid premium and the benchmark premium is waived. This could impact the number of plans participating in the auto
assignment of dual-eligibles and impact the number of dual-eligibles that potentially could be assigned to our plans.

Most
of the provisions of the new healthcare reform legislation are not scheduled to go into effect immediately and may be delayed for several years. During this time, the new healthcare
reform legislation may be subject to further adjustments. Because of the unsettled nature of these reforms and numerous steps required to implement and monitor them, we cannot predict what additional
health insurance reforms will be implemented at the federal or state level, the effect that any future legislation or regulation will have on our business or how CMS will review our future bid
submissions and
ultimately, the overall impact of the new healthcare reform legislation on our business.

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

Issuer Purchases of Equity Securities

We have approved share repurchase plans that have authorized us to repurchase up to $175 million of shares of our common stock.
Through December 31, 2009, we had repurchased

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13.4 million
shares of our common stock for an aggregate amount of $132.7 million, under these programs. There have been no share repurchases since December 31, 2009 under these
programs. As of September 30, 2010, we have $42.3 million that remains available to repurchase additional shares under these plans. However, share repurchases are also limited by the
remaining available restricted payments under our 2007 Credit Facility, which, giving effect to the July 27, 2010 Amendment, limits share repurchases, dividends and other restricted payments to
an aggregate of $300 million (see "Credit Facility Amendment" in Note 14Other Disclosures in the Notes to Consolidated Financial Statements). Currently, we have
$11.3 million remaining available under this restricted payment limit. We are not obligated to repurchase any specific number of shares under the programs or to make repurchases at any specific
time or price.

Recent Sales of Unregistered Securities

None.

ITEM 3DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4OTHER INFORMATION

None.

ITEM 5EXHIBITS

Each exhibit identified below is filed as a part of this report.

31.1

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

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

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


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SIGNATURES

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

UNIVERSAL AMERICAN CORP.November 4, 2010

/s/ RICHARD A. BARASCHRichard A. Barasch Chief Executive OfficerNovember 4, 2010

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


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