UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-Q



ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2009ORo

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




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



New York

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

(I.R.S. Employer
Identification Number)


Six International Drive, Suite 190, Rye Brook, New York 10573(Address of principal executive offices, including 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

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 April 30, 2009$0.01 par value

77,478,367 shares




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TABLE OF CONTENTS



Item

Description

PagePART I

Financial Information1

Financial Statements (unaudited):Consolidated Balance Sheets


5Consolidated Statements of OperationsThree Months


6Consolidated Statements of Stockholders' Equity and Comprehensive Income


7Consolidated Statements of Cash Flows


8Notes to Consolidated Financial Statements


92

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


303

Quantitative and Qualitative Disclosures About Market Risk


434

Controls and Procedures


44PART II

Other Information1

Legal Proceedings


461A

Risk Factors


462

Unregistered Sales of Equity Securities and Use of Proceeds


473

Defaults Upon Senior Securities


474

Submission of Matters to a Vote of Security Holders


475

Other Information


476

Exhibits


48Signatures


49


2

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Table of Contents

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

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

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



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



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

3

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Table of Contents

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

4

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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)

March 31, 2009

December 31, 2008(Unaudited)ASSETSInvestments:Fixed maturities available for sale, at fair value (amortized cost: 2009, $1,012,361; 2008, $1,075,078)

$
967,669

$
1,032,393Policy loans


21,781


22,274Other invested assets


1,670


1,649Total investments


991,120


1,056,316Cash and cash equivalents


470,784


511,032Accrued investment income


11,598


13,214Deferred policy acquisition costs


227,242


237,630Amounts due from reinsurers


210,866


220,986Due and unpaid premiums


238,305


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


186,849


192,742Goodwill and other indefinite lived intangible assets


530,031


530,031Income taxes receivable


25,289


38,032Deferred income tax asset


2,761


CMS contract deposit receivables


256,618


609,293Other Part D receivables


211,595


154,049Advances to agents


63,245


60,017Other assets


128,573


141,501Total assets

$
3,554,876

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

$
383,509

$
396,700Reserves for future policy benefits


626,216


625,012Policy and contract claimslife


9,070


10,133Policy and contract claimshealth


533,313


729,070Advance premiums


10,212


7,183Loan payable


319,750


320,625Other long term debt


110,000


110,000Amounts due to reinsurers


8,486


22,091Deferred income tax liability





6,877Other Part D liabilities


105,590


149,523Other liabilities


162,633


168,865Total liabilities


2,268,779


2,546,079Commitments and contingencies (Note 11)STOCKHOLDERS' EQUITYPreferred stock (Authorized: 3 million shares):Series A (Designated: 300,000 shares, issued and outstanding: 2009, 42,105 shares, liquidation value $35,663; 2008, 42,105 shares, liquidation value
$37,137)


42


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





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


875


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





Additional paid-in capital


874,775


870,520Accumulated other comprehensive loss


(39,250
)

(36,422
)Retained earnings


545,527


558,675Less: treasury stock (2009, 9.5 million shares; 2008, 7.2 million shares)


(95,872
)

(77,605
)Total stockholders' equity


1,286,097


1,316,084Total liabilities and stockholders' equity

$
3,554,876

$
3,862,163


See notes to unaudited consolidated financial statements.

5

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        For the Three Months Ended March 31, 2009 and 2008    
 (Unaudited)        (in thousands, per share amounts in dollars)

2009

2008Revenues:Direct premium and policyholder fees earned

$
1,372,676

$
1,432,811Reinsurance premiums assumed


13,683


11,450Reinsurance premiums ceded


(37,225
)

(226,609
)Net premiums and policyholder fees earned


1,349,134


1,217,652Net investment income


15,736


24,281Fee and other income


4,128


11,862Net realized losses on investments


(7,222
)

(29,008
)Total revenues


1,361,776


1,224,787Benefits, Claims and Expenses:Claims and other benefits


1,189,476


1,113,521Change in reserves for future policy benefits


(169
)

2,363Interest credited to policyholders


4,284


4,139Change in deferred acquisition costs


7,699


7,530Amortization of intangible assets


5,893


1,900Commissions


31,706


39,255Reinsurance commission and expense allowances


(5,519
)

(17,750
)Interest expense


5,259


6,304Other operating costs and expenses


143,787


138,890Total benefits, claims and other deductions


1,382,416


1,296,152Loss before equity in earnings of unconsolidated subsidiary


(20,640
)

(71,365
)Equity in earnings of unconsolidated subsidiary


97


16,052Loss before income taxes


(20,543
)

(55,313
)Benefit from income taxes


(7,395
)

(9,313
)Net loss

$
(13,148
)
$
(46,000
)Loss per common share:Basic (Note 6)

$
(0.16
)
$
(0.50
)Diluted

$
(0.16
)
$
(0.50
)Weighted average shares outstanding:Weighted average common shares outstanding


86,850


74,440Less weighted average treasury shares


(8,446
)

(502
)Basic weighted shares outstanding (Note 6)


78,404


73,938Weighted average common equivalent of preferred shares outstanding


4,211


17,500Effect of dilutive securities


406


781Diluted weighted shares outstanding


83,021


92,219


See
notes to unaudited consolidated financial statements.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  AND COMPREHENSIVE INCOME        For the Three Months Ended
March 31, 2009 and 2008        (Unaudited)        (in thousands)

Preferred
Stock
Series A

Preferred
Stock
Series B

Common
Stock

Additional
Paid-In
Capital

Accumulated
Other
Comprehensive
(Loss) Income

Retained
Earnings

Treasury
Stock

Total2008Balance, January 1, 2008

$
47

$
128

$
750

$
890,882

$
(66
)
$
463,583

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

















(46,000
)




(46,000
)Other comprehensive loss














(8,778
)







(8,778
)Comprehensive loss























(54,778
)Issuance of common stock








1


531











532Stock-based compensation











2,517











2,517Purchase price adjustment for acquisition of MemberHealth








(20
)

(34,521
)










(34,541
)Treasury shares purchased, at cost




















(23,783
)

(23,783
)Treasury shares reissued











(156
)







1,417


1,261Balance, March 31, 2008

$
47

$
128

$
731

$
859,253

$
(8,844
)
$
417,583

$
(26,624
)
$
1,242,2742009Balance, January 1, 2009

$
42

$


$
874

$
870,520

$
(36,422
)
$
558,675

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

















(13,148
)




(13,148
)Other comprehensive loss














(2,828
)







(2,828
)Comprehensive loss























(15,976
)Issuance of common stock








1


48











49Stock-based compensation











4,331











4,331Treasury shares purchased, at cost




















(21,925
)

(21,925
)Treasury shares reissued











(124
)







3,658


3,534Balance, March 31, 2009

$
42

$


$
875

$
874,775

$
(39,250
)
$
545,527

$
(95,872
)
$
1,286,097


See notes to unaudited consolidated financial statements.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        For the Three Months Ended March 31, 2009 and 2008    
 (Unaudited)        (In thousands)

2009

2008Cash flows from operating activities:Net loss

$
(13,148
)
$
(46,000
)Adjustments to reconcile net loss to net cash used in operating activities, net of balances acquired:Equity in earnings of unconsolidated subsidiary


(97
)

(16,052
)Distribution from unconsolidated subsidiary


6,800


12,500Deferred income taxes


(8,115
)

11,604Realized losses on investments


7,222


29,008Amortization of intangible assets


5,893


1,900Net amortization of bond premium


358


424Changes in operating assets and liabilities:Deferred policy acquisition costs


7,699


7,530Reserves for future policy benefits


1,204


2,960Policy and contract claims payable


(196,820
)

80,318Reinsurance balances


(4,064
)

(9,848
)Due and unpaid advance premium, net


(137,956
)

(119,518
)Income taxes payable/receivable


12,743


(40,383
)Other Part D receivables


(57,546
)

(63,350
)Other Part D liabilities


(43,933
)

19,911Other, net


10,754


(50,226
)Cash used in operating activities


(409,006
)

(179,222
)Cash flows from investing activities:Proceeds from sale or redemption of fixed maturity investments


109,172


116,634Cost of fixed maturity investments purchased


(54,053
)

(85,432
)Purchase of business and return of purchase price, net of cash acquired





41,090Purchase of fixed assets


(6,218
)

(5,925
)Other investing activities


20


(13
)Cash provided by investing activities


48,921


66,354Cash flows from financing activities:Net proceeds from issuance of common and preferred stock, net of tax effect


2,617


1,170Cost of treasury stock purchases


(21,925
)

(23,783
)Receipts from CMS contract deposits


955,467


790,085Withdrawals from CMS contract deposits


(602,792
)

(672,631
)Deposits and interest credited to policyholder account balances


4,357


4,798Surrenders and other withdrawals from policyholder account balances


(17,012
)

(14,666
)Principal repayment on loan payable and other long term debt


(875
)

(875
)Cash provided by financing activities


319,837


84,098Net decrease in cash and cash equivalents


(40,248
)

(28,770
)Cash and cash equivalents at beginning of period


511,032


667,685Cash and cash equivalents at end of period

$
470,784

$
638,915


See notes to unaudited consolidated financial statements.

8

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

1. ORGANIZATION AND COMPANY BACKGROUND

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

2. BASIS OF PRESENTATION

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

Unconsolidated Subsidiary:Part D Management Services, L.L.C., known as PDMS, is 50% owned by Universal American and 50%
owned by Caremark. We
do not control PDMS and therefore we do not consolidate PDMS in our financial statements. We account for our investment in PDMS on the equity basis and include it in other assets. During 2008,
together with Caremark, we ended our strategic alliance which created PDMS. As such, effective January 1, 2009, PDMS will no longer manage the strategic alliance and will not earn revenue or
incur expenses related to the 2009 Medicare Prescription Drug Plan (PDP) year. PDMS will continue to operate in 2009 solely to service the run-off activity related to pharmacy claims,
rebates, and revenue related to prior PDP years. Upon dissolution of PDMS in 2009, following the run-out of prior year PDP claims, the economic interest of PDMS would be split equally
between us and Caremark to match the 50% voting and ownership rights held by each entity (see Note 12Unconsolidated Subsidiary).

Use of Estimates:Our consolidated financial statements have been prepared in accordance with Generally Accepted Accounting
Principles, known as
GAAP. The preparation of our financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

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

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

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

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

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

Premiums
received pursuant to Medicare Advantage contracts with CMS for Medicare enrollees are recorded as revenue in the month in which members are entitled to receive service. Premiums
collected in advance are deferred. Accounts receivable from CMS and health plan members for coordinating physician services and inpatient, outpatient and ancillary care are included in other assets

10

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

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



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



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

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)



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

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

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



Our CMS payment is subject to risk sharing through the Medicare Part D risk corridor provisions. The risk corridor provisions
permit our PDPs and CMS to share the risk associated with the ultimate costs of the Part D benefit. The risk corridor provisions compare a plan's actual prescription drug costs to their
targeted costs, as reflected in their bids ("target amount') and could result in positive or negative adjustments to the CMS payment, that are reported through premium revenues. Variances exceeding,
or below, certain thresholds may result in CMS making additional payments to us, or requiring us to refund to CMS a portion of the payments we received. Actual prescription drug costs subject to risk
sharing with CMS are limited to the costs that are, or would have been, incurred under the CMS defined "standard" benefit plan. We estimate and recognize an adjustment to premium revenues related to
the risk corridor payment, at the contract level, based upon prescription drug claims experience to date, net of manufacturer rebates and other Part D revenues, at the end of each reporting
period. Accordingly, this estimate does not consider future prescription drug claims experience. We record a receivable or payable in the consolidated balance sheets based on the expected settlement.
The estimate of the settlement associated with risk corridor provisions requires us to consider factors that may not be certain, including, among others, member eligibility differences with CMS.

Our
CMS payments also include catastrophic reinsurance allowances and Federal subsidies (CMS contract deposits) for which we do not bear risk. These subsidies represent reimbursements
from CMS for claims we pay for which we assume little or no risk. A large percentage of claims paid above the out-of-pocket or catastrophic threshold for which we are not at
risk are reimbursed by CMS through the reinsurance subsidy for PDPs offering the standard coverage. Low-income cost subsidies represent reimbursements from CMS for all or a portion of the
deductible, the coinsurance and co-payment amounts above the out-of-pocket threshold for low-income beneficiaries. Monthly prospective payments from CMS
for reinsurance and low-income cost subsidies are based on assumptions submitted with our annual bid. A reconciliation and related settlement of CMS's prospective subsidies against actual
prescription drug costs we paid is made after the end of the year. We account for these subsidies as

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

deposits
in our consolidated balance sheets and as a financing activity in our consolidated statements of cash flows. We do not recognize premium revenues or claims expense for these subsidies.
Receipt and payment activity is accumulated at the contract level and recorded in our consolidated balance sheets as a CMS contract deposit account asset or liability depending on the net contract
balance at the end of the reporting period.

In
order to allow plans offering enhanced benefits the maximum flexibility in designing alternative prescription drug coverage, CMS provided a demonstration payment option in lieu of the
reinsurance subsidy for plans offering enhanced coverage, or coverage beyond CMS's defined standard benefits. The demonstration payment option is an arrangement in which CMS pays a capitation amount
to a plan for assuming the government's portion of prescription drug costs in the catastrophic layer of coverage. The capitation amount represents a fixed monthly amount per member to provide
prescription drug coverage in the catastrophic layer. We chose the demonstration payment option for all of our enhanced benefit plans. This capitation amount, derived from our annual bid submissions,
is recorded as premium revenue. The variance between the capitation amount and actual drug costs in the catastrophic layer is subject to risk sharing as part of the risk corridor settlement.

Settlement
of the reinsurance and low-income cost subsidies as well as the risk corridor payment is based on a reconciliation made by CMS approximately 9 months after
the close of each calendar year. This reconciliation process requires us to submit claims data necessary for CMS to administer the program. In October 2008, we received the reconciliation settlement
data from CMS for the 2007 Plan year. These amounts were settled on a preliminary basis in the fourth quarter of 2008. However, the Company has requested a reopening of the 2007 Plan year. The Company
does not expect any reopening to have a material impact on the consolidated financial statements.

At
March 31, 2009 and December 31, 2008, the balance due from (to) CMS for the 2006 through 2009 Plan years was $396.8 million and $640.9 million,
respectively, broken down as follows:

March 31, 2009

December 31, 2008Plan 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)2009

$
(283,590
)
$
117,286

$
(166,304
)
$


$


$
2008


528,578


16,470


545,048


528,993


16,551


545,5442007


15,205


7,644


22,849


85,909


16,917


102,8262006


(3,575
)

(1,220
)

(4,795
)

(5,609
)

(1,815
)

(7,424
)Total due to CMS

$
256,618

$
140,180

$
396,798

$
609,293

$
31,653

$
640,946


---

The
Company received payment of $80 million for a reopening of the 2007 Plan year on January 2, 2009 and continues to work with CMS to settle the remaining amounts for the
2007 Plan year.

13

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

During
2009 and 2008, we also paid Part D benefits for individuals who ultimately were determined to be members of other plans. At March 31, 2009 and December 31,
2008, in connection with both the Prescriba RxSM and Community CCRx plans, we have established a receivable totaling $18.1 million and $17.4 million, respectively, for
these claims which is included in other Part D receivables on the consolidated balance sheets. Membership information continues to be reconciled and refined by CMS with respect to the
enrollment of members among all plans participating in the Part D program. Additionally, we have established a liability totaling $4.6 million and $6.2 million, at
March 31, 2009 and December 31, 2008, respectively, included in policy and contract claims-health on the consolidated balance sheets, for our estimate of claims paid by state Medicaid
programs on behalf of members of our PDPs. As these membership differences are resolved, it is likely that the membership data upon which we based our results for prior plan years will change, with a
corresponding change in the financial results for the segment. We are unable to precisely quantify the impact of any potential
change until the membership data is fully reconciled with CMS; however, we do not believe that any change from the amounts reported as of March 31, 2009 or December 31, 2008 is likely to
be material.

Recognition of Prior Plan Year Settlements under Medicare Part D and Private Fee-For-Service Plans:The Medicare
Part D prescription drug benefit program is detail-oriented and relatively complex. The following factors affect the amount due from CMS:



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

The
reconciliation and settlement process with CMS for the Part D coverage within Medicare Advantage PFFS plans is similar to Medicare Part D plans with the two exceptions:
(1) PFFS plans are ineligible for aggregate risk corridor payments; and (2) prospective monthly catastrophic reinsurance payments to PFFS plans are based on CMS estimated average
reinsurance payments to other Medicare AdvantagePrescription Drug (MA-PD) plans for their Part D coverage. In October 2008, we received

14

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)

notification
from CMS of an adjustment to our catastrophic reinsurance reimbursement for the Part D coverage within our PFFS plans for the 2007 Plan year. We expect a similar timetable in 2009
for 2008 plan year settlement data.

3. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS

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

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

FSP
No. FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary
Impairments, will change (1) the trigger for determining whether an other-than-temporary impairment exists and (2) the amount of an
impairment charge to be recorded in earnings. To determine whether an other-than-temporary impairment exists, an entity will be required to assess the likelihood of selling a
security prior to recovering its cost basis. This is a change from the current requirement for an entity to assess whether it has the intent and ability to hold a security to recovery or maturity.
This FSP also expands and increases the frequency of existing disclosure about other-than-temporary impairments and requires new disclosures of the significant inputs used in
determining a credit loss, as well as a rollforward of that amount each period.

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

We
currently are evaluating the provisions of these three FSPs which require adoption effective for the quarter ending June 30, 2009.

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

15

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS

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

March 31, 2009Classification

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

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

$
35,864

$
1,091

$
(1
)
$
36,954Government sponsored agencies


50,865


3,010


(24
)

53,851Other political subdivisions


9,994


196


(232
)

9,958Corporate debt securities


463,675


7,795


(31,378
)

440,092Foreign debt securities


31,758


347


(1,611
)

30,494Mortgage-backed and asset-backed securities


420,205


12,960


(36,845
)

396,320$
1,012,361

$
25,399

$
(70,091
)
$
967,669




December 31, 2008Classification

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

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

$
33,963

$
1,372

$


$
35,335Government sponsored agencies


90,030


4,999





95,029Other political subdivisions


9,993


133


(241
)

9,885Corporate debt securities


441,681


4,055


(25,453
)

420,283Foreign debt securities


32,779


41


(1,930
)

30,890Mortgage-backed and asset-backed securities


466,632


8,109


(33,770
)

440,971$
1,075,078

$
18,709

$
(61,394
)
$
1,032,393


16

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

At March 31, 2009, gross unrealized losses of $36.8 million on mortgage-backed and asset-backed securities reflect unrealized losses of $20.3 million on subprime
residential mortgage loans, as discussed below, and $16.5 million related to obligations of commercial mortgage-backed securities and other asset-backed securities. The value of a majority of
these securities is depressed due to the deterioration of value in the mortgage-backed securities market and related businesses. Corporate debt securities have gross unrealized losses of
$31.4 million at March 31, 2009. These unrealized losses relate to corporate securities across all sectors, and reflect the general depressed market conditions that existed at
March 31, 2009. The majority of the unrealized losses on corporate debt securities are in the financial sector, which has gross unrealized losses of $24.2 million and where the average
market price of our holdings at March 31, 2009 was $83.8 per $100 of par value. Management and the Investment Committee have evaluated these holdings, with input from our investment managers,
and do not believe them to be other-than-temporarily impaired.

The
amortized cost and fair value of fixed maturity investments at March 31, 2009 by contractual maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized
Cost

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

$
51,779

$
51,732Due after 1 year through 5 years


415,487


411,373Due after 5 years through 10 years


86,267


80,842Due after 10 years


38,623


27,402Mortgage and asset-backed securities


420,205


396,320$
1,012,361

$
967,669


Subprime Residential Mortgage Loans

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

As
of March 31, 2009, we held subprime securities with par values of $139.1 million, an amortized cost of $45.9 million and a market value of $25.6 million
representing approximately 2.0% of our cash and invested assets, with collateral comprised substantially of first lien mortgages. The majority of these securities are in senior or senior-mezzanine
level tranches, which have preferential liquidation characteristics, and have an average rating of AA- by Standard & Poors, a division of the McGraw Hill Companies, Inc.,
known as S&P, or equivalent.

17

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

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

Vintage Year

Amortized
Cost

Fair
Value

Unrealized
Gain (Loss)(in thousands)2003

$
5,902

$
3,395

$
(2,507
)2004


2,988


2,315


(673
)2005


24,467


11,646


(12,821
)2006


9,621


6,253


(3,368
)2007


2,887


2,002


(885
)Totals

$
45,865

$
25,611

$
(20,254
)


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

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

Year Ended December 31,Three Months
Ended March 31,
2009Cumulative

2008

2007(in thousands)Subprime

$
93,336

$
4,375

$
47,964

$
40,997Other structured


8,346


3,701


4,645


Corporate


7,177





7,177


$
108,859

$
8,076

$
59,786

$
40,997


During
the quarter ended March 31, 2009, we recognized an other-than temporary impairment on fifteen previously impaired structured securities, including eleven
subprime. In addition, we impaired three structured securities that had not been impaired in the past.

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

18

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

valuation
of these financial instruments, followed by the fair value measurement disclosure requirements of SFAS 157.

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



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

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

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

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

The
following table presents our assets and liabilities that are carried at fair value by SFAS 157 hierarchy levels, as of March 31, 2009 (in thousands):

Total

Level 1

Level 2

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

$
967,669

$


$
964,339

$
3,330Equity securities


490








490Total assets

$
968,159

$


$
964,339

$
3,820Liabilities:Interest rate swaps

$
19,930

$


$
19,930

$



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.

19

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Table of Contents

UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)



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



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



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

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

Due
to a general lack of transparency in the process that brokers use to develop prices, we have classified most valuations that are based on broker's prices as Level 3. We may
classify some valuations

20

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

as
Level 2 if we can corroborate the price. We have also classified internal model priced securities, primarily consisting of private placement asset-backed securities, as Level 3
because this model pricing includes significant non-observable inputs. We have classified private placement equity securities as Level 3 due to the lack of observable inputs.



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

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

During
the three months ended March 31, 2009, the changes in the fair value of the assets measured using significant unobservable inputs (Level 3) were comprised of the
following:

Fixed
Maturities

Equity
Securities

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

$
3,944

$
490

$
4,434Net purchases and sales


(157
)




(157
)Net transfers out


(464
)




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


7





7Fair value as of March 31, 2009

$
3,330

$
490

$
3,820


---

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

6. EARNINGS PER COMMON SHARE COMPUTATION

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

At
March 31, 2009 and 2008, we allocated earnings between common and participating preferred stock as follows:

Three months ended
March 31,2009

2008(in thousands)Net loss attributable to common stock

$
(12,483
)
$
(37,196
)Undistributed loss allocated to participating preferred stock


(665
)

(8,804
)Net loss

$
(13,148
)
$
(46,000
)


7. SHARE REPURCHASE PLAN

We have approved share repurchase plans that have authorized us to repurchase up to $100 million of shares of our common stock. Through March 31, 2009, we had repurchased
9.4 million shares of our common stock for an aggregate amount of $93.7 million, under these programs. Subsequent to quarter end, through April 24, 2009, we repurchased an
additional 0.4 million shares for $3.6 million. As of April 24, 2009, we have $2.7 million that remains available to repurchase additional shares under these plans. We are
not obligated to repurchase any specific number of shares under the programs or to make repurchases at any specific time or price.

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

For the three months ended March 31,2009

2008Shares

Amount

Weighted
Average
Cost Per
Share

Shares

Amount

Weighted
Average
Cost Per
ShareTreasury stock beginning of year


7,194,387

$
77,605

$
10.79


285,545

$
4,258

$
14.91Shares repurchased


2,674,279


21,925


8.20


2,044,239


23,783


11.63Shares distributed in the form of employee bonuses


(339,168
)

(3,658
)

10.42


(114,312
)

(1,417
)

11.03Treasury stock, end of period


9,529,498

$
95,872

$
10.06


2,215,472

$
26,624

$
12.02


22

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss are as follows:

March 31,
2009

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

$
(44,692
)
$
(42,685
)Deferred acquisition cost adjustment


3,928


6,617Foreign currency translation gains


309


332Fair value of cash flow swap on debt


(19,930
)

(20,298
)Deferred income taxes


21,135


19,612Total accumulated other comprehensive loss

$
(39,250
)
$
(36,422
)


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

Three months ended March 31,2009

2008Before
Tax Amount

Tax Expense
(Benefit)

Net of
Tax Amount

Before
Tax Amount

Tax Expense
(Benefit)

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

$
(11,918
)
$
(4,172
)
$
(7,746
)
$
(32,017
)
$
(11,206
)
$
(20,811
)Reclassification adjustment for losses included in net income


7,222


2,528


4,694


29,008


10,153


18,855Net unrealized loss


(4,696
)

(1,644
)

(3,052
)

(3,009
)

(1,053
)

(1,956
)Cash flow hedge


368


129


239


(10,437
)

(3,653
)

(6,784
)Foreign currency translation adjustment


(23
)

(8
)

(15
)

(59
)

(21
)

(38
)Other comprehensive loss

$
(4,351
)
$
(1,523
)
$
(2,828
)
$
(13,505
)
$
(4,727
)
$
(8,778
)


9. STOCK-BASED COMPENSATION

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



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

23

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. STOCK-BASED COMPENSATION (Continued)

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

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

Quarter Ended March 31,2009

2008Risk free interest rates

1.28%  3.05%

2.02%  4.82%Dividend yields

0.0%

0.0%Expected volatility

40.61%  55.63%

35.60%  41.08%Expected lives of options (in years)

3.5  3.75

3.0  4.75


The
weighted-average grant-date fair value was $3.97 for options granted during the first three months of 2009 and was $2.61 for options granted during the first three months
of 2008.

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

A
summary of option activity for the three months ended March 31, 2009 is set forth below:

Options
(in thousands)

Weighted Average
Exercise PriceOutstanding, January 1, 2009


5,640

$
14.85Granted


830


10.32Exercised


(7
)

6.09Forfeited or expired


(20
)

11.27Outstanding, March 31, 2009


6,443

$
14.29Exercisable, March 31, 2009


3,520

$
12.47


The
total intrinsic value of options exercised during the first three months of 2009 was less than $0.1 million and the total intrinsic value of options exercised during the first
three months of 2008 was $1.9 million. As of March 31, 2009, the total compensation cost related to non-vested awards not yet recognized was $14.2 million, which we
expect to recognize over a weighted average period of 1.3 years.

We
received cash of less than $0.1 million from the exercise of stock options during the first three months of 2009 and cash of $0.6 million from the exercise of stock
options during first three months of 2008. FAS 123-R also requires us to report the benefits of tax deductions in excess of recognized compensation cost as a financing cash flow,
rather than as an operating cash flow as required under the prior statement. We recognized $2.6 million of financing cash flows for these excess tax deductions for the three months ended
March 31, 2009 and $0.6 million for the three months ended March 31, 2008.



In accordance with our 1998 Incentive Compensation Plan, we may grant restricted stock to our officers and non-officer
employees. We have issued restricted stock grants which vest ratably over three and four year periods, and some restricted stock grants have contained portions that vest immediately.

24

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. STOCK-BASED COMPENSATION (Continued)

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:

Three Months Ended
March 31, 2009Non-vested Restricted Stock

Shares
(in thousands)

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


471

$
18.89Granted


361


10.42Vested


(69
)

14.54Forfeited


(8
)

10.35Non-vested at end of period


755

$
15.33


The
total fair value of shares of restricted stock vested during the three months ended March 31, 2009 was $0.6 million and the total fair value of shares of restricted
stock vested during the three months ended March 31, 2008 was $0.7 million.

10. DERIVATIVE INSTRUMENTSCASH FLOW HEDGE

On December 4, 2007, we entered into two separate interest rate swap agreements, one with Citibank, N.A. and one with Calyon Corporate and Investment Bank to hedge the variability
of cash flows to be paid under our new credit facility described in Note 14Loan Payable in the Notes to the Consolidated Financial Statements in our Annual Report on
Form 10-K for the year ended December 31, 2008. Pursuant to the swap agreement with Citibank, we agreed to swap our floating rate interest payment based on the floating
three-month LIBOR base rate on a notional amount of $125 million in exchange for a fixed interest rate payment based on a 4.14% locked-in fixed rate. Pursuant to the swap agreement
with Calyon, we agreed to swap our floating rate interest payment based on the floating three-month LIBOR base rate on a notional amount of $125 million in exchange for a fixed interest rate
payment based on a 4.13% locked-in fixed rate. The swap agreements provide a hedge against variability in interest payments on the a combined $250 million amount of the variable
rate term loans under our new credit facility, which is due to changes in the LIBOR base rate, through September 2012. We expect changes in the cash flows of the interest rate swap to exactly offset
the changes in cash flows from interest rate payments attributable to fluctuations in the LIBOR base rate on the $250 million portion of the variable rate term loan portion of our new credit
facility. The combined fair value of these swaps was a $19.9 million liability at March 31, 2009 and a $20.3 million liability at December 31, 2008. We have reflected this
fair value in other liabilities. In connection with the transaction executed with Citibank, N.A. we are required to post collateral, which is held at Citibank, 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 $9.7 million as of March 31,

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. DERIVATIVE INSTRUMENTSCASH FLOW HEDGE (Continued)

2009
and $9.3 million as of December 31, 2008. Based on the fact that, at inception, the critical terms of the hedging instrument and the hedged forecasted transaction were the same, we
have concluded that we expect changes in cash flows attributable to the risk being hedged to be completely offset by the hedging derivative, and have designated these swaps as cash flow hedges. As a
result, we reflected the unrealized loss on these hedges in accumulated other comprehensive loss. We will perform subsequent assessments of hedge effectiveness by verifying and documenting whether the
critical terms of the
hedging instrument and the forecasted transaction have changed during the period, rather than by quantifying the relevant changes in cash flows.

11. COMMITMENTS AND CONTINGENCIES



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



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

12. UNCONSOLIDATED SUBSIDIARY

During 2005, we entered into a strategic alliance with Caremark and created PDMS, which is 50% owned by us and 50% owned by Caremark. PDMS principally performs marketing and risk
management services on behalf of our Prescriba RxSM PDPs and Caremark, for which it receives fees and other remuneration from our Prescriba RxSM PDPs and Caremark. We do
not control PDMS and therefore PDMS is not consolidated in our financial statements. Our investment in PDMS is accounted for on the equity basis and is included in other assets. Our investment in PDMS
was $0.2 million at March 31, 2009 and $6.9 million at December 31, 2008. We reflect our share in the income or loss of PDMS in equity in earnings of unconsolidated
subsidiary. Our share in the net income of PDMS was $0.1 million and $16.1 million for the three months ended March 31, 2009 and 2008, respectively. PDMS made distributions to its
owners aggregating $13.6 million during the three months ended March 31, 2009. Our share of those distributions was $6.8 million.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

12. UNCONSOLIDATED SUBSIDIARY (Continued)

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

Three months ended
March 31,2009

2008(in thousands)Total revenue

$
203

$
32,830Total expenses


9


726Net income

$
194

$
32,104


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

13. BUSINESS SEGMENT INFORMATION

Our business segments are based on product and consist of



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

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

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

13. BUSINESS SEGMENT INFORMATION (Continued)

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

Three months ended March 31,2009

2008Revenue

Income
(Loss) Before
Income Taxes

Revenue

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

$
646,246

$
46,242

$
566,719

$
371Medicare Part D


615,739


(35,864
)

573,163


(29,634
)Traditional Insurance


104,103


(15,489
)

122,857


1,019Senior Administrative Services


12,004


3,425


22,570


6,023Corporate


169


(11,635
)

669


(4,084
)Intersegment revenues


(9,166
)




(16,131
)

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


(7,222
)

(7,222
)

(29,008
)

(29,008
)Equity in earnings of unconsolidated subsidiary(2)


(97
)




(16,052
)

Total

$
1,361,776

$
(20,543
)
$
1,224,787

$
(55,313
)


---

14. OTHER DISCLOSURES

Medicare Advantage:The overall Medicare Advantage benefit ratio was 80.8% for the first quarter of 2009. Excluding prior period
favorable
development of prior year reserves of $7.7 million and 2008 risk revenue of $8.0 million that was recorded in the first quarter of 2009, the benefit ratio was 83.0%. The per share impact
of this favorable development and risk revenue was $0.12 per diluted share for the quarter ended March 31, 2009.

Income Taxes:Our effective tax rate was 36.0% for the first quarter of 2009, and 16.8% for the first quarter of 2008. The low
effective tax rate in
the first quarter of 2008 was due primarily to a valuation allowance established in connection with the investment impairment. This allowance was subsequently released in the second quarter of 2008.

Reinsurance:We evaluate the financial condition of our reinsurers and monitor concentrations of credit risk to minimize our
exposure to significant
losses from reinsurer insolvencies. We are obligated

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14. OTHER DISCLOSURES (Continued)

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 March 31, 2009, all of our primary
reinsurers were rated "A" or better by A.M. Best. We do not know of any instances where any of our reinsurers have been unable to pay any policy claims on any reinsured business.

In
connection with the termination of our strategic alliance with Caremark on December 31, 2008, the agreement to reinsure the Prescription PathwaySM PDPs sponsored
by our subsidiaries on a 50% coinsurance funds withheld basis to PharmaCare Re ended. Direct and ceded premium under this agreement in the first quarter of 2008 amounted to $95.1 million,
representing PharmaCare Re's 50% share of direct premium.

On
July 1, 2008, the agreements to provide an insured drug benefit for the employees of the State of Connecticut and to reinsure the risk with PharmaCare Re under a 100%
quota-share contract was non-renewed. Direct and ceded premium under this agreement in the first quarter of 2008 amounted to $85.6 million.

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

Three months ended March 31,2009

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

$


$
(34,541
)


Statutory Financial Data:Effective September 30, 2009 the NAIC is requiring adoption of SSAP No. 98, Treatment of
Cash Flows When
Quantifying Changes in Valuation and Impairments. SSAP No. 98 effectively changes the impairment trigger from an undiscounted cash flow basis test to a fair value test. In addition, SSAP
No. 98 changes the method of valuing the new cost basis of the impaired security from an undiscounted cash flow basis to a fair value basis. Had we adopted SSAP No. 98 on
March 31, 2009, we would have recognized an additional $34.9 million of realized losses, pre-tax, for other-than-temporary impairments of investments
on a statutory basis. However, the actual impairment recorded will depend upon conditions at the measurement date.

15. SUBSEQUENT EVENT

Life Insurance and Annuity Reinsurance Transaction:On April 24, 2009 we completed the close of the previously announced
Life Insurance and
Annuity Reinsurance transaction with the Commonwealth Annuity and Life Insurance Company and the First Allmerica Financial Life Insurance Company, Goldman Sachs Group, Inc. subsidiaries
(NYSE:GS). Under this transaction, we will reinsure substantially all of our in force life insurance and annuity business under a 100% coinsurance treaty. At closing, we transferred approximately
$456 million of assets and related insurance liabilities to the reinsurers net of a ceding commission of $79 million.

On
a GAAP basis, the financial impact of the transaction is expected to be immaterial. The transaction is expected to increase statutory capital by approximately $60 million in
our insurance subsidiaries and reduce required capital by approximately $10 million.

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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 March 31, 2009 and our results of
operations for the three months ended March 31, 2009 and 2008. You should read the following analysis of our consolidated results of operations and financial condition in conjunction with the
consolidated financial statements and related consolidated footnotes included elsewhere in this quarterly report on Form 10-Q as well as the consolidated financial statements and
related consolidated footnotes and the Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year
ended December 31, 2008. You should also read the following analysis in conjunction with the Risk Factors contained in the current report on
Form 8-K that we filed with the Securities and Exchange Commission on May 4, 2009, as supplemented by the risk factors set forth in Part II, Item 1A "Risk
Factors" below.

Significant First Quarter Items



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Table of Contents



Membership

The following table presents our membership in Medicare Advantage and Part D products as of March 31, 2009 and 2008.



As of March 31,2009

2008(in thousands)Medicare AdvantagePFFS


173


182Network-based (HMO and PPO)


63


51Total Medicare Advantage


236


233Part DCCRx


1,280


1,309PRx(1)


420


269Total Part D


1,700


1,578Total Membership


1,936


1,811






Critical Accounting Policies

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

Sensitivity Analysis

The following table illustrates the sensitivity of our accident and health IBNR payable at March 31, 2009 to identified
reasonably possible changes to the estimated weighted average completion factors and health care cost trend rates. However, it is possible that the actual completion factors and

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

Completion Factor(1):

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

Increase
(Decrease) in
Net Accident
& Health
IBNR

(Decrease)
Increase
in Factor

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

$
2,056


(3
)%
$
(12,287
)(2)%

$
1,370


(2
)%
$
(8,191
)(1)%

$
685


(1
)%
$
(4,096
)1%

$
(685
)

1
%
$
4,1092%

$
(1,369
)

2
%
$
8,2183%

$
(2,053
)

3
%
$
12,326






Results of OperationsConsolidated Overview

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

Three months ended March 31,2009

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

$
46,242

$
371Medicare Part D(1)


(35,864
)

(29,634
)Traditional Insurance(1)


(15,489
)

1,019Senior Administrative Services(1)


3,425


6,023Corporate(1)


(11,635
)

(4,084
)Net realized losses on investments


(7,222
)

(29,008
)Loss before benefit for income taxes(1)


(20,543
)

(55,313
)Benefit for income taxes


(7,395
)

(9,313
)Net loss

$
(13,148
)
$
(46,000
)Loss per common share (diluted):Net loss

$
(0.16
)
$
(0.50
)






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Net loss for the three months ended March 31, 2009 was $13.1 million, or $0.16 per diluted share, compared to net loss of
$46.0 million, or $0.50 per diluted share for the three months ended March 31, 2008. The net loss for the first quarter of 2009 includes realized investment losses, net of taxes, of
$4.7 million, or $0.06 per diluted share, relating primarily to the recognition of other-than-temporary impairments on investments. Net income for the first quarter of
2008 includes realized investment losses, net of taxes, of $29.3 million, or $0.32 per diluted share, also related primarily to the recognition of other-than-temporary
impairments on investments. Our effective tax rate was 36.0% for the first quarter of 2009, and 16.8% for the first quarter of 2008. The low effective tax rate in the first quarter of 2008 was due
primarily to a valuation allowance established in connection with the investment impairment. This allowance was subsequently released in the second quarter of 2008.

Our
Senior Managed CareMedicare Advantage segment generated income before taxes of $46.2 million in the three months ended March 31, 2009, an increase of
$45.9 million compared to the three months ended March 31, 2008. The increase in earnings was driven by higher earnings of our PFFS and HMO businesses partially offset by continued
investment in the development of networks at PPO. The improved earnings at PFFS were driven by higher premium and improved loss ratio, and
lower expenses. The improved earnings at HMO were driven by higher premium, improved loss ratio partially offset by higher expenses.

Our
Medicare Part D income decreased by $6.2 million compared to the first quarter of 2008. The seasonality of our Part D earnings increased as a result of the
elimination of PDMS, our joint venture with Caremark, whose profitability was historically earned more evenly through the year. In addition, we recorded $4.0 million of intangibles amortization
in the first quarter of 2009, with the corresponding expense in 2008 not recorded until the second quarter. As a result, this mitigated the increase in profitability resulting from improvements in
both benefit costs and operating expenses.

Our
Traditional Insurance segment income before taxes decreased by $16.5 million compared to the first quarter of 2008, due primarily to decreased net investment income combined
with an increase in the overall loss ratio for the segment to 83.0% for the quarter ended March 31, 2009 from 77.1% for the same period last year.

Segment
income before taxes for our Senior Administrative Services segment declined by $2.6 million, or 43%, to $3.4 million for the first quarter of 2009, as compared to
the same period of 2008. This decrease is primarily the result of anticipated reduction in service fee revenues, along with a corresponding decrease in general expenses.

The
loss from our Corporate segment increased by $7.6 million, or 185%, for the first quarter of 2009 compared to the first quarter of 2008. This was due primarily to a
significant non-recurring release of a bonus accrual in the first quarter of 2008 as well as lower net investment income, partially offset by lower interest expense.

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Table of Contents

Segment ResultsSenior Managed CareMedicare Advantage

Three months ended
March 31,2009

2008(in thousands)Net premiums

$
640,885

$
561,685Net investment and other income


5,361


5,034Total revenue


646,246


566,719Medical expenses


517,771


490,290Amortization of intangible assets


1,146


1,014Commissions and general expenses


81,087


75,044Total benefits, claims and other deductions


600,004


566,348Segment income before taxes

$
46,242

$
371


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



Our Senior Managed CareMedicare Advantage segment generated income before taxes of $46.2 million in the three
months ended March 31, 2009, an increase of $45.9 million compared to the three months ended March 31, 2008. The increase in earnings was driven by higher earnings of our PFFS and
HMO businesses partially offset by continued investment in the development of provider networks at PPO. The improved earnings at PFFS were driven by higher
premiums and an improved loss ratio, and lower expenses. The improved earnings at HMO were driven by higher premiums and an improved loss ratio partially offset by higher expenses.

Membership.For a discussion of the accounting for Medicare Advantage policies, including PFFS, see Note 2 of the notes to the
consolidated
financial statements in our annual report on Form 10-K. There are timing differences between the addition of members to our administrative system and the approval, or accretion, of
the member by CMS before we are paid for the member by CMS. We analyze the membership in our administrative system and the enrollment provided by CMS. Due to the growth of the business and limited
historical experience, we recognize these timing delays and that CMS may not approve the Medicare beneficiary for enrollment in our plans. Although we are unable to precisely quantify the impact of
any potential member change from that used in our consolidated financial results, we do not believe that any change from the amounts reported as of March 31, 2009 is likely to be material.

Revenues.Net premiums for the Senior Managed CareMedicare Advantage segment increased by $79.2 million compared to the
three
months ended March 31, 2008, primarily due to an increase in the amount of premium for PFFS and HMO. This increase was due primarily to an increase in the PFFS and HMO per member premium yield,
including an $8.0 million adjustment of 2008 risk scores as well as growth in HMO membership. The improved yield was partially offset by a decline in PFFS member months relative to the three
months ended March 31, 2008.

Benefits, Claims and Expenses.Medical expenses increased by $27.5 million compared to the first quarter of 2008, consistent with
the higher
level of earned premium. The Medicare Advantage medical

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Table of Contents

loss
ratio improved to 80.8% for the first quarter of 2009 from 87.3% for the same period in 2008. This improvement was due to an increase in the premium earned discussed above combined with lower
utilization of HMO benefits and $7.7 million of net positive development related to prior years in the PFFS and HMO lines. This positive development compares with $10.0 million of
adverse prior year development recognized in the first quarter of 2008. Commissions and general expenses increased by $6.0 million compared to the first quarter of 2008 primarily as the result
of an increase in commissions and general expenses related to PPO. The ratio of commissions and general expenses to premiums decreased to 12.7% in first quarter 2009 from 13.4% in first quarter 2008.

Segment ResultsMedicare Part D

Three months ended
March 31,2009

2008(in thousands)Direct and assumed premium

$
496,669

$
523,542Risk corridor adjustment/government reinsurance


117,729


126,311Direct and assumed premium after risk corridor adjustment


614,398


649,853Ceded premium


133


(99,088
)Net premium


614,531


550,765Other Part D incomePDMS


97


16,052Total Part D revenue


614,628


566,817Net investment and other income


1,111


6,346Total revenue


615,739


573,163Pharmacy benefits


593,785


544,450Amortization of intangible assets


4,011


Commissions and general expenses


53,807


58,347Total benefits, claims and other deductions


651,603


602,797Segment loss before taxes

$
(35,864
)
$
(29,634
)


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

For
a discussion of the accounting for Part D see Notes 2 and 3 of the notes to the consolidated financial statements in our Annual Report on Form 10-K.
Our revenues and claims expense are based on earned premium and incurred pharmacy benefits for the reported enrolled membership. The membership information is subject to reconciliation and refinement
with CMS with respect to the allocation among all plans participating in the Part D program and is an on-going process. As a result of the on-going reconciliation
process, it is likely that the membership data upon which we based our results will change, with a corresponding change in the financial results for the segment. We are unable to precisely quantify
the impact of any potential change until the membership data for specific time periods is fully reconciled with CMS, however, based upon our past experience, we do not believe that the effect of any
change from the amounts reported as of March 31, 2009 is likely to be material.

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Other
Part D incomePDMS represented our equity in the earnings of PDMS. We report this as revenue for segment reporting purposes in analyzing the ratio of net
pharmacy benefits incurred
because the amount is incorporated in the calculation of the risk corridor adjustment. For consolidated reporting, we reflect this amount as a separate line following income from continuing
operations. See the reconciliation of segment revenues in Note 12 of the notes to the consolidated financial statements in this Quarterly Report on Form 10-Q.

Our
strategic alliance with CVS/Caremark was terminated effective December 31, 2008. Upon termination of this strategic alliance, CVS and Universal American were each assigned
responsibility for the drug benefit of specific Prescription Pathway's plan members in a manner to achieve an approximately equal distribution of the value of business that had been generated by the
strategic alliance. Universal American has continued to operate PDPs derived from this business under the name PrescribaRx. Effective January 1, 2009, PDMS will no longer manage the strategic
alliance and will not earn revenue or incur expenses related to the 2009 Medicare PDP year. The historical net earnings of PDMS were not subject to any seasonality patterns during the year, and as
such, we anticipate that the results of our Part D plan for 2009 will have more seasonality.

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



Our Medicare Part D income decreased by $6.2 million compared to the first quarter of 2008. The seasonality of our
Part D earnings increased as a result of the elimination of PDMS, our joint venture with Caremark, whose profitability was historically earned more evenly through the year. In addition, we
recorded $4.0 million of intangibles amortization in the first quarter of 2009, with the corresponding expense in 2008 not recorded until the second quarter. As a result, this mitigated the
increase in profitability resulting from improvements in both benefit costs and operating expenses.

Membership.At March 31, 2009, our total membership for Medicare Part D, based on enrollment information provided by CMS, was
approximately 1,700,000 members compared to our net retained membership of 1,578,000 members at March 31, 2008, representing an increase of 122,000 members or 8% over March 31, 2008. The
increase is principally attributable to growth from open enrollment and dual eligible member's automatically assigned to our plans in 2009.

Revenues.Net premium increased by $63.8 million, or 12%, compared to the first quarter of 2008. This
growth resulted primarily from the increase in Medicare Part D net retained membership discussed above. The government risk corridor adjustment for the first quarter of 2009 was an increase in
revenues of $117.7 million, compared with an increase of $126.3 million for the same period in 2008. Other Part D incomePDMS decreased by $16.0 million
compared to the first quarter of 2008 as a result of the termination of the strategic alliance with CVS/Caremark. Net investment and other income decreased by $5.2 million principally as a
result of lower rates of return on investments and lower cash flow.

Benefits, Claims and Expenses.Pharmacy benefits increased by $49.3 million or 9% compared to the first quarter of 2008. Benefits
for the
first quarter of 2009 reflect a $1.4 million increase related to its reserves for the 2008 CMS PDE reconciliation. This compares to a $2.0 million reduction in benefits during the same
period in 2008 related to the 2007 CMS PDE reconciliation. The ratio of incurred prescription drug benefits to net premium in 2009 was 96.6% compared to 98.9% for 2008 primarily as a result of the
improvement in benefit costs in 2009. Commissions and general expenses increased by $0.9 million primarily due to a $1.4 million accelerated depreciation charge, offset by the net
reduction in expenses both related to the restructuring of our Medicare Part D call center and other member services. This restructuring initiative began during 2008 and will be completed
during 2009.

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Table of Contents

Segment ResultsTraditional Insurance

Three months ended
March 31,2009

2008(in thousands)Premiums:Direct and assumed

$
125,379

$
227,111Ceded


(31,650
)

(121,902
)Net premiums


93,729


105,209Net investment income


9,301


16,422Other income


1,073


1,226Total revenue


104,103


122,857Policyholder benefits


77,764


81,153Interest credited to policyholders


4,284


4,139Change in deferred acquisition costs


7,699


7,530Amortization of intangible assets


684


804Commissions and general expenses, net of allowances


29,161


28,212Total benefits, claims and other deductions


119,592


121,838Segment (loss) income before taxes

$
(15,489
)
$
1,019




Our Traditional Insurance segment (loss) income before taxes decreased by $16.5 million compared to the first quarter of 2008,
due primarily to decreased net investment income combined with an increase in the overall loss ratio for the segment to 83.0% for the quarter ended March 31, 2009 from 77.1% for the same period
last year. In addition to increased mortality on the life business, there was a higher frequency of claims on the senior market business and a slightly higher frequency of disability income claims.
Individual loss ratios for the quarter ended March 31, 2009 were 78.9% for Medicare supplement, compared with 76.2% for the same period last year; 98.5% for specialty health, compared with
92.5% for the same period last year and 84.0% for life and annuity, compared with 63.1% for the same period last year.

Revenues.Net premium declined by $11.5 million, or 11%, primarily caused by the continued effect of lapsation of our Medicare
supplement in
force products. Gross and ceded premium for specialty health declined in the first quarter of 2009 compared to the same period of 2008 as the result of the termination of the reinsurance arrangement
with PharmaCare Re for the state of Connecticut employees. Below is a summary of premium for the segment by major lines of business:

Premium

Three months ended March 31,2009

2008Gross

Ceded

Net

Gross

Ceded

Net(in thousands)Medicare supplement

$
87,174

$
(22,972
)
$
64,202

$
101,380

$
(27,500
)
$
73,880Specialty health


18,870


(2,820
)

16,050


106,189


(88,803
)

17,386Life insurance and annuity


19,335


(5,858
)

13,477


19,542


(5,599
)

13,943Total premium

$
125,379

$
(31,650
)
$
93,729

$
227,111

$
(121,902
)
$
105,209


37

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Table of Contents

Net
investment income decreased by $7.1 million as a result of lower invested assets caused by less business in force as well as lower interest rates.

Benefits, Claims and Expenses.Policyholder benefits incurred declined by $3.4 million, or 4.2%, compared to the first quarter of
2008. This
decline was principally caused by a net reduction in Medicare supplement benefits of $5.6 million as a result of a decline in the business partially offset by an increase in the loss ratio to
78.9% for the first quarter of 2009 from 76.2% for the same period last year, driven by an increase in lifetime reserve/exhaust claims. This decrease was partially offset by a $2.5 million, or
28.7% increase in life and annuity benefits which were driven by unfavorable mortality.

Commissions
and general expenses, net of allowances, increased by $0.9 million, or 3.4%, compared to the first quarter of 2008. The following table details the components of
commission and general expenses, net of allowances:

Three months ended
March 31,2009

2008(in thousands)Commissions

$
15,311

$
17,944Other operating costs


20,516


19,128Reinsurance allowances


(6,666
)

(8,860
)Commissions and general expenses, net of allowances

$
29,161

$
28,212


The
lower level of commissions is associated with the continued aging of our in force renewal premium and less new business production that has higher commission rates. Other operating
costs increased $1.4 million for the quarter ended March 31, 2009, compared to the first quarter of 2008. This was partially driven by increased cost associated with the conversion and
sale of the Life and Annuity business. Allowances received from reinsurers decreased $2.2 million for the first quarter of 2009 from the first quarter of 2008, primarily due to the termination
of the reinsurance arrangement with PharmaCare Re, the reduction in new business ceded and the effects of normal lower commission allowances on our aging base of ceded renewal business.

38

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Table of Contents

Segment ResultsSenior Administrative Services

Three months ended
March 31,2009

2008(in thousands)Affiliated fee revenueMedicare supplement

$
3,556

$
5,181Part D





7,026Long term care


1,101


545Life insurance


2,052


653Other


1,683


2,092Total affiliated revenue


8,392


15,497Unaffiliated fee revenueMedicare Advantage


985


3,539Medicare supplement


1,207


1,493Long term care


1,286


1,615Non-insurance products


113


252Part D





136Other


21


38Total unaffiliated revenue


3,612


7,073Total revenue


12,004


22,570Amortization of present value of future profits


52


82General expenses


8,527


16,465Total expenses


8,579


16,547Segment income before taxes

$
3,425

$
6,023


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



Segment income before taxes for our Senior Administrative Services segment declined by $2.6 million, or 43%, to
$3.4 million for the first quarter of 2009, as compared to the same period of 2008. This decrease is primarily the result of anticipated reductions in service fee revenues, along with a
corresponding decrease in general expenses.

Revenue
declined by $10.6 million, or 47%, during the first quarter of 2009 compared to the first quarter of 2008. Affiliated service fee revenue decreased by $7.1 million
primarily as a result of the loss
of fee income associated with the administration of our Part D business that is performed directly by the affiliated entities in 2009. Unaffiliated service fee revenue decreased by
$3.5 million, due primarily to a decrease in services performed for unaffiliated Medicare Advantage, long term care and Medicare supplement business. General expenses for the segment decreased
by $7.9 million, or 48%, primarily due to the decline in the business discussed above.

39

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Table of Contents

Segment ResultsCorporate

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

Three months ended
March 31,2009

2008(in thousands)Interest expense

$
5,259

$
6,295Amortization of capitalized loan origination fees


262


262Stock-based compensation expense


1,764


1,605Other parent company expenses, net of revenues


4,350


(4,078
)Segment loss before taxes

$
11,635

$
4,084




The loss from our Corporate segment increased by $7.6 million, or 185%, for the first quarter of 2009 compared to the first
quarter of 2008. This was due primarily to a significant non-recurring release of a bonus accrual in the first quarter of 2008 as well as lower net investment income, partially offset by
lower interest expense.

The
decrease in interest expense of $1.0 million is due primarily to a reduction in the interest rates charged on the debt, as compared to the first quarter of 2008. The weighted
average interest rate on our loan payable was 4.6% for the first quarter of 2009 compared to 4.8% for the first quarter of 2008. The weighted average interest rate on our other long term debt was 6.4%
for the first quarter of 2009 compared to 7.7% for the first quarter of 2008. See "Liquidity and Capital Resources" for additional information regarding our loan payable and other long term debt. The
increase in stock-based compensation resulted primarily from option awards, in the second half of 2008 and the first quarter of 2009, to officers and other employees approved by the compensation
committee.

The
increase in other parent company expenses, net of revenues, of $8.4 million was primarily due to the release in the first quarter of 2008 of a 2007 bonus accrual that was
$5.6 million in excess of the final amounts approved by the compensation committee and paid in 2008, compared with a $0.5 million release for similar reasons in the first quarter of
2009. In addition, net investment income decreased $1.5 million as a result of lower invested assets as a lower rate.



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

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



40

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Table of Contents



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

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

As
of March 31, 2009, the principal amount of the surplus note issued by American Exchange was $5.6 million and bears interest at LIBOR plus 250 basis points. American
Exchange did not make a principal payment during the quarter ended March 31, 2009, but we anticipate the surplus note balance will be paid in full during the 2nd quarter of
2009.

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

Our
parent holding company did not make capital contributions to American Exchange and American Exchange did not make capital contributions to its subsidiaries during the quarters ended
March 31, 2009. Further, no dividends were declared nor paid to American Exchange from its subsidiaries during the first quarter of 2009.

Capital
contributions to and dividends from for our HMO affiliates are made through our managed care holding company, Heritage Health Systems, Inc. ("HHSI"). HHSI made capital
contributions totaling $3.1 million to its HMO subsidiaries during the first quarter of 2009. Further, no dividends were declared nor paid to HHSI from its subsidiaries during the first quarter
of 2009.

Debt principal and interestCredit Facility, Swaps and Other Long Term Debt.We currently have a credit facility consisting of a
$350 million term loan and a $150 million revolver. As of March 31, 2009, $319.8 million was outstanding under the term loan agreement. Effective March 31, 2009, the
interest rate on the term loan portion of the credit facility was 1.62% and we pay a commitment fee on the unutilized revolving loan facility at an annualized rate of 10 basis points. We had not drawn
on the revolving loan facility as of the date of this report. We made a regularly scheduled principal payment of $0.9 million and interest payments totaling $3.8 million during the first
quarter of 2009.

On
December 4, 2007, we entered into two separate interest rate swap agreements on a total notional amount of $250 million, where we pay an average locked-in
fixed rate of 4.14% and receive a floating rate based on Libor. In the first quarter of 2009, we paid a net amount of $0.2 million in association with these swap agreements.

We
formed statutory business trusts, in order to issue a combined $125.0 million in thirty year trust preferred securities, with $110 million currently outstanding.
$60 million of these securities have floating interest rates based on Libor and are currently at an average rate of 5.26%. The remaining

41

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Table of Contents

$50 million
is fixed at 7.68% until March 2012. We made interest payments on the trust preferred securities totaling $2.0 million during the first quarter of 2009.

Insurance subsidiaries and HMO affiliatesLiquidity.At March 31, 2009, we held cash and cash equivalents totaling
$334 million and fixed maturity securities that could readily be converted to cash with carrying values of $968 million. The net yields on our cash and invested assets decreased to 4.5%
for the quarter ended March 31, 2009, from 5.7% for the quarter ended March 31, 2008.

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

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

Investments.We invest primarily in fixed maturity securities of the U.S. Government and its agencies, mortgage back securities and in
corporate
fixed maturity securities with investment grade ratings of BBB- or higher by S&P or Baa3 or higher by Moody's Investor Service. As of March 31, 2009, approximately 98% of our fixed
maturity investments had investment grade ratings from S&P or Moody's.

We
have recently adopted a more conservative approach to our investment portfolio, which focuses more on capital preservation than on generation of investment yield. As a result, as of
March 31, 2009, approximately 33% of our portfolio is in cash equivalents, largely in government money market funds,
and, in the aggregate, approximately 48% of our portfolio is securities backed by the US government or its agencies.

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

Effects of Recently Issued and Pending Accounting Pronouncements

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

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Table of Contents

ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Investment Interest Rate Sensitivity

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

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

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

The
sensitivity analysis of interest rate risk assumes an instantaneous shift in a parallel fashion across the yield curve, with scenarios of interest rates increasing and decreasing 100
and 200 basis points from their levels as of March 31, 2009, and with all other variables held constant. The following table summarizes the impact of the assumed changes in market interest
rates.

March 31, 2009

Effect of Change in Market Interest Rates on Market Value
of Fixed Income Portfolio as of March 31, 2009Market Value of
Fixed Income Portfolio

200 Basis
Point Decrease

100 Basis
Point Decrease

100 Basis
Point Increase

200 Basis
Point Increase(in millions)$967.7

$48.2

$24.3

$(24.3)

$(51.4)


Debt

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

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

The
sensitivity analysis of interest rate risk assumes scenarios involving increases or decreases in LIBOR of 100 and 200 basis points from their levels as of and for the three months
ended March 31,

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Table of Contents

2009,
and with all other variables held constant. The following table summarizes the impact of changes in LIBOR.

Effect of Change in LIBOR on Pre-tax Income
for the three months ended March 31, 2009Weighted
Average
Balance
OutstandingDescription of Floating Rate Debt

Weighted
Average
Interest Rate

200 Basis
Point
Decrease(1)

100 Basis
Point
Decrease

100 Basis
Point
Increase

200 Basis
Point
Increase(in millions)Loan payable


1.93
%
$
70.6

$
0.2

$
0.1

$
(0.2
)
$
(0.4
)Other long term debt


5.81
%
$
60.0


0.3


0.2


(0.2
)

(0.3
)Total







$
0.5

$
0.3

$
(0.4
)
$
(0.7
)


---

As
noted above, we have fixed the interest rate on $300 million of our $430 million of total debt outstanding, leaving $130 million of the debt exposed to rising
interest rates, as of March 31, 2009. We had approximately $471 million of cash and cash equivalents as of March 31, 2009. As discussed previously, on April 24, 2009, we
closed on the reinsurance of substantially all of our in force life insurance and annuity business. In connection with this closing, we sold approximately $50 million of fixed maturity
securities to raise cash for the transfer of approximately $456 million of cash equivalents to the reinsurer. We anticipate that any increase or decrease in the interest cost of our debt as a
result of an increase in interest rates will be mitigated by an increase or decrease in the net investment income from our cash and cash equivalents.

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

ITEM 4CONTROLS AND PROCEDURES



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



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

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Table of Contents

acts
of some persons or collusion of two or more people can also circumvent controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls
to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.



We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2009. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2009, at a reasonable assurance level, to timely alert management to
material information required to be included in our periodic filings with the Securities and Exchange Commission.



There were no changes in our internal controls over financial reporting during the quarter ended March 31, 2009 that have
materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

45

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Table of Contents

PART II

ITEM 1LEGAL PROCEEDINGS

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

ITEM 1ARISK FACTORS

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

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

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

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

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

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

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

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

In April 2009, the World Health Organization assessed the status of the influenza known as swine flu and classified it as a phase 5 alert. This strain of
influenza can become a pandemic health event

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Table of Contents

that
may cause a significant increase in the utilization of our health benefits, and may impact the health of our employees which might increase absenteeism, either or both of which can adversely
impact our business.

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

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

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

Issuer Purchases of Equity Securities

Period

Total Number
of Shares
Purchased

Average
Price
Paid
Per Share

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

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


848,218

$
9.59


848,218

$
20,062February 1, 2009  February 28, 2009


589,261

$
8.91


589,261


14,814March 1, 2009  March 31, 2009


1,236,800

$
6.90


1,236,800


6,275Total


2,674,279





2,674,279


---

Recent Sales of Unregistered Securities

None.

ITEM 3DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5OTHER INFORMATION

None.

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Table of Contents

ITEM 6EXHIBITS

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

3.1

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

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

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

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

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

Certificate of Amendment to Certificate of Incorporation changing the name of Universal American Financial Corp. to Universal American Corp. (filed as Exhibit 99.1 to the Registrant's Current Report on
Form 8-K filed December 3, 2007, and incorporated by reference herein).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.May 4, 2009

/s/ RICHARD A. BARASCH Richard A. Barasch Chief Executive OfficerMay 4, 2009

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


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