<PAGE>

================================================================================

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

                             ----------------------

                                    FORM 10-Q

(MARK ONE)

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

                                       OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
                    FOR THE TRANSITION PERIOD FROM     TO

                           COMMISSION FILE NO. 0-11321
                           ---------------------------

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

           NEW YORK                                        11-2580136
(State of other jurisdiction of               (IRS Employer Identification No.)
incorporation or organization)

SIX INTERNATIONAL DRIVE, SUITE 190
         RYE BROOK, NEW YORK                                  10573
(Address of principal executive offices)                    (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 [X] No [ ]

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ ]

      The number of shares of the registrant's common stock, par value $0.01 per
share, outstanding as of August 3, 2004 was 54,825,301.

================================================================================

<PAGE>

                       UNIVERSAL AMERICAN FINANCIAL CORP.
                                    FORM 10-Q

                                    CONTENTS

<TABLE>
<CAPTION>
                                                                                                               Page No.
<S>                                                                                                            <C>
PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements (unaudited)

         Consolidated Balance Sheets                                                                              3
         Consolidated Statements of Operations - Three Months                                                     4
         Consolidated Statements of Operations - Six Months                                                       5
         Consolidated Statements of Stockholders' Equity and Comprehensive Income                                 6
         Consolidated Statements of Cash Flows                                                                    7
         Notes to Consolidated Financial Statements                                                               8

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations                   24

Item 3.  Quantitative and Qualitative Disclosure of Market Risk                                                  53

Item 4.  Controls and Procedures                                                                                 55

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings                                                                                       55

Item 2.  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                        55

Item 3.  Defaults Upon Senior Securities                                                                         56

Item 4.  Submission of Matters to a Vote of Security Holders                                                     56

Item 5.  Other Information                                                                                       56

Item 6.  Exhibits and Reports on Form 8-K                                                                        57

Signatures                                                                                                       57
</TABLE>

                                       2
<PAGE>

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

                       UNIVERSAL AMERICAN FINANCIAL CORP.
                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                               JUNE 30,            DECEMBER 31,
                                                                                                 2004                  2003
                                                                                                 ----                  ----
                                                                                                       (In thousands)
<S>                                                                                          <C>                   <C>
        ASSETS
Investments (Note 7):
  Fixed maturities available for sale, at fair value
    (amortized cost: 2004, $1,127,009; 2003, $1,081,954)                                     $  1,154,291          $  1,141,392
  Equity securities, at fair value (cost: 2004, $758; 2003, $1,481)                                   748                 1,507
  Policy loans                                                                                     25,093                25,502
  Other invested assets                                                                             1,169                 1,583
                                                                                             ------------          ------------
    Total investments                                                                           1,181,301             1,169,984

Cash and cash equivalents                                                                          85,971               116,524
Accrued investment income                                                                          14,153                14,476
Deferred policy acquisition costs                                                                 177,486               143,711
Amounts due from reinsurers                                                                       215,114               219,182
Due and unpaid premiums                                                                             7,748                 7,433
Deferred income tax asset                                                                          15,950                15,757
Present value of future profits and other amortizing intangible assets                             62,352                44,047
Goodwill and other indefinite lived intangible assets (Note 4)                                     78,691                13,117
Income taxes receivable                                                                             1,100                     -
Other assets                                                                                       49,012                36,717
                                                                                             ------------          ------------
    Total assets                                                                             $  1,888,878          $  1,780,948
                                                                                             ============          ============

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Policyholder account balances                                                                $    449,141          $    419,685
Reserves for future policy benefits                                                               724,778               722,466
Policy and contract claims - life                                                                   7,305                 8,672
Policy and contract claims - health                                                               109,215               100,232
Loan payable (Note 10)                                                                            103,688                38,172
Other long term debt (Note 11)                                                                     75,000                75,000
Amounts due to reinsurers                                                                           5,606                 6,779
Income taxes payable                                                                                    -                12,489
Other liabilities                                                                                  57,526                51,715
                                                                                             ------------          ------------
    Total liabilities                                                                           1,532,259             1,435,210
                                                                                             ------------          ------------
STOCKHOLDERS' EQUITY (Note 9)

Common stock (Authorized: 100 million shares, issued:
  2004, 54.8 million shares; 2003, 54.1 million shares)                                               548                   541
Additional paid-in capital                                                                        167,232               164,355
Accumulated other comprehensive income                                                             20,478                39,774
Retained earnings                                                                                 169,385               142,458
Less:  Treasury stock (2004, 0.1 million shares; 2003, 0.2 million shares)                         (1,024)               (1,390)
                                                                                             ------------          ------------
    Total stockholders' equity                                                                    356,619               345,738
                                                                                             ------------          ------------
    Total liabilities and stockholders' equity                                               $  1,888,878          $  1,780,948
                                                                                             ============          ============
</TABLE>

            See notes to unaudited consolidated financial statements.

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                           2004                  2003
                                                                           ----                  ----
THREE MONTHS ENDED JUNE 30,                                            (IN THOUSANDS, PER SHARE AMOUNTS IN
---------------------------                                                          DOLLARS)
<S>                                                                    <C>                  <C>
Revenues:
   Direct premiums and policyholder fees earned                        $   199,574          $     179,880
   Reinsurance premiums assumed                                              8,786                  6,290
   Reinsurance premiums ceded                                              (61,763)               (67,517)
                                                                       -----------          -------------
         Net premiums and policyholder fees earned                         146,597                118,653

   Net investment income                                                    16,084                 15,432
   Realized gains on investments                                               209                  1,185
   Fee and other income                                                      3,617                  2,839
                                                                       -----------          -------------
          Total revenues                                                   166,507                138,109
                                                                       -----------          -------------
Benefits, claims and expenses:
   Net change in future policy benefits                                       (271)                 1,627
   Net claims and other benefits                                            99,918                 81,585
   Interest credited to policyholders                                        4,258                  3,724
   Net increase in deferred acquisition costs                              (14,902)               (11,057)
   Amortization of present value of future profits                             948                  1,074
   Commissions                                                              34,417                 34,747
   Commission and expense allowances on reinsurance ceded                  (12,179)               (18,065)
   Interest expense                                                          1,762                  1,257
   Other operating costs and expenses                                       32,631                 26,572
                                                                       -----------          -------------
          Total benefits, claims and expenses                              146,582                121,464
                                                                       -----------          -------------
Income before taxes                                                         19,925                 16,645
Income tax expense                                                           6,874                  5,645
                                                                       -----------          -------------
Net income                                                             $    13,051          $      11,000
                                                                       ===========          =============

Earnings per common share:
  Basic                                                                $      0.24          $        0.21
                                                                       ===========          =============
  Diluted                                                              $      0.23          $        0.20
                                                                       ===========          =============
</TABLE>

            See notes to unaudited consolidated financial statements.

                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                         2004                   2003
                                                                         ----                   ----
SIX MONTHS ENDED JUNE 30,                                            (IN THOUSANDS, PER SHARE AMOUNTS IN
-------------------------                                                         DOLLARS)
<S>                                                                  <C>                    <C>
Revenues:
   Direct premiums and policyholder fees earned                      $     392,305          $     334,526
   Reinsurance premiums assumed                                             18,319                 12,739
   Reinsurance premiums ceded                                             (127,937)              (149,426)
                                                                     -------------          -------------
         Net premiums and policyholder fees earned                         282,687                197,839

   Net investment income                                                    32,162                 29,810
   Realized gains on investments                                             3,801                  1,295
   Fee and other income                                                      6,395                  7,078
                                                                     -------------          -------------
          Total revenues                                                   325,045                236,022
                                                                     -------------          -------------
Benefits, claims and expenses:
   Net change in future policy benefits                                      7,864                  6,693
   Net claims and other benefits                                           186,292                132,325
   Interest credited to policyholders                                        8,478                  6,856
   Net increase in deferred acquisition costs                              (31,223)               (19,308)
   Amortization of present value of future profits                           1,871                  1,195
   Commissions                                                              68,212                 65,111
   Commission and expense allowances on reinsurance ceded                  (23,262)               (40,421)
   Interest expense                                                          3,285                  2,073
   Early extinguishment of debt (Note 10)                                        -                  1,766
   Other operating costs and expenses                                       62,418                 51,436
                                                                     -------------          -------------
          Total benefits, claims and expenses                              283,935                207,726
                                                                     -------------          -------------
Income before taxes                                                         41,110                 28,296
Income tax expense                                                          14,183                  9,748
                                                                     -------------          -------------
Net income                                                           $      26,927          $      18,548
                                                                     =============          =============
Earnings per common share:
  Basic                                                              $        0.50          $        0.35
                                                                     =============          =============
  Diluted                                                            $        0.48          $        0.34
                                                                     =============          =============
</TABLE>

            See notes to unaudited consolidated financial statements.

                                       5
<PAGE>

                       UNIVERSAL AMERICAN FINANCIAL CORP.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                            AND COMPREHENSIVE INCOME
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                ACCUMULATED
                                                   ADDITIONAL      OTHER
                                       COMMON        PAID-IN    COMPREHENSIVE     RETAINED     TREASURY
SIX MONTHS ENDED JUNE 30,               STOCK       CAPITAL     INCOME (LOSS)     EARNINGS       STOCK        TOTAL
-------------------------               -----       -------     -------------     --------       -----        -----
                                                                       (In thousands)
<S>                                   <C>         <C>          <C>               <C>           <C>          <C>
                2003

Balance, January 1, 2003              $     532   $   158,264  $       29,887    $    99,406   $  (1,320)   $  286,769

Net income                                    -             -               -         18,548           -        18,548
Other comprehensive income
   (Note 8)                                   -             -          21,974              -           -        21,974
                                                                                                            ----------
Comprehensive income                                                                                            40,522
                                                                                                            ----------
Issuance of common stock (Note 9)             5         2,147               -              -           -         2,152
Stock-based compensation                      -           535               -              -           -           535
Loans to officers                                         110               -              -           -           110
Treasury shares purchased, at
  cost (Note 9)                               -             -               -              -        (240)         (240)
Treasury shares reissued (Note 9)             -            18               -              -       1,041         1,059
                                      ---------   -----------  --------------    -----------   ---------    ----------
Balance, June 30, 2003                $     537   $   161,074  $       51,861    $   117,954   $    (519)   $  330,907
                                      =========   ===========  ==============    ===========   =========    ==========
                2004

Balance, January 1, 2004              $     541   $   164,355  $       39,774    $   142,458   $  (1,390)   $  345,738

Net income                                    -             -               -         26,927           -        26,927
Other comprehensive income
   (Note 8)                                   -             -         (19,296)             -           -       (19,296)
                                                                                                            ----------
Comprehensive income                                                                                             7,631
                                                                                                            ----------
Issuance of common stock (Note 9)             7         2,405               -              -           -         2,412
Stock-based compensation                      -           219               -              -           -           219
Loans to officers                             -            38               -              -           -            38
Treasury shares purchased, at
  cost (Note 9)                               -             -               -              -        (270)         (270)
Treasury shares reissued (Note 9)             -           215               -              -         636           851
                                      ---------   -----------  --------------    -----------   ---------    ----------
Balance, June 30, 2004                $     548   $   167,232  $       20,478    $   169,385   $  (1,024)   $  356,619
                                      =========   ===========  ==============    ===========   =========    ==========
</TABLE>

            See notes to unaudited consolidated financial statements.

                                       6

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                           2004                2003
SIX MONTHS ENDED JUNE 30,                                                                  ----                ----
-------------------------                                                                     (In thousands)
<S>                                                                                  <C>                 <C>
Cash flows from operating activities:
Net income                                                                           $        26,927      $       18,548
Adjustments to reconcile net income to net cash provided by operating activities,
  net of balances acquired (see Note 3 - Business Combinations):
  Deferred income taxes                                                                       12,589               8,490
  Change in reserves for future policy benefits                                                7,311               1,164
  Change in policy and contract claims                                                       (10,240)              3,221
  Change in deferred policy acquisition costs                                                (31,223)            (19,308)
  Amortization of present value of future profits                                              1,871               1,195
  Amortization of bond premium                                                                (1,601)             (1,856)
  Amortization of capitalized loan origination fees                                              277               2,009
  Change in policy loans                                                                         409                (236)
  Change in accrued investment income                                                            323                (934)
  Change in reinsurance balances                                                               2,208              19,330
  Realized gains on investments                                                               (3,801)             (1,295)
  Change in income taxes payable                                                             (13,589)             (1,771)
  Other, net                                                                                  (4,744)             (1,522)
                                                                                     ---------------     ---------------
Net cash provided (used) by operating activities                                             (13,283)             27,035
                                                                                     ---------------     ---------------
Cash flows from investing activities:
  Proceeds from sale or redemption of fixed maturities                                       146,195             151,365
  Cost of fixed maturities purchased                                                        (191,574)           (136,621)
  Proceeds from sale of equity securities                                                        723                 286
  Cost of equity securities purchased                                                              -                (427)
  Change in other invested assets                                                                414                 582
  Change in due from / to broker                                                                (482)             (1,322)
  Purchase of business, net of cash acquired (Note 3)                                        (65,961)            (56,880)
  Other investing activities                                                                  (2,052)             (1,515)
                                                                                     ---------------     ---------------
Net cash used by investing activities                                                       (112,737)            (44,532)
                                                                                     ---------------     ---------------
Cash flows from financing activities:
  Net proceeds from issuance of common stock                                                   2,451               2,263
  Cost of treasury stock purchases                                                              (270)               (240)
  Change in policyholder account balances                                                     29,456              45,875
  Change in reinsurance on policyholder account balances                                         389                 584
  Principal repayment on loan payable                                                         (3,078)             (2,825)
  Early extinguishment of debt (Note 10)                                                           -             (62,950)
  Issuance of new debt (Note 10)                                                              66,519              65,000
  Issuance of trust preferred securities (Note 11)                                                 -              40,000
                                                                                     ---------------     ---------------
Net cash provided by financing activities                                                     95,467              87,707
                                                                                     ---------------     ---------------
Net increase (decrease) in cash and cash equivalents                                         (30,553)             70,210

Cash and cash equivalents at beginning of period                                             116,524              36,754
                                                                                     ---------------     ---------------
Cash and cash equivalents at end of period                                           $        85,971     $       106,964
                                                                                     ===============     ===============
Supplemental cash flow information:
  Cash paid during the period for interest                                           $         3,219     $         1,938
                                                                                     ===============     ===============
  Cash paid during the period for income taxes                                       $        15,038     $         3,099
                                                                                     ===============     ===============
</TABLE>

            See notes to unaudited consolidated financial statements.

                                       7
<PAGE>

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

1.       BASIS OF PRESENTATION

         The interim financial information herein is unaudited, but in the
opinion of management, includes all adjustments (consisting of normal, recurring
adjustments) necessary to present fairly the financial position and results of
operations for such periods. The results of operations for the three months and
six months ended June 30, 2004 and 2003 are not necessarily indicative of the
results to be expected for the full year. The accompanying consolidated
financial statements and notes should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 2003. Certain
reclassifications have been made to prior year's financial statements to conform
to current period classifications.

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

         Pyramid Life was acquired on March 31, 2003 and Heritage was acquired
on May 28, 2004. Operating results for these entities prior to the date of their
respective acquisitions are not included in Universal American's consolidated
results of operations.

         Collectively, the insurance company subsidiaries are licensed to sell
life and accident & health insurance and annuities in all fifty states, the
District of Columbia, Puerto Rico and all the provinces of Canada. The principal
insurance products are Medicare Supplement and Select, fixed benefit accident
and sickness disability insurance, long term care, senior life insurance and
fixed annuities. The Company distributes these products through an independent
general agency system and a career agency system. The career agents focus on
sales for Pennsylvania Life, Pyramid Life and Penncorp Life (Canada) while the
independent general agents sell for American Pioneer, American Progressive,
Constitution and Union Bankers. Heritage arranges health care services for
enrolled Medicare beneficiaries for a predetermined, prepaid periodic fee
principally through affiliated entities. CHCS, the Company's administrative
services company, acts as a service provider for both affiliated and
unaffiliated insurance companies for senior market insurance and non-insurance
programs.

2.       RECENT AND PENDING ACCOUNTING PRONOUNCEMENTS

         Adoption of New Accounting Standards

         In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities", an interpretation of Accounting Research Bulletin No. 51,
which requires an entity to assess its interests in a variable interest entity
to determine whether to consolidate that entity. A variable interest entity is
an entity in which the equity investment at risk is not sufficient to permit the
entity to finance its activities without additional subordinated support from
other parties or the equity investors do not have the characteristics of a
controlling financial interest. FIN 46 requires that a variable interest entity
be consolidated by its primary beneficiary, which is the party that will absorb
a majority of the entity's expected losses if they occur, receive a majority of
the entity's expected residual returns if they occur, or both.

                                       8
<PAGE>

         The provisions of FIN 46 were effective immediately for variable
interest entities created after January 31, 2003 and for variable interest
entities for which the Company obtains an interest after that date. For any
variable interest entities acquired prior to February 1, 2003, the provisions of
the interpretation of FIN 46, as amended by FASB Staff Position No. 46-6, are
effective for the quarter ending December 31, 2003. An interpretation of FIN 46
was issued in December 2003, which allows the Company to defer the effective
date for consolidation of variable interest entities to the first reporting
period that ends after March 15, 2004. Adoption of the provisions of the
interpretation FIN 46 did not have a material impact on the consolidated
financial condition or results of operations.

         In December 2003, the FASB issued a revised version of FIN 46 ("FIN
46R"), which incorporates a number of modifications and changes made to the
original version. FIN 46R replaces the previously issued FIN 46 and, subject to
certain special provisions, is effective no later than the end of the first
reporting period that ends after December 15, 2003 for entities considered to be
special-purpose entities and no later than the end of the first reporting period
that ends after March 15, 2004 for all other variable interest entities
("VIEs"). Although early adoption was permitted, the Company adopted FIN 46R in
the first quarter of 2004. The adoption of FIN 46R resulted in the
deconsolidation of the VIEs that issued mandatorily redeemable preferred
securities of a subsidiary trust ("trust preferred securities"). The sole assets
of the VIEs are junior subordinated debentures issued by the Company with
repayment terms identical to the trust preferred securities. Previously, the
trust preferred securities were reported as a separate liability on the
Company's balance sheet as "company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior subordinated debentures".
The dividends on the trust preferred securities were reported as interest
expense. As a result of the deconsolidation, the liability for the junior
subordinated debentures issued by the Company to the subsidiary trusts will be
reported as a separate liability in the Company's balance sheet as "other long
term debt". See Note 11 - Other Long Term Debt for a description of the trust
preferred securities.

         In July 2003, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued a final Statement of
Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts" ("SOP 03-1").
SOP 03-1 addresses a wide variety of topics, however, the primary provision that
applies to the Company relates to capitalizing sales inducements that meet
specified criteria and amortizing such amounts over the life of the contracts
using the same methodology as used for amortizing deferred acquisition costs.
The Company adopted SOP 03-1 effective January 1, 2004.

         The Company currently offers enhanced or bonus crediting rates to
contract-holders on certain of its individual annuity products. The Company's
policy in this regard was to defer only the portion of the bonus interest amount
that was offset by a corresponding reduction in the sales commission to the
agent. Effective January 1, 2004, all bonus interest was deferred and amortized.
The adoption of SOP 03-1 did not have a material impact on the consolidated
financial position or results of operations of the Company.

         The Company has various stock-based compensation plans for its
employees, directors and agents, which are more fully described in Note 9 to the
Consolidated Financial Statements included in the Company's 2003 Annual Report
on Form 10-K. The Company uses the fair value method of accounting for
stock-based awards granted to agents, however, as permitted by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", ("SFAS 123"), the Company measures its stock-based compensation
for employees and directors using the intrinsic value approach under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Accordingly, the Company does not recognize compensation expense upon the
issuance of its stock options when the option terms are fixed and the exercise
price equals the market price of the underlying common stock on the grant date.
The Company has not yet adopted the fair value method of accounting for
stock-based compensation provisions of SFAS 123 for its employees or directors.

                                       9
<PAGE>

         On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure" ("SFAS 148"). This
standard amends SFAS 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. This standard also requires prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has applied the disclosure provisions of SFAS 148 as of
December 31, 2003, as required and presented below. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period. The following table illustrates the pro forma
net income and pro forma earnings per share as if the Company had applied the
fair value based method of accounting to all stock-based awards during each
period presented (using the Black-Scholes option-pricing model for stock
options).

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,                                           2004                  2003
-------------------------                                       ------------          -----------
                                                                     (In thousands, except per
                                                                          share amounts)
<S>                                                             <C>                   <C>
Reported net income                                             $     26,927          $     18,548
Add back:  Stock-based compensation expense included in
  reported net income, net of tax                                         47                   692
Less:  Stock based compensation expense determined under
  fair value based method for all awards, net of tax                    (695)               (1,308)
                                                                ------------          ------------
Pro forma net income                                            $     26,279          $     17,933
                                                                ============          ============

Net income per share:
  Basic, as reported                                            $       0.50          $       0.35
  Basic, pro forma                                              $       0.48          $       0.34

  Diluted, as reported                                          $       0.48          $       0.34
  Diluted, pro forma                                            $       0.47          $       0.33
</TABLE>

         Pro forma compensation expense reflected for prior periods is not
indicative of future compensation expense that would be recorded by the Company
if it were to adopt the fair value based recognition provisions of SFAS 123 for
stock-based compensation for its employees and directors. Future expense may
vary based upon factors such as the number of awards granted by the Company, the
then-current fair market value of such awards.

         Pending Accounting Standards

         In March 2004, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" ("EITF 03-1"). EITF 03-1 adopts a three-step
impairment model for securities within its scope. The three-step model must be
applied on a security-by-security basis as follows:

         Step 1:   Determine whether an investment is impaired. An investment
                   is impaired if the fair value of the investment is less than
                   its amortized cost basis.

         Step 2:   Evaluate whether an impairment is other-than-temporary.
                   For debt securities that cannot be contractually prepaid or
                   otherwise settled in such a way that the investor would not
                   recover substantially all of its cost, an impairment is
                   deemed other-than-temporary if the investor does not have the
                   ability and intent to hold the investment until a forecasted
                   market price recovery or it is probable that the investor
                   will be unable to collect all amounts due according to the
                   contractual terms of the debt security.

         Step 3:   If the impairment is other-than-temporary, recognize an
                   impairment loss equal to the difference between the
                   investment's cost basis and its fair value.

                                       10
<PAGE>

         Subsequent to an other-than-temporary impairment loss, a debt security
should be accounted for in accordance with Statement of Position ("SOP") 03-3,
"Accounting for Loans and Certain Debt Securities Acquired in a Transfer". EITF
03-1 does not replace the impairment guidance for investments accounted for
under EITF Issue 99-20, "Recognition of Interest Income and Impairments on
Purchased and Retained Beneficial Interests in Securitized Financial Assets"
("EITF 99-20"), however, investors will be required to determine if a security
is other-than-temporarily impaired under EITF 03-1 if the security is determined
not to be impaired under EITF 99-20. The disclosure provisions of EITF 03-1
adopted by the Company effective December 31, 2003 and included in Note 6 -
Investments of the consolidated financial statements included in the Company's
2003 Annual Report on Form 10-K will prospectively include securities subject to
EITF 99-20.

         The impairment evaluation and recognition guidance in EITF 03-1 will be
applied prospectively for all relevant current and future investments, effective
in reporting periods beginning after June 15, 2004. Besides the disclosure
requirements adopted by the Company effective December 31, 2003, the final
version of EITF 03-1 included additional disclosure requirements that are
effective for fiscal years ending after June 15, 2004. The adoption of this
standard is not expected to have a material impact on the Company's consolidated
financial condition or results of operations.

3.       BUSINESS COMBINATIONS

         Acquisition of Pyramid Life

         On March 31, 2003, the Company completed the acquisition of all of the
outstanding common stock of Pyramid Life. As part of this transaction, the
Company acquired a block of in-force business as well as a career sales force
that is skilled in selling senior market insurance products. The purchase price
of $57.5 million and transaction costs of $2.4 million were financed with $20.1
million of net proceeds generated from the refinancing of the Company's credit
facility and $39.8 million of cash on hand (See Note 10 - Loan Payable and Note
11 - Other Long Term Debt). Operating results generated by Pyramid Life prior to
March 31, 2003, the date of acquisition, are not included in the Company's
consolidated financial statements.

         At the time of closing, the fair value of net tangible assets of the
acquired company amounted to $27.6 million. The excess of the purchase price
over the fair value of net tangible assets acquired was $32.3 million. At March
31, 2003, the Company performed the initial allocation of the excess to
identifiable intangible assets. Based on this initial allocation, approximately
$13.1 million, net of deferred income taxes of $7.1 million, was assigned to the
present value of future profits acquired, which has a weighted average life of 7
years. Approximately $14.3 million, net of deferred income taxes of $7.7
million, was assigned to the distribution channel acquired, which has a weighted
average life of 30 years. The value of the distribution channel represents the
projected new sales production from the career distribution established by
Pyramid Life. Pyramid Life distributes its products on an exclusive basis
through Senior Sales Solution Centers. The remaining $4.9 million was assigned
to the value of the trademarks and licenses acquired, which are deemed to have
an indefinite life.

         Acquisition of Heritage Health Systems, Inc.

         On May 28, 2004, the Company acquired Heritage Health Systems, Inc.
("Heritage"), a privately owned managed care company that operates Medicare
Advantage plans in Houston and Beaumont Texas, for $98 million in cash plus
transaction costs of $1.6 million. Founded in 1995, Heritage generates its
revenues and profits from three sources. First, Heritage owns an interest in
SelectCare of Texas, a health plan that offers coverage to Medicare
beneficiaries under a contract with the federal government's Centers for
Medicare & Medicaid Services, ("CMS"). Next, Heritage operates three separate
Management Service Organizations ("MSO's") that manage the business of
SelectCare and two affiliated Independent Physician Associations ("IPA's").
Last, Heritage participates in the net results derived from these IPA's. The
acquisition was financed with $66.5 million of net proceeds derived from the
amendment of the Company's credit facility (See Note 10 - Loan Payable) and
$33.1 million of cash on hand. As of July 31, 2004, Heritage had approximately
17,000 Medicare members and annualized revenues of approximately $142 million.
Operating results generated by Heritage prior to May 28, 2004, the date of
acquisition, are not included in the Company's consolidated financial
statements.

                                       11
<PAGE>

         On the acquisition date, the fair value of net tangible assets of
Heritage amounted to $20.9 million. The excess of the purchase price over the
fair value of net tangible assets acquired was $78.7 million. As of May 28,
2004, the Company performed the initial allocation of the excess to identifiable
intangible assets. Based on this initial allocation, approximately $13.1 million
was assigned to amortizing intangible assets, including $11.9 million, net of
deferred income taxes of $6.3 million, which was assigned to the value of the
membership in force, and was determined to have a weighted average life of 6
years and $1.2 million, net of deferred taxes of $0.8 million which was assigned
to the internal IPA's, and was determined to have a weighted average life of 13
years. Approximately $8.2 million was allocated to non-amortizing intangible
assets, including $5.1 million assigned to the value of trademarks, $2.4 million
assigned to an external IPA and $0.7 million assigned to the value of Heritage's
licenses. Each of these items was determined to have indefinite lives. The
balance of $57.4 million was assigned to goodwill.

         The consolidated pro forma results of operations, assuming that Pyramid
Life and Heritage were purchased on January 1, 2004 and 2003 is as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,                       2004                2003
-------------------------                       ----                ----
                                                     (In thousands)
<S>                                         <C>                <C>
Total revenue                               $   382,203        $    329,712
Income before taxes (1)                     $    45,247        $     30,945
Net income (1)                              $    29,616        $     20,260

Earnings per common share:
    Basic                                   $      0.55        $       0.38
    Diluted (1)                             $      0.53        $       0.37
</TABLE>

             (1) The above pro forma results of operations includes excess
                 amortization of capitalized loan fees of $1.9 million in 2003
                 as a result of the assumed refinancing of the existing debt at
                 January 1, 2003. This additional expense reduced net income by
                 $1.2 million or $0.02 per diluted share in 2003. The actual
                 amount of excess amortization reported in 2003 was $1.8
                 million.

         The pro forma results of operations reflect management's best estimate
based upon currently available information. The pro forma adjustments are
applied to the historical financial statements of Universal American, Pyramid
Life and Heritage to account for Pyramid Life and Heritage under the purchase
method of accounting. In accordance with SFAS No. 141, "Business Combinations",
the total purchase cost was allocated to the assets and liabilities of Pyramid
Life and Heritage based on their relative fair values. These allocations are
subject to valuations as of the date of the acquisition based upon appraisals
and other information at that time. Management has provided its best estimate of
the fair values of assets and liabilities for the purpose of this pro forma
information. The pro forma information presented above is for disclosure
purposes only and is not necessarily indicative of the results of operations
that would have occurred if the acquisition had been consummated on the dates
assumed, nor is the pro forma information intended to be indicative of Universal
American's future results of operations.

                                       12
<PAGE>

4.       INTANGIBLE ASSETS

         The following table shows the Company's acquired intangible assets that
continue to be subject to amortization and accumulated amortization expense.

<TABLE>
<CAPTION>
                                                   JUNE 30, 2004                 DECEMBER 31, 2003
                                                   -------------                 -----------------
                                            GROSS CARRY   ACCUMULATED       GROSS CARRY     ACCUMULATED
                                              AMOUNT      AMORTIZATION         AMOUNT       AMORTIZATION
                                              ------      ------------         ------       ------------
                                                                   (In thousands)
<S>                                         <C>           <C>               <C>             <C>
Present value of future profits:
  Career Agency                               $20,208        $ 2,670           $20,208          $  1,784
  Senior Market Brokerage                       2,391          1,117             2,391               974
  Medicare Advantage                           18,246            253                 -                 -
  Administrative Services                       7,672          6,903             7,672             6,770
Value of future override fees                   1,797             96             1,820                20
Value of IPA                                    1,954             13                 -                 -
Distribution Channel - Career Agency           22,055            919            22,055               551
                                              -------        -------           -------          --------
     Total                                    $74,323        $11,971           $54,146          $ 10,099
                                              =======        =======           =======          ========
</TABLE>

         The following table shows the changes in the present value of future
profits and other amortizing intangible assets.

<TABLE>
<CAPTION>
Six months ended June 30,                 2004               2003
-------------------------                 ----               ----
                                                (In thousands)
<S>                                  <C>                <C>
Balance, beginning of year           $       44,047     $       2,986
  Additions and adjustments                  20,176            42,263
  Amortization, net of interest              (1,871)           (1,194)
                                     --------------     -------------
Balance, end of period               $       62,352     $      44,055
                                     ==============     =============
</TABLE>

         Estimated future net amortization expense (in thousands) for the
succeeding five years is as follows:

<TABLE>
<S>                                      <C>
2004 (Remainder of year)                $  3,665
2005                                       6,553
2006                                       6,461
2007                                       6,300
2008                                       5,930
Thereafter                                33,443
                                        --------

   Total                                $ 62,352
                                        ========
</TABLE>

         The carrying amounts of goodwill and intangible assets with indefinite
lives as of June 30, 2004 and December 31, 2003 are shown below.

<TABLE>
<CAPTION>
                                              June 30,            December 31,
                                               2004                  2003
                                               ----                  ----
                                                    (In thousands)
<S>                                          <C>                  <C>
Career Agency                                $  4,867               $  4,867
Senior Market Brokerage                         3,893                  3,893
Medicare Advantage                             65,574                      -
Administrative Services                         4,357                  4,357
                                             --------               --------
   Total                                     $ 78,691               $ 13,117
                                             ========               ========
</TABLE>

                                       13
<PAGE>

5.       REINSURANCE TRANSACTIONS

         Recapture of Reinsurance Ceded

         Effective April 1, 2003, American Pioneer entered into agreements to
recapture approximately $48 million of Medicare Supplement business that had
previously been reinsured to Transamerica Occidental Life Insurance Company,
Reinsurance Division ("Transamerica") under two quota share contracts. In 1996,
American Pioneer entered into two reinsurance treaties with Transamerica.
Pursuant to the first of these contracts, American Pioneer ceded to Transamerica
90% of approximately $50 million of annualized premium that it had acquired from
First National Life Insurance Company in 1996. Under the second contract, as
subsequently amended, American Pioneer agreed to cede to Transamerica 75% of
certain new business from October 1996 through December 31, 1999. As of April 1,
2003, approximately $27 million remained ceded under the First National treaty
and approximately $16 million remained ceded under the new business treaty.

         As part of an effort to exit certain non-core lines of business,
Transamerica approached the Company in 2002 to determine our interest in
recapturing the two treaties. Under the terms of the recapture agreements,
Transamerica transferred approximately $18 million in cash to American Pioneer
to cover the statutory reserves recaptured by American Pioneer. No ceding
allowance was paid by American Pioneer in the recapture. American Pioneer
currently retains 100% of the risks on the current in force amount remaining of
the block of $48 million of Medicare Supplement business. There was no gain or
loss incurred on these recapture agreements.

         Acquisition of Guarantee Reserve Marketing Organization

         Effective July 1, 2003, Universal American entered into an agreement
with Swiss Re and its newly acquired subsidiary, Guarantee Reserve Life
Insurance Company ("Guarantee Reserve"), to acquire Guarantee Reserve's
marketing organization, including all rights to do business with its field
force. The primary product sold by this marketing organization is low face
amount whole life insurance.

         Beginning July 1, 2003, the Guarantee Reserve field force continued to
write this business in Guarantee Reserve, with Universal American administering
all new business and assuming 50% of the risk through a quota share reinsurance
arrangement. Beginning in the second quarter of 2004, as the products were
approved for sale in each state, the new business was written by a Universal
American subsidiary, with 50% of the risk ceded to Swiss Re.

6.       EARNINGS PER SHARE

         The reconciliation of the numerators and the denominators of the basic
and diluted earnings per share is as follows:

<TABLE>
<CAPTION>
                                                             INCOME             SHARES             PER SHARE
THREE MONTHS ENDED JUNE 30, 2004                           (NUMERATOR)        (DENOMINATOR)          AMOUNT
--------------------------------                           -----------        -------------          ------
                                                            (In thousands, other than per share amounts)
<S>                                                        <C>                <C>                  <C>
Weighted average common stock outstanding                                         54,624
   Less:  Weighted average treasury shares                                          (146)
                                                                                  ------

Basic earnings per share                                     $ 13,051             54,478              $ 0.24
                                                             ========                                 ======
   Effect of Dilutive Securities                                                   1,992
                                                                                  ------

Diluted earnings per share                                   $ 13,051             56,470              $ 0.23
                                                             ========             ======              ======
</TABLE>

                                       14
<PAGE>

<TABLE>
<CAPTION>
                                                              INCOME            SHARES             PER SHARE
THREE MONTHS ENDED JUNE 30, 2003                            (NUMERATOR)      (DENOMINATOR)           AMOUNT
--------------------------------                            -----------      -------------           ------
                                                              (In thousands, other than per share amounts)
<S>                                                         <C>              <C>                   <C>
Weighted average common stock outstanding                                        53,466
   Less:  weighted average treasury shares                                          (89)
                                                                                 ------
Basic earnings per share                                      $11,000            53,377               $0.21
                                                              =======                                 =====

   Effect of Dilutive Securities                                                  1,220
                                                                                 ------

Diluted earnings per share                                    $11,000            54,597               $0.20
                                                              =======            ======               =====
</TABLE>

<TABLE>
<CAPTION>
                                                             INCOME              SHARES            PER SHARE
SIX MONTHS ENDED JUNE 30, 2004                             (NUMERATOR)        (DENOMINATOR)          AMOUNT
------------------------------                             -----------        -------------          ------
                                                            (In thousands, other than per share amounts)
<S>                                                        <C>                <C>                  <C>
Weighted average common stock outstanding                                        54,447
   Less:  weighted average treasury shares                                         (177)
                                                                                 ------
Basic earnings per share                                      $26,927            54,270               $0.50
                                                              =======                                 =====
   Effect of Dilutive Securities                                                  2,016
                                                                                 ------
Diluted earnings per share                                    $26,927            56,286               $0.48
                                                              =======            ======               =====
</TABLE>

<TABLE>
<CAPTION>
                                                              INCOME            SHARES             PER SHARE
SIX MONTHS ENDED JUNE 30, 2003                              (NUMERATOR)      (DENOMINATOR)            AMOUNT
------------------------------                              -----------      -------------            ------
                                                            (In thousands, other than per share amounts)
<S>                                                         <C>              <C>                   <C>
Weighted average common stock outstanding                                         53,361
   Less:  weighted average treasury shares                                          (175)
                                                                                  ------
Basic earnings per share                                      $18,548             53,186              $0.35
                                                              =======                                 =====
   Effect of Dilutive Securities                                                   1,198
                                                                                  ------
Diluted earnings per share                                    $18,548             54,384              $0.34
                                                              =======             ======              =====
</TABLE>

7.       INVESTMENTS

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

<TABLE>
<CAPTION>
                                                                            GROSS           GROSS
                                                       AMORTIZED          UNREALIZED       UNREALIZED        FAIR
               CLASSIFICATION                            COST              GAINS             LOSSES          VALUE
               --------------                            ----              -----             ------          -----
                                                                              (In thousands)
<S>                                                <C>                  <C>              <C>              <C>
JUNE 30, 2004
US Treasury securities
  and obligations of US government                 $         75,250     $        179     $        (749)   $     74,680
Corporate debt securities                                   530,637           23,922            (1,342)        546,352
Foreign debt securities (1)                                 201,545           11,077            (8,207)        211,280
Mortgage- and asset-backed securities                       319,577            5,505            (3,103)        321,979
                                                   ----------------     ------------     -------------    ------------
                                                   $      1,127,009     $     40,683     $     (13,401)   $  1,154,291
                                                   ================     ============     =============    ============

DECEMBER 31, 2003
US Treasury securities
  and obligations of US government                 $         74,187     $        695     $        (219)   $     74,663
Corporate debt securities                                   544,744           36,892            (4,988)        576,648
Foreign debt securities (1)                                 218,011           19,041              (118)        236,934
Mortgage- and asset-backed securities                       245,012            8,711              (576)        253,147
                                                   ----------------     ------------     -------------    ------------
                                                   $      1,081,954     $     65,339     $      (5,901)   $  1,141,392
                                                   ================     ============     =============    ============
</TABLE>

(1) Primarily Canadian dollar denominated bonds owned by our Canadian insurance
subsidiary.

                                       15
<PAGE>

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

<TABLE>
<CAPTION>
                                                             JUNE 30, 2004
                                                  -----------------------------------
                                                    AMORTIZED                FAIR
                                                      COST                   VALUE
                                                  -----------                -----
                                                            (In thousands)
<S>                                               <C>                     <C>
Due in 1 year or less                             $     37,339            $    37,638
Due after 1 year through 5 years                       154,342                162,657
Due after 5 years through 10 years                     403,102                420,111
Due after 10 years                                     212,649                211,905
Mortgage - and asset-backed securities                 319,577                321,980
                                                  ------------            -----------
                                                  $  1,127,009            $ 1,154,291
                                                  ============            ===========
</TABLE>

         During the six months ended June 30, 2004, the Company did not write
down the value of any fixed maturity securities. During the six months ended
June 30, 2003, the Company wrote down the value of certain fixed maturity
securities by $0.2 million. These write downs represent management's estimate of
other than temporary declines in value and were included in net realized gains
on investments in our consolidated statement of operations.

8.       COMPREHENSIVE INCOME

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

<TABLE>
<CAPTION>
                                                              2004                                    2003
                                              ------------------------------------      ---------------------------------
                                               GROSS OF                    NET OF       GROSS OF                  NET OF
THREE MONTHS ENDED JUNE 30,                      TAX       TAX EFFECT       TAX           TAX       TAX EFFECT      TAX
---------------------------                   ---------    ----------     --------      --------    ----------    -------
                                                                            (In thousands)
<S>                                           <C>          <C>            <C>           <C>         <C>           <C>
Net unrealized gain (loss) arising
   during the year (net  of
   deferred acquisition cost adjustment)      $ (44,238)   $ (15,483)     $(28,755)     $ 30,604    $  10,710     $19,894
Less:  Reclassification adjustment
   for gains included in net income                (209)         (73)         (136)       (1,185)        (414)       (771)
                                              ---------    ---------      --------      --------    ---------     -------
Net unrealized gains (losses)                   (44,447)     (15,556)      (28,891)       29,419       10,296      19,123

Cash Flow Hedge                                   1,214          425           789             -            -           -
Currency translation adjustments                 (1,053)        (369)         (684)        4,611        1,614       2,997
                                              ---------    ---------      --------      --------    ---------     -------

Other comprehensive income (loss)             $ (44,286)   $ (15,500)     $(28,786)     $ 34,030    $  11,910     $22,120
                                              =========    =========      ========      ========    =========     =======
</TABLE>

<TABLE>
<CAPTION>

                                                              2004                                    2003
                                              ------------------------------------      ---------------------------------
                                              GROSS OF                     NET OF       GROSS OF                   NET OF
SIX MONTHS ENDED JUNE 30,                       TAX        TAX EFFECT       TAX           TAX       TAX EFFECT       TAX
-------------------------                     ---------    ----------     --------      --------    ----------    -------
                                                                            (In thousands)
<S>                                           <C>          <C>            <C>           <C>         <C>           <C>
Net unrealized gain (loss) arising
   during the year (net  of
   deferred acquisition cost adjustment)      $ (25,217)    $ (8,826)     $(16,391)     $ 27,522    $   9,628     $17,894
Less:  Reclassification adjustment
   for gains included in net income              (3,801)      (1,330)       (2,471)       (1,295)        (453)       (842)
                                              ---------    ---------      --------      --------    ---------     -------
Net unrealized gains (losses)                   (29,018)     (10,156)      (18,862)       26,227        9,175      17,052

Cash Flow Hedge                                     945          331           614
Currency translation adjustments                 (1,613)        (565)       (1,048)        7,573        2,651       4,922
                                              ---------    ---------      --------      --------    ---------     -------
Other comprehensive income (loss)             $ (29,686)   $ (10,390)     $(19,296)     $ 33,800    $  11,826     $21,974
                                              =========    =========      ========      ========    =========     =======
</TABLE>

                                       16
<PAGE>

9.       STOCKHOLDERS' EQUITY

         Common Stock

         The par value of common stock is $.01 per share with 100 million shares
authorized for issuance. The shareholders approved a proposal to amend the
Company's Restated Certificate of Incorporation to increase the number of
authorized shares of common stock, par value $0.01 per share, from 80 million
shares to 100 million shares at the Annual Meeting on May 26, 2004. The Board of
Directors of the Company (the "Board") has concluded that increasing the number
of authorized shares of common stock will give the Company the ability to react
quickly to future growth opportunities for the Company. Although the Board has
no specific plans or commitments for the issuance of any of the additional
shares that would be authorized by the amendment, the Board believes that the
increase in the number of authorized shares will provide flexibility for actions
the Company might wish to take, such as paying for acquisitions with stock of
the Company, equity offerings to raise capital, distributing stock splits or
stock dividends and granting new awards under employee benefit plans.

         Changes in the number of shares of common stock issued were as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,                                          2004              2003
-------------------------                                       ----------        ----------
<S>                                                             <C>               <C>
Common stock issued, beginning of year                          54,111,923        53,184,381
Stock options exercised                                            665,270           311,750
Agent stock award                                                        -            37,368
Stock purchases pursuant to agents' stock purchase plans             3,100           178,486
                                                                ----------        ----------
Common stock issued, end of period                              54,780,293        53,711,985
                                                                ==========        ==========
</TABLE>

         Treasury Stock

         The Board approved a plan to repurchase up to 1.5 million shares of
Company stock in the open market. The primary purpose of the plan is to fund
employee stock bonuses.

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,                           2004                                      2003
-------------------------          ---------------------------------------  --------------------------------------
                                                                  WEIGHTED                                WEIGHTED
                                                                  AVERAGE                                 AVERAGE
                                                                  COST PER                                COST PER
                                   SHARES           AMOUNT         SHARE       SHARES        AMOUNT        SHARE
                                   ------           ------         -----       ------        ------        -----
                                               (In thousands)                             (Inthousands)
<S>                                <C>             <C>            <C>       <C>            <C>            <C>
Treasury stock beginning of year   192,863         $  1,390       $ 7.21      241,076      $  1,320       $  5.48
Shares repurchased                  26,092              270        10.35       41,988           240          5.72
Shares distributed in the form
of employee bonuses                (84,351)            (636)       10.09     (189,635)       (1,041)         5.58
                                   -------         --------       ------    ---------      --------
Treasury stock, end of period      134,604         $  1,024       $ 7.61    $  93,429      $    519       $  5.56
                                   =======         ========                 =========      ========
</TABLE>

         Through June 30, 2004, the Company had repurchased 786,282 shares at an
aggregate cost of $4.4 million. As of June 30, 2004, 713,718 shares remained
available for repurchase under the program. Additional repurchases may be made
from time to time at prevailing prices, subject to restrictions on volume and
timing.

         Accumulated Other Comprehensive Income

         The components of accumulated other comprehensive income are as
follows:

<TABLE>
<CAPTION>
                                                        JUNE 30,             DECEMBER 31,
                                                          2004                  2003
                                                        -------              ------------
                                                                 (in thousands)
<S>                                                  <C>                    <C>
Net unrealized appreciation on investments           $     27,272           $     59,464
Deferred acquisition cost adjustment                       (1,811)                (4,985)
Foreign currency translation gains (losses)                 4,903                  6,516
Fair value of cash flow swap                                1,141                    196
Deferred income taxes on the above                        (11,027)               (21,417)
                                                      -----------            -----------
     Accumulated other comprehensive income           $    20,478            $    39,774
                                                      ===========            ===========
</TABLE>

                                       17
<PAGE>

10.      LOAN PAYABLE

         Credit Facility, as Amended in May 2004

         In connection with the acquisition of Pyramid Life (see Note 3 -
Business Combinations), the Company obtained an $80 million credit facility (the
"Credit Agreement") on March 31, 2003 to repay the then existing loan and
provide funds for the acquisition of Pyramid Life. The Credit Agreement
consisted of a $65 million term loan which was drawn to fund the acquisition and
a $15 million revolving loan facility. The Credit Agreement initially called for
interest at the London Interbank Offering Rate ("LIBOR") for one, two or three
months, at the option of the Company, plus 300 basis points. Effective March 31,
2004, the spread over LIBOR was reduced to 275 basis points in accordance with
the terms of the Credit Agreement. Principal repayments were scheduled over a
five-year period with a final maturity date of March 31, 2008. The Company
incurred loan origination fees of approximately $2.1 million, which were
capitalized and are being amortized on a straight-line basis over the life of
the Credit Agreement. As of the end of the March 31, 2004, the outstanding
balance of the term loan was $36.4 million.

         In connection with the acquisition of Heritage on May 28, 2004 (see
Note 3 - Business Combinations), the Company amended the Credit Agreement by
increasing the facility to $120 million from $80 million (the "Amended Credit
Agreement"), including an increase in the term loan portion to $105 million from
$36.4 million (the balance outstanding at May 28, 2004) and maintaining the $15
million revolving loan facility. None of the revolving loan facility has been
drawn as of June 30, 2004. Under the Amended Credit Agreement, the spread over
LIBOR was reduced to 225 basis points. Principal repayments are scheduled at
$5.3 million per year over a five-year period with a final payment of $78.9
million due upon maturity on May 28, 2009. The Company incurred additional loan
origination fees of approximately $2.1 million, which were capitalized and are
being amortized on a straight-line basis over the life of the Amended Credit
Agreement along with the continued amortization of the origination fees incurred
in connection with the Credit Agreement. The Company pays an annual commitment
fee of 50 basis points on the unutilized revolving loan facility. The
obligations of the Company under the Amended Credit Facility are guaranteed by
WorldNet Services Corp., CHCS Services Inc., CHCS Inc., Quincy Coverage
Corporation, Universal American Financial Services, Inc., Heritage, HHS-HPN
Network, Inc., Heritage Health Systems of Texas, Inc., PSO Management of Texas,
LLC, HHS Texas Management, Inc. and HHS Texas Management LP (collectively the
"Guarantors") and secured by substantially all of the assets of each of the
Guarantors. In addition, as security for the performance by the Company of its
obligations under the Amended Credit Facility, the Company, WorldNet Services
Corp., CHCS Services Inc., Heritage and HHS Texas Management, Inc. have each
pledged and assigned substantially all of their respective securities (but not
more than 65% of the issued and outstanding shares of voting stock of any
foreign subsidiary), all of their respective limited liability company and
partnership interests, all of their respective rights, title and interest under
any service or management contract entered into between or among any of their
respective subsidiaries and all proceeds of any and all of the foregoing.

         The Amended Credit Facility requires the Company and its subsidiaries
to meet certain financial tests, including a minimum fixed charge coverage
ratio, a minimum risk based capital test and a minimum consolidated net worth
test. The Amended Credit Facility also contains covenants, which among other
things, limit the incurrence of additional indebtedness, dividends, capital
expenditures, transactions with affiliates, asset sales, acquisitions, mergers,
prepayments of other indebtedness, liens and encumbrances and other matters
customarily restricted in such agreements.

         The Amended Credit Facility contains customary events of default,
including, among other things, payment defaults, breach of representations and
warranties, covenant defaults, cross-acceleration, cross-defaults to certain
other indebtedness, certain events of bankruptcy and insolvency and judgment
defaults.

         The Company made regularly scheduled principal payments of $3.1 million
and paid $1.0 million in interest and fees in connection with its credit
facilities during the six months ended June 30, 2004. During the six months
ended June 30, 2003, the Company made regularly scheduled principal payments of
$2.8 million and paid $1.6 million in interest and fees in connection with its
credit facilities

                                       18

<PAGE>

         The following table shows the schedule of principal payments (in
thousands) remaining on the Amended Credit Agreement, as of June 30, 2004, with
the final payment in May 2009:

<TABLE>
<S>                                 <C>
2004 (Remainder of year)            $       2,625
2005                                        5,250
2006                                        5,250
2007                                        5,250
2008                                        5,250
2009                                       80,063
                                    -------------
                                    $     103,688
                                    =============
</TABLE>

         2003 Refinancing of Debt

         On March 31, 2003, the Credit Facility issued in 1999 was repaid from
the proceeds of the Credit Agreement obtained in connection with the acquisition
of Pyramid Life. The early extinguishment of this debt resulted in the immediate
amortization of the related capitalized loan origination fees, resulting in a
pre-tax expense of approximately $1.8 million.

11.      OTHER LONG TERM DEBT

         The Company has formed statutory business trusts, which exist for the
exclusive purpose of issuing trust preferred securities representing undivided
beneficial interests in the assets of the trust, investing the gross proceeds of
the trust preferred securities in junior subordinated deferrable interest
debentures of the Company (the "Junior Subordinated Debt") and engaging in only
those activities necessary or incidental thereto. In accordance with the
adoption of FIN 46R, the Company has deconsolidated the trusts. For further
discussion of the adoption of FIN 46R, see Note 2 - Recent and Pending
Accounting Pronouncements.

         Separate subsidiary trusts of the Company (the "Trusts") have issued a
combined $75.0 million in thirty year trust preferred securities (the "Capital
Securities") as of June 30, 2004, as detailed in the following table:

<TABLE>
<CAPTION>
  Maturity                  Amount                                    Spread               Rate as of
   Date                     Issued               Term                Over LIBOR           June 30, 2004
---------                 ------------     --------------           -------------         -------------
                         (In thousands)                             (Basis points)
<S>                      <C>               <C>                      <C>                   <C>
December 2032               $ 15,000       Fixed/Floating                   400(1)             6.7%
March 2033                    10,000       Floating                         400                5.1%
May 2033                      15,000       Floating                         420                5.5%
May 2033                      15,000       Fixed/Floating                   410(2)             7.4%
October 2033                  20,000       Fixed/Floating                   395(3)             7.0%
                            --------
                            $ 75,000
                            ========
</TABLE>

     (1) Effective September 2003, the Company entered into a swap agreement
         whereby it will pay a fixed rate of 6.7% in exchange for a floating
         rate of LIBOR plus 400 basis points. The swap contract expires in
         December 2007.

     (2) The rate on this issue is fixed at 7.4% for the first five years, after
         which it is converted to a floating rate equal to LIBOR plus 410 basis
         points.

     (3) Effective April 29, 2004, the Company entered into a swap agreement
         whereby it will pay a fixed rate of 6.98% in exchange for a floating
         rate of LIBOR plus 395 basis points. The swap contract expires in
         October 2008.

         The Trusts have the right to call the Capital Securities at par after
five years from the date of issuance. The proceeds from the sale of the Capital
Securities, together with proceeds from the sale by the Trusts of their common
securities to the Company, were invested in thirty-year floating rate Junior
Subordinated Debt of the Company. From the proceeds of the trust preferred
securities, $26.0 million was used to pay down debt during 2003. The balance of
the proceeds has been used, in part to fund acquisitions, to provide capital to
the Company's insurance subsidiaries to support growth and to be held for
general corporate purposes.

                                       19
<PAGE>

         The Capital Securities represent an undivided beneficial interest in
the Trusts' assets, which consist solely of the Junior Subordinated Debt.
Holders of the Capital Securities have no voting rights. The Company owns all of
the common securities of the Trusts. Holders of both the Capital Securities and
the Junior Subordinated Debt are entitled to receive cumulative cash
distributions accruing from the date of issuance, and payable quarterly in
arrears at a floating rate equal to the three-month LIBOR plus a spread. The
floating rate resets quarterly and is limited to a maximum of 12.5% during the
first sixty months. Due to the variable interest rate for these securities, the
Company would be subject to higher interest costs if short-term interest rates
rise. The Capital Securities are subject to mandatory redemption upon repayment
of the Junior Subordinated Debt at maturity or upon earlier redemption. The
Junior Subordinated Debt is unsecured and ranks junior and subordinate in right
of payment to all present and future senior debt of the Company and is
effectively subordinated to all existing and future obligations of the Company's
subsidiaries. The Company has the right to redeem the Junior Subordinated Debt
after five years from the date of issuance.

         The Company has the right at any time, and from time to time, to defer
payments of interest on the Junior Subordinated Debt for a period not exceeding
20 consecutive quarters up to each debenture's maturity date. During any such
period, interest will continue to accrue and the Company may not declare or pay
any cash dividends or distributions on, or purchase, the Company's common stock
nor make any principal, interest or premium payments on or repurchase any debt
securities that rank equally with or junior to the Junior Subordinated Debt. The
Company has the right at any time to dissolve the Trusts and cause the Junior
Subordinated Debt to be distributed to the holders of the Capital Securities.
The Company has guaranteed, on a subordinated basis, all of the Trusts'
obligations under the Capital Securities including payment of the redemption
price and any accumulated and unpaid distributions to the extent of available
funds and upon dissolution, winding up or liquidation but only to the extent the
Trusts have funds available to make such payments.

         The Company paid $2.2 million in interest in connection with the Junior
Subordinated Debt during the six months ended June 30, 2004, and paid $0.4
million during the six months ended June 30, 2003.

12.      DERIVATIVE INSTRUMENTS - CASH FLOW HEDGE

         Effective September 4, 2003, the Company entered into a swap agreement
whereby it pays a fixed rate of 6.7% on a $15.0 million notional amount relating
to the December 2002 trust preferred securities issuance, in exchange for a
floating rate of LIBOR plus 400 basis points, capped at 12.5%. The swap contract
expires in December 2007. Effective April 29, 2004, the Company entered into a
second swap agreement whereby it pays a fixed rate of 6.98% on a $20.0 million
notional amount relating to the October 2003 trust preferred securities
issuance, in exchange for a floating rate of LIBOR plus 395 basis points, capped
at 12.45%. The swap contract expires in October 2008. The swaps are designated
and qualify as cash flow hedges, and changes in their fair value are recorded in
accumulated other comprehensive income. As of June 30, 2004, the fair value of
the swaps was $1.1 million and is included in other assets.

13.      STATUTORY CAPITAL AND SURPLUS REQUIREMENTS

         The insurance subsidiaries are required to maintain minimum amounts of
capital and surplus as required by regulatory authorities. Each of the insurance
subsidiaries' statutory capital and surplus exceeds its respective minimum
requirement. However, substantially more than such minimum amounts are needed to
meet statutory and administrative requirements of adequate capital and surplus
to support the current level of our insurance subsidiaries' operations.
Additionally, the National Association of Insurance Commissioners ("NAIC")
imposes regulatory risk-based capital ("RBC") requirements on life insurance
enterprises. At June 30, 2004, all of our insurance subsidiaries maintained
ratios of total adjusted capital to RBC in excess of the "authorized control
level". The combined statutory capital and surplus, including asset valuation
reserve, of the U.S. insurance subsidiaries totaled $122.2 million at June 30,
2004 and $110.5 million at June 30, 2003. Statutory net income for the six
months ended June 30, 2004 was $3.8 million, which included net realized gains
of $0.1 million, and for the six months ended June 30, 2003 was $5.1 million,
which included net realized gains of $0.4 million.

                                       20
<PAGE>

         Penncorp Life (Canada) reports to Canadian regulatory authorities based
upon Canadian statutory accounting principles that vary in some respects from
U.S. statutory accounting principles. Penncorp Life (Canada)'s net assets based
upon Canadian statutory accounting principles were C$58.8 million (US$43.6
million) as of June 30, 2004 and were C$59.8 million (US$44.4 million) as of
June 30, 2003. Net income based on Canadian generally accepted accounting
principles was C$4.4 million (US$3.3 million) for the six months ended June 30,
2004 and was C$4.1 million (US$2.8 million) for the six months ended June 30,
2003. Penncorp Life (Canada) maintained a Minimum Continuing Capital and Surplus
Requirement Ratio ("MCCSR") in excess of the minimum requirement at June 30,
2004.

14.      BUSINESS SEGMENT INFORMATION

         The Company's principal business segments are: Career Agency, Senior
Market Brokerage, Medicare Advantage and Administrative Services. The Company
also reports the corporate activities of our holding company in a separate
segment. A description of these segments follows:

CAREER AGENCY -- The Career Agency segment is comprised of the operations of
Pennsylvania Life, Penncorp Life (Canada), and, beginning March 31, 2003,
Pyramid Life. Pennsylvania Life and Pyramid Life operate in the United States,
while Penncorp Life (Canada) operates exclusively in Canada. This segment's
products include Medicare Supplement/Select, other supplemental senior health
insurance, fixed benefit accident and sickness disability insurance, life
insurance, and fixed annuities. These products are distributed by career agents
who are under contract with Pennsylvania Life, Pyramid Life or Penncorp Life
(Canada).

SENIOR MARKET BROKERAGE -- This segment includes the operations of, American
Pioneer, American Progressive, Constitution and Union Bankers, which distribute
senior market products through non-exclusive general agency and brokerage
distribution systems. The products sold include Medicare Supplement/Select, long
term care, senior life insurance and fixed annuities.

MEDICARE ADVANTAGE - The Medicare Advantage segment includes the operations of
Heritage and our other initiatives in Medicare managed care, including our
Medicare Advantage private fee-for-service plans. Heritage arranges health care
services for enrolled Medicare beneficiaries for a predetermined, prepaid
periodic fee principally through affiliated entities. Founded in 1995, Heritage
generates its revenues and profits from three sources. First, Heritage owns an
interest in SelectCare of Texas, a health plan that offers coverage to Medicare
beneficiaries under a contract with the federal government's Centers for
Medicare & Medicaid Services, ("CMS"). Next, Heritage operates three separate
Management Service Organizations ("MSO's") that manage the business of
SelectCare of Texas and two affiliated Independent Physician Associations
("IPA's"). Last, Heritage participates in the net results derived from these
IPA's. Our private fee-for-service plans were introduced during the second
quarter of 2004. Currently, Heritage operates plans in Texas and our private
fee-for-service plans are offered in the northeastern portion of the United
States.

ADMINISTRATIVE SERVICES -- CHCS acts as a third-party administrator and service
provider for both affiliated and unaffiliated insurance companies, primarily
with respect to senior market insurance products and non-insurance products. The
services provided include policy underwriting and issuance, telephone and
face-to-face verification, policyholder services, claims adjudication, case
management, care assessment and referral to health care facilities.

CORPORATE -- This segment reflects the activities of Universal American,
including the payment of interest on our debt, certain senior executive
compensation, and the expense of being a public company.

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

                                       21
<PAGE>

Financial results by segment are as follows:

<TABLE>
<CAPTION>
                                                   2004                           2003
                                      ---------------------------      ----------------------------
                                                     Income (Loss)                     Income (Loss)
                                                         Before                            Before
THREE MONTHS ENDED JUNE 30,             Revenue      Income Taxes        Revenue      Income Taxes
---------------------------             -------      ------------        -------      ------------
                                                               (In thousands)
<S>                                   <C>            <C>               <C>            <C>
Career Agency                         $    75,298    $     12,845      $    70,844    $       9,720
Senior Market Brokerage                    76,098           5,473           63,448            5,352
Medicare Advantage                         11,958             838                -                -
Administrative Services                    13,950           3,333           11,499            2,632
Corporate                                      34          (2,774)              30           (2,244)
Intersegment revenues                     (11,041)              -           (8,897)               -
                                      -----------    ------------           ------    -------------
  Segment total (1)                       166,297          19,715          136,924           15,460
Adjustments to segment total:
  Net realized  gains (1)                     210             210            1,185            1,185
                                      -----------    ------------      -----------    -------------

Total                                 $   166,507    $     19,925      $   138,109    $      16,645
                                      ===========    ============      ===========    =============
</TABLE>

<TABLE>
<CAPTION>
                                                 2004                               2003
                                      ---------------------------      ------------------------------
                                                      Income (Loss)                     Income (Loss)
                                                         Before                            Before
SIX MONTHS ENDED JUNE 30,               Revenue       Income Taxes       Revenue        Income Taxes
-------------------------             -----------     ------------       -------        ------------
                                                               (In thousands)
<S>                                   <C>            <C>               <C>            <C>
Career Agency                         $   151,781    $     26,289      $   112,183    $       19,190
Senior Market Brokerage                   151,621           8,954          115,912             8,408
Medicare Advantage                         11,958             838                -                 -
Administrative Services                    27,925           6,487           24,308             5,197
Corporate                                      70          (5,259)              70            (5,794)
Intersegment revenues                     (22,111)              -          (17,746)                -
                                      -----------    ------------      -----------    --------------
  Segment total (1)                       321,244          37,309          234,727            27,001
Adjustments to segment total:
  Net realized  gains (1)                   3,801           3,801            1,295             1,295
                                      -----------    ------------      -----------    --------------
Total                                 $   325,045    $     41,110      $   236,022    $       28,296
                                      ===========    ============      ===========    ==============
</TABLE>

(1)      We evaluate the results of operations of our segments based on income
         before realized gains and losses and income taxes. Management believes
         that realized gains and losses are not indicative of overall operating
         trends. The schedule above reconciles our segment revenue to total
         revenue and operating income to net income in accordance with generally
         accepted accounting principles.

Identifiable assets by segment are as follows:

<TABLE>
<CAPTION>
                                            JUNE 30,               DECEMBER 31,
                                              2004                     2003
                                       --------------            -------------
                                                   (In thousands)
<S>                                    <C>                       <C>
Career Agency                          $      932,447            $    945,911
Senior Market Brokerage                       791,680                 785,054
Medicare Advantage                            126,758                       -
Administrative Services                        20,524                  19,321
Corporate                                     561,995                 475,377
Intersegment assets (1)                      (544,526)               (444,715)
                                       --------------            ------------
Total Assets                           $    1,888,878            $  1,780,948
                                       ==============            ============
</TABLE>

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

                                       22
<PAGE>

15.      FOREIGN OPERATIONS

         A portion of the operations of the Company's Career Agency segment is
conducted in Canada through Penncorp Life (Canada). These assets and liabilities
are located in Canada where the insurance risks are written. Revenues, excluding
capital gains, of the Career Agency segment by geographic area are as follows:

<TABLE>
<CAPTION>
                              THREE MONTHS ENDED JUNE 30,               SIX MONTHS ENDED JUNE 30,
                              ---------------------------               -------------------------
                              2004                 2003                 2004                 2003
                              ---------------------------               -------------------------
                              (In thousands, in US$'s)                   (In thousands, in US$'s)
<S>                         <C>                   <C>                 <C>                  <C>
Revenues
  United States             $  58,861             $  54,878           $ 118,043            $  81,116
  Canada                       16,437                15,969              33,738               31,067
                            ---------             ---------           ---------            ---------
     Total                  $  75,298             $  70,844           $ 151,781            $ 112,183
                            =========             =========           =========            =========
</TABLE>

         Total assets and liabilities of Penncorp Life (Canada), which are
located entirely in Canada, are as follows:

<TABLE>
<CAPTION>
                                                JUNE 30,            DECEMBER 31,
                                                 2004                  2003
                                              ----------            -----------
                                                       (In thousands)
<S>                                           <C>                   <C>
Assets                                        $  197,872            $  236,185
                                              ==========            ==========
Liabilities                                   $  164,029            $  175,253
                                              ==========            ==========
</TABLE>

                                       23
<PAGE>

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

FORWARD LOOKING STATEMENTS

Certain statements in this report or incorporated by reference into this report
and oral statements made from time to time by our representatives constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are statements not
based on historical information. They relate to future operations, strategies,
financial results or other developments. In particular, statements using verbs
such as "expect," "anticipate," "believe," "estimate," "plan," "intend" or
similar words generally involve forward-looking statements. Forward-looking
statements include statements about development and distribution of our
products, investment spreads or yields, the impact of proposed or completed
acquisitions, the adequacy of reserves or the earnings or profitability of our
activities. Forward-looking statements are based upon estimates and assumptions
that are subject to significant business, economic and competitive
uncertainties, many of which are beyond our control and are subject to change.
These uncertainties can affect actual results and could cause actual results to
differ materially from those expressed in any forward-looking statements.
Whether or not actual results differ materially from forward-looking statements
may depend on numerous foreseeable and unforeseeable risks and uncertainties,
some of which relate particularly to our business, such as our ability to set
adequate premium rates and maintain adequate reserves, our ability to compete
effectively and our ability to grow our business through internal growth as well
as through acquisitions. Other risks and uncertainties may be related to the
insurance industry generally or the overall economy, such as regulatory
developments, industry consolidation and general economic conditions and
interest rates. We disclaim any obligation to update forward-looking statements.
As a result of our acquisition of Heritage, the Company is exposed to additional
risks and uncertainties. The risks and uncertainties described below are those
that we currently believe may materially affect our company. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial
also may impair our business operations.

                        NEW RISK FACTORS ASSOCIATED WITH
                OUR ACQUISITION OF HERITAGE HEALTH SYSTEMS, INC.

RISKS RELATED TO OUR MEDICARE ADVANTAGE BUSINESS

IF OUR GOVERNMENT CONTRACTS ARE NOT RENEWED OR ARE TERMINATED, OUR BUSINESS
COULD BE SUBSTANTIALLY IMPAIRED.

We provide our Medicare and other services through a limited number of contracts
with federal government agencies. These contracts generally have terms of one or
two years and are subject to nonrenewal by the applicable agency. All of our
government contracts are terminable for cause if we breach a material provision
of the contract or violate relevant laws or regulations. In addition, our right
to add new members may be suspended by a government agency if it finds
deficiencies in our provider network or operations.

If we are unable to renew, or to successfully rebid or compete for any of our
government contracts, or if any of our contracts are terminated, our business
could be substantially impaired. If any of those circumstances were to occur, we
would likely pursue one or more alternatives, including seeking to enter into
contracts in other geographic markets, seeking to enter into contracts for other
services in our existing markets, or seeking to acquire other businesses with
existing government contracts. If we were unable to do so, we could be forced to
cease conducting business. In any such event, our revenues and profits would
decrease materially.

                                       24
<PAGE>

IF WE ARE UNABLE TO MANAGE MEDICAL BENEFITS EXPENSE EFFECTIVELY, OUR
PROFITABILITY WILL LIKELY BE REDUCED OR WE COULD CEASE TO BE PROFITABLE.

The profitability of our Medicare Advantage business depends, to a significant
degree, on our ability to predict and effectively manage our costs related to
the provision of healthcare services. Relatively small changes in the ratio of
our expenses related to healthcare services to the premiums we receive, or
medical loss ratio, can create significant changes in our financial results.
Factors that may cause medical benefits expense to exceed our estimates include:

         -        an increase in the cost of healthcare services and supplies,
                  including pharmaceuticals, whether as a result of inflation or
                  otherwise;

         -        higher than expected utilization of healthcare services;

         -        periodic renegotiation of hospital, physician and other
                  provider contracts;

         -        the occurrence of catastrophes, major epidemics, terrorism or
                  bio-terrorism;

         -        changes in the demographics of our members and medical trends
                  affecting them; and

         -        new mandated benefits or other changes in healthcare laws,
                  regulations and/or practices.

Because of the relatively high average age of the Medicare population, medical
benefits expense for our Medicare plans may be particularly difficult to
control. According to the Centers for Medicare & Medicaid Services ("CMS"), from
1967 to 2002, Medicare healthcare expenses nationwide increased on average by
13.2% annually.

Although we have been able to manage our medical benefits expense through a
variety of techniques, including various payment methods to primary care
physicians and other providers, advance approval for hospital services and
referral requirements, medical management and quality management programs,
upgraded information systems, and reinsurance arrangements, we may not be able
to continue to manage these expenses effectively in the future. If our medical
benefits expense increases, our profits could be reduced or we may not remain
profitable.

We maintain reinsurance to protect us against severe or catastrophic medical
claims, but we cannot assure you that such reinsurance coverage currently is or
will be adequate or available to us in the future or that the cost of such
reinsurance will not limit our ability to obtain it.

BECAUSE OUR MEDICARE ADVANTAGE PREMIUMS, WHICH GENERATE MOST OF OUR MEDICARE
ADVANTAGE REVENUES, ARE FIXED BY CONTRACT, WE ARE UNABLE TO INCREASE OUR
MEDICARE ADVANTAGE PREMIUMS DURING THE CONTRACT TERM IF OUR CORRESPONDING
MEDICAL BENEFITS EXPENSE EXCEEDS OUR ESTIMATES.

Most of our Medicare Advantage revenues are generated by premiums consisting of
fixed monthly payments per member. These payments are fixed by contract, and we
are obligated during the contract period, which is generally one or two years,
to provide or arrange for the provision of healthcare services as established by
state and federal governments. We have less control over costs related to the
provision of healthcare services than we do over our selling, general and
administrative expense. Medical benefits expense as a percentage of premium
revenue tends to fluctuate. If our medical benefits expense exceeds our
estimates, we will be unable to adjust the premiums we receive under our current
contracts, and our profits may decline.

REDUCTIONS IN FUNDING FOR GOVERNMENT HEALTHCARE PROGRAMS COULD SUBSTANTIALLY
REDUCE OUR PROFITABILITY.

All of our Medicare Advantage programs we offer are through government-sponsored
programs, such as Medicare. As a result, our profitability is dependent, in
large part, on continued funding for government healthcare programs at or above
current levels. For example, the premium rates paid to health plans like ours by
state and federal governments differ depending on a combination of factors such
as upper payment limits established by the state and federal governments, a
member's health status, age, gender, county or region, benefit mix and member
eligibility categories. In addition, CMS has adopted a payment program, whereby
in 2004, 30% of the premium rates paid to health plans relate to specific
disease classification of members. In 2007, 100% of premium rates will be based
upon the specific disease classification of members. Reductions in payments
under Medicare or the other programs under which we offer health plans could
likewise reduce our profitability.

                                       25
<PAGE>

Federal budgetary constraints also may limit premiums payable under our Medicare
plans. For example, as a result of the Balanced Budget Act of 1997, annual
increases on premiums paid to many Medicare+Choice plans (renamed "Medicare
Advantage" plans) were subject to a 2% cap, even though overall Medicare
healthcare expenses were increasing at a higher rate.

WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION, AND ANY VIOLATION OF THE LAWS
AND REGULATIONS APPLICABLE TO US COULD REDUCE OUR REVENUES AND PROFITABILITY AND
OTHERWISE ADVERSELY AFFECT OUR OPERATING RESULTS.

Our Medicare Advantage business is extensively regulated by the federal
government and the states in which we operate. The laws and regulations
governing our Medicare Advantage operations are generally intended to benefit
and protect health plan members and providers rather than stockholders. The
government agencies administering these laws and regulations have broad latitude
to enforce them. These laws and regulations, along with the terms of our
government contracts, regulate how we do business, what services we offer, and
how we interact with our members, providers and the public. We are subject, on
an ongoing basis, to various governmental reviews, audits and investigations to
verify our compliance with our contracts and applicable laws and regulations.
Any adverse review, audit or investigation could result in:

         -        forfeiture of amounts we have been paid pursuant to our
                  government contracts;

         -        imposition of civil or criminal penalties, fines or other
                  sanctions on us;

         -        loss of our right to participate in government-sponsored
                  programs, including Medicare;

         -        damage to our reputation in various markets;

         -        increased difficulty in marketing our products and services;
                  and

         -        loss of one or more of our licenses to act as an insurer or
                  health maintenance organization or to otherwise provide a
                  service.

Any of these events could reduce our revenues and profitability and otherwise
adversely affect our operating results.

WE DERIVE A SUBSTANTIAL PORTION OF OUR MEDICARE ADVANTAGE REVENUES AND PROFITS
FROM MEDICARE ADVANTAGE OPERATIONS IN TEXAS, AND LEGISLATIVE ACTIONS, ECONOMIC
CONDITIONS OR OTHER FACTORS THAT ADVERSELY AFFECT THOSE OPERATIONS COULD
MATERIALLY REDUCE OUR REVENUES AND PROFITS.

If we are unable to continue to operate in Texas, or if our current operations
in any portion of Texas are significantly curtailed, our revenues will decrease
materially. Our reliance on our operations in Texas could cause our revenues and
profitability to change suddenly and unexpectedly, depending on legislative
actions, economic conditions and similar factors. In addition, our significant
market share in Texas may make it more difficult for us to expand our membership
in existing markets in Texas. Our inability to continue to operate in Texas, or
a decrease in the revenues of our Texas operations, would harm our overall
operating results.

WE MAY NOT BE ABLE TO REALIZE THE BENEFITS WE ANTICIPATE FROM THE ACQUISITION OF
HERITAGE.

As a result of our recent acquisition of Heritage, we will face significant
challenges in integrating organizations, operations, technology and services in
a timely and efficient manner and in retaining key personnel. Cost savings,
revenue growth and other anticipated benefits of the acquisition may not
materialize. The acquisition may result in a diversion of our management's
attention, loss of management-level and other key employees of Heritage, and an
inability to integrate management, systems and operations. The failure to
integrate Heritage successfully and to manage the challenges presented by the
integration process may result in our not achieving the anticipated benefits of
the acquisition.

                                       26
<PAGE>

WE MAY BE UNABLE TO EXPAND INTO SOME GEOGRAPHIC AREAS WITHOUT INCURRING
SIGNIFICANT ADDITIONAL COSTS.

We are likely to incur additional costs if we enter states or counties where we
do not currently operate. Our rate of expansion into other geographic areas may
also be inhibited by:

         -        the time and costs associated with obtaining a health
                  maintenance organization license to operate in the new area or
                  the expansion of our licensed service area, if necessary;

         -        our inability to develop a network of physicians, hospitals
                  and other healthcare providers that meets our requirements and
                  those of government regulators;

         -        competition, which increases the costs of recruiting members;

         -        the cost of providing healthcare services in those areas; and

         -        demographics and population density.

Accordingly, we may be unsuccessful in entering other metropolitan areas,
counties or states.

A FAILURE TO ESTIMATE INCURRED BUT NOT REPORTED MEDICAL BENEFITS EXPENSE
ACCURATELY WILL AFFECT OUR PROFITABILITY.

Our medical benefits expense includes estimates of medical claims incurred but
not reported, or IBNR. We, together with our internal and consulting actuaries,
estimate our medical cost liabilities using actuarial methods based on
historical data adjusted for payment patterns, cost trends, product mix,
seasonality, utilization of healthcare services and other relevant factors.
Actual conditions, however, could differ from those assumed in the estimation
process. Due to the uncertainties associated with the factors used in these
assumptions, materially different amounts could be reported in our financial
statements for a particular period under different conditions or using different
assumptions. Adjustments, if necessary, are made to medical benefits expense
when the criteria used to determine IBNR change and when actual claim costs are
ultimately determined. Although our estimates of IBNR have historically been
adequate, they may be inadequate in the future, which would adversely affect our
results of operations. Further, our inability to estimate IBNR accurately may
also affect our ability to take timely corrective actions, further exacerbating
the extent of any adverse effect on our results.

THE NEW MEDICARE LEGISLATION MAKES CHANGES TO THE MEDICARE PROGRAM THAT COULD
REDUCE OUR PROFITABILITY AND INCREASE COMPETITION FOR OUR EXISTING AND
PROSPECTIVE MEMBERS.

On December 8, 2003, President Bush signed the Medicare Modernization Act of
2003. This legislation makes significant changes to the Medicare program. We
believe that many of these changes will benefit the managed care sector.
However, the new rate methodologies, expanded benefits and shifts in certain
coverage responsibilities pursuant to the Act may increase competition and
create uncertainties, including the following:

         -        The Act increases reimbursement for Medicare+Choice plans,
                  which was renamed "Medicare Advantage". Higher reimbursement
                  rates may increase the number of plans that participate in the
                  program, creating new competition that could adversely affect
                  our profitability.

         -        Beginning in 2006, a new regional Medicare Preferred Provider
                  Organization, or Medicare PPO, program will be implemented
                  pursuant to the Act. Medicare PPOs would allow their members
                  more flexibility to select physicians than the current plans,
                  which are HMOs that require members to coordinate with a
                  primary care physician. The Act requires the Secretary of the
                  Department of Health and Human Services to create between 10
                  and 50 regions for the Medicare PPO program, with each region
                  covering at least one state and some possibly crossing state
                  lines. The regional Medicare PPO program will compete with
                  local Medicare Advantage HMO programs and may affect our
                  Medicare Advantage HMO business. We do not know whether the
                  regions will be constructed in a way that will create
                  obstacles or opportunities for us to participate in the
                  program. We also do not know how the creation of the regional
                  Medicare PPO program, which is intended to provide further
                  choice to beneficiaries, will affect our Medicare Advantage
                  HMO business.

         -        In order to participate in the regional Medicare Advantage PPO
                  program under the Act, a plan must meet certain requirements,
                  including having an adequate provider network throughout the
                  region. The Act provides some incentives for certain hospitals
                  to join the network. However, we

                                       27
<PAGE>

                  do not know whether we will be able to contract with a
                  sufficient number of providers throughout our regions to
                  satisfy the network adequacy requirements under the Act that
                  would enable us to participate in the regional product.

         -        Beginning in 2006, the payments for the local Medicare
                  Advantage HMO and regional Medicare Advantage PPO programs
                  will be based on a competitive bidding process that may
                  decrease the amount of premiums paid to us or cause us to
                  increase the benefits we offer.

         -        Beginning in 2006, organizations that offer Medicare Advantage
                  plans of the type we currently offer will be required to offer
                  a level prescription drug benefit, as defined by Medicare. It
                  is not known at this time whether the governmental payments
                  will be adequate to cover the costs for this benefit. In
                  addition, Medicare Advantage enrollees will be required to
                  obtain their drug benefit from their Medicare Advantage plan.
                  Enrollees may prefer a stand-alone drug plan and may disenroll
                  from the Medicare Advantage plan altogether in order to
                  participate in another drug plan. Accordingly, the new
                  prescription drug benefit could reduce our profitability and
                  membership enrollment following its implementation in 2006.

         -        Some enrollees may have chosen our Medicare+Choice plan in the
                  past rather than a Medicare fee-for-service program because of
                  the added drug benefit that we offer with our Medicare+Choice
                  plan. Following the implementation of the new prescription
                  drug benefit, Medicare beneficiaries will have the opportunity
                  to obtain a drug benefit without joining a managed care plan.
                  As a result, our membership enrollment may decline.

         -        Beginning in 2006, individuals eligible for both Medicare and
                  Medicaid, or dual-eligibles, will generally receive their drug
                  coverage from Medicare rather than from Medicaid. Because
                  Medicaid will no longer be directly responsible for most drug
                  coverage for dual-eligibles, Medicaid payments to plans will
                  be reduced. We cannot predict whether this change in Medicaid
                  payments will have an adverse effect on our operating results.

FUTURE CHANGES IN HEALTHCARE LAW MAY REDUCE OUR PROFITABILITY OR LIQUIDITY.

Healthcare laws and regulations, and their interpretations, are subject to
frequent change. Changes in existing laws or regulations, or their
interpretations, or the enactment of new laws or regulations could reduce our
profitability by:

         -        imposing additional capital requirements;

         -        increasing our administrative and other costs;

         -        increasing mandated benefits;

         -        forcing us to restructure our relationships with providers; or

         -        requiring us to implement additional or different programs and
                  systems.

Changes in state law also may adversely affect our profitability. Laws relating
to managed care consumer protection standards, including increased plan
information disclosure, limits to premium increases, expedited appeals and
grievance procedures, third party review of certain medical decisions, health
plan liability, access to specialists, clean claim payment timing, physician
collective bargaining rights and confidentiality of medical records either have
been enacted or continue to be under discussion. New healthcare reform
legislation may require us to change the way we operate our business, which may
be costly. Further, although we have exercised care in structuring our
operations to attempt to comply in all material respects with the laws and
regulations applicable to us, government officials charged with responsibility
for enforcing such laws may assert that we or certain transactions in which we
are involved are in violation of these laws, or courts may ultimately interpret
such laws in a manner inconsistent with our interpretation. Therefore, it is
possible that future legislation and regulation and the interpretation of laws
and regulations could have a material adverse effect on our ability to operate
under the Medicare program and to continue to serve our members and attract new
members.

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<PAGE>

RESTRICTIONS ON OUR ABILITY TO MARKET WOULD ADVERSELY AFFECT OUR REVENUE.

We rely on our marketing and sales efforts for a significant portion of our
membership growth. The federal and state governments in which we currently
operate permit marketing but impose strict requirements and limitations as to
the types of marketing activities that are permitted. If our marketing efforts
were to be prohibited or curtailed, our ability to increase or sustain
membership would be significantly harmed, which would adversely affect our
revenue.

IF WE ARE UNABLE TO MAINTAIN SATISFACTORY RELATIONSHIPS WITH OUR PROVIDERS, OUR
PROFITABILITY COULD DECLINE AND WE MAY BE PRECLUDED FROM OPERATING IN SOME
MARKETS.

Our profitability depends, in large part, upon our ability to enter into
cost-effective contracts with hospitals, physicians and other healthcare
providers in appropriate numbers in our geographic markets and at convenient
locations for our members. In any particular market, however, providers could
refuse to contract, demand higher payments or take other actions that could
result in higher medical benefits expense. In some markets, certain providers,
particularly hospitals, physician/hospital organizations or multi-specialty
physician groups, may have significant market positions or near monopolies. If
such a provider or any of our other providers refuse to contract with us, use
their market position to negotiate contracts that might not be cost-effective or
otherwise place us at a competitive disadvantage, those activities could
adversely affect our operating results in that market area. In the long term,
our ability to contract successfully with a sufficiently large number of
providers in a particular geographic market will affect the relative
attractiveness of our managed care products in that market and could preclude us
from renewing our Medicaid or Medicare contracts in those markets or from
entering into new markets.

Our provider contracts with network primary care physicians and specialists
generally have terms of one year, with automatic renewal for successive one-year
terms. We may terminate these contracts for cause, based on provider conduct or
other appropriate reasons, subject to laws giving providers due process rights.
The contracts generally may be cancelled by either party without cause upon 60
or 90 days prior written notice. Our contracts with hospitals generally have
terms of one to two years, with automatic renewal for successive one-year terms.
We may terminate these contracts for cause, based on provider misconduct or
other appropriate reasons. Our hospital contracts generally may be cancelled by
either party without cause upon 120 days prior written notice. We may be unable
to continue to renew such contracts or enter into new contracts enabling us to
serve our members profitably. We will be required to establish acceptable
provider networks prior to entering new markets. Although we have established
long-term relationships with many of our network providers, we may be unable to
maintain those relationships or enter into agreements with providers in new
markets on a timely basis or under favorable terms. If we are unable to retain
our current provider contracts or enter into new provider contracts timely or on
favorable terms, our profitability could decline.

WE MAY NOT HAVE ADEQUATE INTELLECTUAL PROPERTY RIGHTS IN OUR BRAND NAMES FOR OUR
HEALTH PLANS, AND WE MAY BE UNABLE TO ADEQUATELY ENFORCE SUCH RIGHTS.

Our success depends, in part, upon our ability to market our health plans under
our brand names, including "Texan Plus". While we hold federal trademark
registrations for the "Texan Plus" trademark, we have not taken enforcement
action to prevent infringement of our federal trademark and have not secured
registrations of our other marks. Other businesses may have prior rights in the
brand names that we market under or in similar names, which could limit or
prevent our ability to use these marks, or to prevent others from using similar
marks. If we are unable to prevent others from using our brand names, or if
others prohibit us from using them, our revenues could be adversely affected.
Even if we are able to protect our intellectual property rights in such brands,
we could incur significant costs in doing so.

                                       29
<PAGE>

INEFFECTIVE MANAGEMENT OF OUR GROWTH MAY ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS, FINANCIAL CONDITION AND BUSINESS.

Depending on acquisition and other opportunities, we expect to continue to
increase our membership and to expand into other markets. Continued rapid growth
could place a significant strain on our management and on other resources. Our
ability to manage our growth may depend on our ability to strengthen our
management team and attract, train and retain skilled associates, and our
ability to implement and improve operational, financial and management
information systems on a timely basis. If we are unable to manage our growth
effectively, our financial condition and results of operations could be
materially and adversely affected. In addition, due to the initial substantial
costs related to potential acquisitions, rapid growth could adversely affect our
short-term profitability and liquidity.

WE ARE SUBJECT TO COMPETITION THAT MAY LIMIT OUR ABILITY TO INCREASE OR MAINTAIN
MEMBERSHIP IN THE MARKETS WE SERVE.

We operate in a highly competitive environment and in an industry that is
currently subject to significant changes due to business consolidations, new
strategic alliances and aggressive marketing practices by other managed care
organizations. We compete for members principally on the basis of size, location
and quality of provider network, benefits provided, quality of service and
reputation. A number of these competitive elements are partially dependent upon
and can be positively affected by financial resources available to a health
plan.

Many other organizations with which we compete have substantially greater
financial and other resources than we do. In addition, changes resulting from
the new Medicare legislation may bring additional competitors into our market
area. As a result, we may be unable to increase or maintain our membership.

WE HAVE INCURRED ADDITIONAL DEBT OBLIGATIONS IN CONNECTION WITH OUR ACQUISITION
OF HERITAGE THAT COULD RESTRICT OUR OPERATIONS.

We have a significant amount of outstanding indebtedness, including $103 million
in borrowings under our amended credit agreement and $75 million in trust
preferred securities. We have available borrowing capacity under our new senior
secured revolving credit facility of approximately $15 million. We may also
incur additional indebtedness in the future. Our substantial indebtedness could
have adverse consequences, including:

         -        increasing our vulnerability to adverse economic, regulatory
                  and industry conditions, and placing us at a disadvantage
                  compared to our competitors that are less leveraged;

         -        limiting our ability to compete and our flexibility in
                  planning for, or reacting to, changes in our business and the
                  industry in which we operate;

         -        limiting our ability to borrow additional funds for working
                  capital, capital expenditures, acquisitions and general
                  corporate or other purposes; and

         -        exposing us to greater interest rate risk since the interest
                  rate on borrowings under our senior credit facilities is
                  variable.

Our debt service obligations will require us to use a portion of our operating
cash flow to pay interest and principal on indebtedness instead of for other
corporate purposes, including funding future expansion of our business and
ongoing capital expenditures. If our operating cash flow and capital resources
are insufficient to service our debt obligations, we may be forced to sell
assets, seek additional equity or debt capital or restructure our debt. However,
these measures might be unsuccessful or inadequate in permitting us to meet
scheduled debt service obligations.

                                       30
<PAGE>

CLAIMS RELATING TO MEDICAL MALPRACTICE AND OTHER LITIGATION COULD CAUSE US TO
INCUR SIGNIFICANT EXPENSES.

Our providers involved in medical care decisions may be exposed to the risk of
medical malpractice claims. A small percentage of these providers do not have
malpractice insurance. Although our network providers are independent
contractors, claimants sometimes allege that a managed care organization such as
us should be held responsible for alleged provider malpractice, and some courts
have permitted that theory of liability. In addition, managed care organizations
may be sued directly for alleged negligence, such as in connection with the
credentialing of network providers or for improper denials or delay of care. In
addition, Congress and several states are considering legislation that would
expressly permit managed care organizations to be held liable for negligent
treatment decisions or benefits coverage determinations.

From time to time, we are party to various other litigation matters, some of
which seek monetary damages. We cannot predict with certainty the eventual
outcome of any pending litigation or potential future litigation, and we might
incur substantial expense in defending these or future lawsuits or indemnifying
third parties with respect to the results of such litigation.

We maintain errors and omissions insurance with a policy limit of $10 million
and other insurance coverage and, in some cases, indemnification rights that we
believe are adequate based on industry standards. However, potential liabilities
may not be covered by insurance or indemnity, our insurers or indemnifying
parties may dispute coverage or may be unable to meet their obligations or the
amount of our insurance or indemnification coverage may be inadequate. We cannot
assure you that we will be able to obtain insurance coverage in the future, or
that insurance will continue to be available on a cost-effective basis, if at
all. Moreover, even if claims brought against us are unsuccessful or without
merit, we would have to defend ourselves against such claims. The defense of any
such actions may be time-consuming and costly, and may distract our management's
attention. As a result, we may incur significant expenses and may be unable to
effectively operate our business.

NEGATIVE PUBLICITY REGARDING THE MANAGED CARE INDUSTRY MAY HARM OUR BUSINESS AND
OPERATING RESULTS.

In the past, the managed care industry has received negative publicity. This
publicity has led to increased legislation, regulation, review of industry
practices and private litigation in the commercial sector. These factors may
adversely affect our ability to market our services, require us to change our
services and increase the regulatory burdens under which we operate, further
increasing the costs of doing business and adversely affecting our operating
results.

RESULTS OF OPERATIONS

INTRODUCTION

         The following discussion and analysis presents a review of the Company
as of June 30, 2004 and its results of operations for the three months and six
months ended June 30, 2004. This Management's Discussion and Analysis of
Financial Condition and Results of Operation should be read in conjunction with
the consolidated financial statements as well as the Management's Discussion and
Analysis of Financial Condition and Results of Operation included in the
Company's 2003 Annual Report on Form 10-K.

OVERVIEW

         Our principal business segments are: Career Agency, Senior Market
Brokerage, Medicare Advantage and Administrative Services. We also report the
activities of our holding company in a separate segment. See Note 14 - Business
Segment Information in our consolidated financial statements included in this
Form 10-Q for a description of our segments.

                                       31
<PAGE>

CRITICAL ACCOUNTING POLICIES

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

         Policy related liabilities

         We calculate and maintain reserves for the estimated future payment of
claims to our policyholders using the same actuarial assumptions that we use in
the pricing of our products. For our accident and health insurance business, we
establish an active life reserve plus a liability for due and unpaid claims,
claims in the course of settlement and incurred but not reported claims, as well
as a reserve for the present value of amounts not yet due on claims. Many
factors can affect these reserves and liabilities, such as economic and social
conditions, inflation, hospital and pharmaceutical costs, changes in doctrines
of legal liability and extra contractual damage awards. Therefore, the reserves
and liabilities we establish are based on extensive estimates, assumptions and
prior years' statistics. When we acquire other insurance companies or blocks of
insurance, our assessment of the adequacy of transferred policy liabilities is
subject to similar estimates and assumptions. Establishing reserves is an
uncertain process, and it is possible that actual claims will materially exceed
our reserves and have a material adverse effect on our results of operations and
financial condition. Our net income depends significantly upon the extent to
which our actual claims experience is consistent with the assumptions we used in
setting our reserves and pricing our policies. If our assumptions with respect
to future claims are incorrect, and our reserves are insufficient to cover our
actual losses and expenses, we would be required to increase our liabilities
resulting in reduced net income and shareholders' equity.

         The reserves that we record are often different than the reserves
recorded by unaffiliated reinsurers that participate in any of our risks. In
July 2004, the 50% quota share reinsurer of our Freedom Care block, a health
insurance product, informed us that it was adding $7.0 million to its own claim
reserve, bringing its reserve for its quota share of the business to $16.3
million. After extensive discussion with the reinsurer, we do not believe that,
on the basis of currently available information, the posting of such additional
reserves is required. During the third quarter, we will perform a detailed study
of the various assumptions used to derive this reserve, primarily claim
continuance assumptions, to verify this finding, and record additional reserves
if required. We do not believe that any potential adjustment will be material.

         Deferred policy acquisition costs

         The cost of acquiring new business, principally non-level commissions
and agency production, underwriting, policy issuance, and associated costs, all
of which vary with, and are primarily related to the production of new and
renewal business, have been deferred. For interest-sensitive life and annuity
products, these costs are being amortized in relation to the present value of
expected gross profits on the policies arising principally from investment,
mortality and expense margins in accordance with SFAS No. 97, "Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for
Realized Gains and Losses from the Sale of Investments". For other life and
health products, these costs are amortized in proportion to premium revenue
using the same assumptions used in estimating the liabilities for future policy
benefits in accordance with SFAS No. 60, "Accounting and Reporting by Insurance
Enterprises."

                                       32
<PAGE>

         The determination of expected gross profits for intrest-sensitive
products is an inherently uncertain process that relies on assumptions including
projected interest rates, the persistency of the policies issued as well as
anticipated benefits, commissions and expenses. It is possible that the actual
profits from the business will vary materially from the assumptions used in the
determination and amortization of deferred acquisition costs. Deferred policy
acquisition costs are written off to the extent that it is determined that
future policy premiums and investment income or gross profits would not be
adequate to cover related losses and expenses.

         Present Value of Future Profits and other Intangibles

         Business combinations accounted for as a purchase result in the
allocation of the purchase consideration to the fair values of the assets and
liabilities acquired, including the present value of future profits,
establishing such fair values as the new accounting basis. The present value of
future profits is based on an estimate of the cash flows of the in force
business acquired, discounted to reflect the present value of those cash flows.
The discount rate selected depends upon the general market conditions at the
time of the acquisition and the inherent risk in the transaction. Purchase
consideration in excess of the fair value of net assets acquired, including the
present value of future profits and other identified intangibles, for a specific
acquisition, is allocated to goodwill. Allocation of purchase price is performed
in the period in which the purchase is consummated. Adjustments, if any, in
subsequent periods relate to resolution of pre-acquisition contingencies and
refinements made to estimates of fair value in connection with the preliminary
allocation.

         Amortization of present value of future profits is based upon the
pattern of the projected cash flows of the in-force business acquired, over
periods ranging from ten to forty years. Other identified intangibles are
amortized over their estimated lives.

         On a periodic basis, management reviews the unamortized balances of
present value of future profits, goodwill and other identified intangibles to
determine whether events or circumstances indicate the carrying value of such
assets is not recoverable, in which case an impairment charge would be
recognized. Management believes that no impairments of present value of future
profits, goodwill or other identified intangibles existed as of June 30, 2004.

         Investment valuation

         Fair value of investments is based upon quoted market prices, where
available, or on values obtained from independent pricing services. For certain
mortgage and asset-backed securities, the determination of fair value is based
primarily upon the amount and timing of expected future cash flows of the
security. Estimates of these cash flows are based upon current economic
conditions, past credit loss experience and other circumstances.

         We regularly evaluate the amortized cost of our investments compared to
the fair value of those investments. Impairments of securities generally are
recognized when a decline in fair value below the amortized cost basis is
considered to be other-than-temporary. Generally, we consider a decline in fair
value to be other-than-temporary when the fair value of an individual security
is below amortized cost for an extended period and we do not believe that
recovery in fair value is probable. Impairment losses for certain mortgage and
asset-backed securities are recognized when an adverse change in the amount or
timing of estimated cash flows occurs, unless the adverse change is solely a
result of changes in estimated market interest rates. The cost basis for
securities determined to be impaired are reduced to their fair value, with the
excess of the cost basis over the fair value recognized as a realized investment
loss.

                                       33
<PAGE>

         Income taxes

         We use the asset and liability method to account for deferred income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date of
a change in tax rates.

         We establish valuation allowances on our deferred tax assets for
amounts that we determine will not be recoverable based upon our analysis of
projected taxable income and our ability to implement prudent and feasible tax
planning strategies. Increases in these valuation allowances are recognized as
deferred tax expense. Subsequent determinations that portions of the valuation
allowances are no longer necessary are reflected as deferred tax benefits. To
the extent that valuation allowances were established in conjunction with
acquisitions, changes in those allowances are first applied to increasing or
decreasing the goodwill (but not below zero) or other intangibles related to the
acquisition and then applied as an increase or decrease in income tax expense.

ACQUISITIONS AND FINANCING ACTIVITY

         Acquisition of Heritage Health Systems, Inc.

         On May 28, 2004, the Company acquired Heritage Health Systems, Inc.
("Heritage"), a privately owned managed care company that operates Medicare
Advantage plans in Houston and Beaumont Texas, for $98 million in cash plus
transaction costs of $1.6 million. Founded in 1995, Heritage generates its
revenues and profits from three sources. First, Heritage owns an interest in
SelectCare of Texas, a health plan that offers coverage to Medicare
beneficiaries under a contract with the federal government's Centers for
Medicare & Medicaid Services, ("CMS"). Next, Heritage operates three separate
Management Service Organizations ("MSO's") that manage the business of
SelectCare and two affiliated Independent Physician Associations ("IPA's").
Last, Heritage participates in the profits derived from these IPA's. The
acquisition was financed with $66.5 million of net proceeds derived from the
amendment of the Company's credit facility (See Note 10 - Loan Payable) and
$33.1 million of cash on hand. As of July 31, 2004, Heritage had approximately
17,000 Medicare members and annualized revenues of approximately $142 million.
Operating results generated by Heritage prior to May 28, 2004, the date of
acquisition, are not included in the Company's consolidated financial
statements. Refer to Note 3 - Business Combinations in our consolidated
financial statements included in this Form 10-Q for additional information on
the acquisition.

         2004 Amendment of Credit Agreement

         In connection with the acquisition of Heritage (see Note 3 - Business
Combinations in our consolidated financial statements included in this Form
10-Q) on May 28, 2004, we amended our credit facility to increase the term loan
to $105 million from $36.4 million (the balance outstanding at May 28, 2004). We
used the proceeds to fund the purchase of Heritage. Under the amended credit
agreement, the interest rate was reduced to 225 basis points over the London
Inter Bank Offering Rate. (Refer to Note 10 - Loan Payable in our consolidated
financial statements included in this Form 10-Q).

         Acquisition of Guarantee Reserve Marketing Organization

         Effective July 1, 2003, we entered into an agreement with Swiss Re and
its newly acquired subsidiary, Guarantee Reserve Life Insurance Company
("Guarantee Reserve"), to acquire Guarantee Reserve's marketing organization
including all rights to do business with its field force. The primary product
sold by this marketing organization is low face amount whole life insurance.

         Beginning July 1, 2003, the Guarantee Reserve field force continued to
write this business in Guarantee Reserve, with us administering all new business
and assuming 50% of the risk through a quota share reinsurance arrangement.
Beginning in the second quarter of 2004, as the products were approved for sale
in each state, the new business was written by our subsidiaries, with 50% of the
risk ceded to Swiss Re.

                                       34
<PAGE>

         Recapture of Reinsurance Ceded

         Effective April 1, 2003, our subsidiary, American Pioneer entered into
agreements to recapture approximately $48 million of Medicare Supplement
business that had previously been reinsured to Transamerica Occidental Life
Insurance Company, Reinsurance Division ("Transamerica") under two quota share
contracts. In 1996, American Pioneer entered into two reinsurance treaties with
Transamerica. Pursuant to the first of these contracts, American Pioneer ceded
to Transamerica 90% of approximately $50 million of annualized premium that it
had acquired from First National Life Insurance Company in 1996. Under the
second contract, as subsequently amended, American Pioneer agreed to cede to
Transamerica 75% of certain new business from October 1996 through December 31,
1999. As of April 1, 2003, approximately $27 million remained ceded under the
First National treaty and approximately $16 million remained ceded under the new
business treaty.

         As part of an effort to exit certain non-core lines of business,
Transamerica approached the Company in 2002 to determine our interest in
recapturing the two treaties. Under the terms of the recapture agreements,
Transamerica transferred approximately $18 million in cash to American Pioneer
to cover the statutory reserves recaptured by American Pioneer. No ceding
allowance was paid by American Pioneer in the recapture. American Pioneer
currently retains 100% of the risks on the current in force amount remaining of
the block of $48 million of Medicare Supplement business. There was no gain or
loss reported on these recapture agreements.

         Acquisition of Pyramid Life

         On March 31, 2003, we acquired all of the outstanding common stock of
Pyramid Life. Pyramid Life specializes in selling health and life insurance
products to the senior market, including Medicare Supplement and Select, long
term care, life insurance, and fixed annuities. With this acquisition, we
acquired a $120 million block of in-force business, as well as a career sales
force that is skilled in selling senior market insurance products. Pyramid Life
markets its products in 26 states through a career agency sales force operating
out of Senior Solutions Sales Centers. During the full year 2003, Pyramid Life
agents produced more than $27 million of annualized new sales. Following a
transition period that took approximately ten months, the Pyramid Life business
has been fully transitioned into our existing operations, where we will be able
to take advantage of increased scale and efficiencies. Operating results
generated by Pyramid Life prior to the date of acquisition are not included in
our consolidated financial statements. Refer to Note 3 - Business Combinations
in our consolidated financial statements included in this Form 10-Q for
additional information on the acquisition.

         2003 Refinancing of Debt

         Prior to March 31, 2003, we had $38 million outstanding on our then
existing term loan credit facility. In connection with the acquisition of
Pyramid Life (see Note 3 - Business Combinations in our consolidated financial
statements included in this Form 10-Q) on March 31, 2003, we entered into a new
$80 million credit facility consisting of a $65 million term loan and a $15
million revolving loan facility. We used the proceeds from the new term loan to
repay the balance outstanding on our then existing term loan and to fund the
purchase of Pyramid Life. The early extinguishment of the existing debt resulted
in the immediate amortization of the related capitalized loan origination fees,
resulting in a pre-tax expense of approximately $1.8 million. A portion of the
proceeds from Trust preferred issuances in May 2003 and October 2003 (see the
discussion below) were used to reduce the balance of the term loan by $21.0
million during 2003. (Refer to Note 10 - Loan Payable in our consolidated
financial statements included in this Form 10-Q).

         Trust Preferred Securities Issuances

         During 2003, we issued $60.0 million of fixed and floating rate trust
preferred securities through subsidiary trusts, which including the $15.0
million issued in December 2002, results in a total of $75 million of such
securities outstanding. A portion of the proceeds was used to repay our existing
debt and the balance was retained at the parent company for general corporate
purposes (for more detailed information, see Note 11 - Other Long Term Debt in
our consolidated financial statements included in this Form 10-Q).

                                       35
<PAGE>

RESULTS OF OPERATIONS - CONSOLIDATED OVERVIEW

         The following table reflects income from each of our segments(1) and
contains a reconciliation to reported net income:

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED                 SIX MONTHS ENDED
                                                               JUNE 30,                          JUNE 30,
                                                     -------------------------        -----------------------------
                                                       2004            2003              2004               2003
                                                     ---------       ---------        -----------        ----------
                                                                             (In thousands)
<S>                                                  <C>             <C>              <C>                <C>
Career Agency (1)                                    $  12,845       $   9,720        $    26,289        $   19,190
Senior Market Brokerage (1)                              5,473           5,352              8,954             8,408
Medicare Advantage (1)                                     838               -                838                 -
Administrative Services (1)                              3,333           2,632              6,487             5,197

Corporate & Eliminations                                (2,774)         (2,244)            (5,259)           (5,794)

Realized gains (losses)                                    210           1,185              3,801             1,295
                                                     ---------       ---------        -----------        ----------

Income before income taxes (1)                          19,925          16,645             41,110            28,296

Income taxes, excluding capital gains                   (6,800)         (5,231)           (12,853)           (9,913)
Income taxes on capital gains                              (74)           (414)            (1,330)             (454)
Income taxes on early extinguishment of debt                 -               -                  -               619
                                                     ---------       ---------        -----------        ----------
Total income taxes                                      (6,874)         (5,645)           (14,183)           (9,748)
                                                     ---------       ---------        -----------        ----------

    Net income                                       $  13,051       $  11,000        $    26,927        $   18,548
                                                     =========       =========        ===========        ==========

Per Share Data (Diluted):

    Net income                                       $    0.23       $    0.20        $      0.48        $     0.34
                                                     =========       =========        ===========        ==========
</TABLE>

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

Three months ended June 30, 2004 and 2003

         Net income for the second quarter of 2004 increased 19% to $13.1
million, or $0.23 per share, compared to $11.0 million, or $0.20 per share in
2003. During the second quarter of 2004, we recognized realized gains, net of
tax of $0.1 million, or $0.00 per share, compared to realized gains, net of tax
of $0.8 million, or $0.01 per share in 2003. Our overall effective tax rate was
34.5% for the second quarter of 2004 as compared to 33.9% for the second quarter
of 2003.

         Our Career Agency segment results improved by $3.1 million, or 32%, to
$12.8 million in the second quarter of 2004 compared to the second quarter of
2003.

         Senior Market Brokerage segment second quarter 2004 results increased
$0.1 million, or 2%, to $5.5 million compared to 2003.

         Administrative Services segment income improved by $0.7 million, or
27%, compared to the second quarter of 2003. This improvement is primarily a
result of the growth in premiums managed.

         The loss from the Corporate segment increased by $0.5 million, or 24%,
compared to the second quarter of 2003.

                                       36
<PAGE>

Six months ended June 30, 2004 and 2003

         Net income for the first six months of 2004 increased 45% to $26.9
million, or $0.48 per share, compared to $18.5 million, or $0.34 per share in
2003. During the six months of 2004, we recognized realized gains, net of tax of
$2.5 million, or $0.04 per share, compared to realized gains, net of tax of $0.8
million, or $0.02 per share in 2003. The realized gains in 2004 were primarily
generated at Penncorp Life (Canada) as a result of the sale of investments to
fund the dividend of approximately $19.6 million paid to the parent company
during the first quarter of 2004 and the tax payments made during the first
quarter of 2004 relating to 2003 taxable income. See "Liquidity and Capital
Resources - Obligations of the Parent Company to Affiliates" for additional
information regarding the dividend. Our overall effective tax rate was 34.5% for
the first six months of both 2004 and 2003.

         Our Career Agency segment results improved by $7.1 million, or 37%, to
$26.3 million in the first six months of 2004 compared to the first six months
of 2003, primarily as a result of the acquisition of Pyramid Life, as well as
the strengthening of the Canadian dollar.

         Senior Market Brokerage segment first six months 2004 results increased
$0.5 million, or 7%, to $9.0 million compared to 2003.

         Administrative Services segment income improved by $1.3 million, or
25%, compared to the first six months of 2003. This improvement is primarily a
result of the growth in premiums managed.

         The loss from the Corporate segment decreased by $0.5 million, or 9%,
compared to the first six months of 2003. During the first six months of 2003,
the segment reported a charge relating to the early extinguishment of debt that
was incurred during the first quarter of 2003, that did not recur in 2004.

SEGMENT RESULTS - CAREER AGENCY

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED                SIX MONTHS ENDED
                                                                         JUNE 30,                         JUNE 30,
                                                                  -----------------------          ----------------------
                                                                   2004             2003            2004            2003
                                                                  -------          -------         -------         ------
                                                                                        (In thousands)
<S>                                                               <C>              <C>           <C>              <C>
Net premiums and policyholder fees:

  Life and annuity                                                $ 5,885          $ 5,297       $  11,777        $  9,166
  Accident & health                                                59,671           55,870         120,428          84,699
                                                                  -------          -------       ---------        --------
  Net premiums                                                     65,555           61,167         132,205          93,865
Net investment income                                               9,666            9,589          19,390          18,116
Other income                                                           77               88             186             202
                                                                  -------          -------       ---------        --------
  Total revenue                                                    75,298           70,844         151,781         112,183
                                                                  -------          -------       ---------        --------

Policyholder benefits                                              41,246           40,444          83,626          59,554
Interest credited to policyholders                                  1,921            1,816           3,780           2,879
Change in deferred acquisition costs                               (7,977)          (6,114)        (15,882)        (10,734)
Amortization of present value of future profits                       510              848           1,254             848
Commissions and general expenses, net of allowances                26,753           24,130          52,714          40,046
                                                                  -------          -------       ---------        --------
  Total benefits, claims and other deductions                      62,453           61,124         125,492          92,993
                                                                  -------          -------       ---------        --------

  Segment income                                                  $12,845          $ 9,720       $  26,289        $ 19,190
                                                                  =======          =======       =========        ========
</TABLE>

Three Months ended June 30, 2004 and 2003

         Our Career Agency segment results improved by $3.1 million, or 32%, to
$12.8 million in the second quarter of 2004 compared to the second quarter of
2003. The operations of Penncorp Life (Canada), which are included in the Career
Agency segment results, are transacted using the Canadian dollar as the
functional currency. The Canadian dollar has strengthened relative to the U.S.
dollar. The average conversion rate increased 3%, to C$0.7362 per US$1.00 for
the three months ended June 30, 2004, from C$0.7143 per US$1.00 for the same
period of 2003. This strengthening added approximately $0.1 million to the
Career Agency segment results for 2004, compared to 2003. See discussion below
under the heading "Quantitative and Qualitative Disclosures about Market Risk"
for additional information.

         REVENUES. Net premiums during the three months ended June 30, 2004 for
the Career Agency

                                       37
<PAGE>

segment increased by approximately $4.4 million, or 7%, compared to 2003.
Canadian premiums accounted for approximately 20% of the net premiums of this
segment in 2004 and 22% of the net premiums in 2003.

         Our Career agents also sold $8.1 million of fixed annuities during the
three months ended June 30, 2004, compared to $15.7 million in 2003. Annuity
deposits are not considered premiums for reporting in accordance with generally
accepted accounting principles.

         Net investment income was relatively flat, compared to the second
quarter of 2003. The increase in the segment's invested assets was offset by a
decrease in overall investment yields.

         BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits, including
the change in reserves, increased by $0.8 million, or 2%, during the second
quarter of 2004 compared to 2003, primarily as a result of the increase in
business in force. Overall loss ratios for the segment decreased to 63% in 2004
from 66% in 2003. Interest credited increased by $0.1 million, due to the
increase in annuity balances, offset by a reduction in credited rates.

         The increase in deferred acquisition costs was approximately $1.9
million more in the second quarter of 2004, compared to the increase in the
second quarter of 2003. This is directly related to the increase in the new
business added by Pyramid Life, as well as continued sales of annuities
generated by the segment.

         The amortization of the present value of future profits relates to the
intangibles acquired with Pyramid Life.

         Commissions and general expenses increased by approximately $2.6
million, or 11%, in the second quarter of 2004 compared to 2003.

Six Months ended June 30, 2004 and 2003

         Our Career Agency segment results improved by $7.1 million, or 37%, to
$26.3 million in the first six months of 2004 compared to the first six months
of 2003, primarily as a result of the acquisition of Pyramid Life, as well as
the strengthening of the Canadian dollar. The operations of Penncorp Life
(Canada), which are included in the Career Agency segment results, are
transacted using the Canadian dollar as the functional currency. The Canadian
dollar has strengthened relative to the U.S. dollar. The average conversion rate
increased 9%, to C$0.7474 per US$1.00 for the six months ended June 30, 2004,
from C$0.6877 per US$1.00 for the same period of 2003. This strengthening added
approximately $0.4 million to the Career Agency segment results for 2004,
compared to 2003. See discussion below under the heading "Quantitative and
Qualitative Disclosures about Market Risk" for additional information.

         REVENUES. Net premiums during the six months ended June 30, 2004 for
the Career Agency segment increased by approximately $38.3 million, or 41%,
compared to 2003, primarily as a result of the $35.2 million increase in
premiums from the Pyramid Life business. Canadian premiums accounted for
approximately 22% of the net premiums of this segment in 2004 and 40% of the net
premiums in 2003. Net Canadian premiums increased approximately $1.4 million,
however, the percentage of Canadian premiums dropped as a result of the increase
in U.S. premiums from the addition of the Pyramid Life business.

         Our Career agents also sold $26.9 million of fixed annuities during the
six months ended June 30, 2004, compared to $32.2 million in 2003. Annuity
deposits are not considered premiums for reporting in accordance with generally
accepted accounting principles.

         Net investment income increased by approximately $1.3 million, or 7%,
compared to the first six months of 2003. The increase is due to an increase in
the segment's invested assets from the acquisition of Pyramid Life (net of the
assets used to fund a portion of the acquisition) and the sale of annuities,
offset by a decrease in overall investment yields.

         BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits, including
the change in
                                       38
<PAGE>

reserves, increased by $23.7 million, or 40%, during the first six months of
2004 compared to 2003, primarily as a result of the increase in business in
force. Approximately $23.6 million of the increase relates to the Pyramid Life
business added in 2003. Overall loss ratios for the segment decreased to 63% in
2004 from 64% in 2002. Interest credited increased by $0.9 million, due to the
increase in annuity balances as a result of the continued sales and the Pyramid
business added in 2003, offset by a reduction in credited rates.

         The increase in deferred acquisition costs was approximately $5.1
million more in the first six months of 2004, compared to the increase in the
first six months of 2003. This is directly related to the increase in the new
business added by Pyramid Life, as well as continued sales of annuities
generated by the segment.

         The amortization of the present value of future profits relates to the
intangibles acquired with Pyramid Life.

         Commissions and general expenses increased by approximately $12.7
million, or 32%, in the first six months of 2004 compared to 2003. Approximately
$9.6 million of the increase relates to the Pyramid Life business, with the
balance relating primarily to the increase in the segment's new business.

SEGMENT RESULTS - SENIOR MARKET BROKERAGE

<TABLE>
<CAPTION>
                                                                    THREE MONTHS ENDED                SIX MONTHS ENDED
                                                                          JUNE 30,                        JUNE 30,
                                                                  ------------------------        -----------------------
                                                                   2004             2003            2004            2003
                                                                  -------          -------       ---------        --------
                                                                                      (In thousands)
<S>                                                               <C>              <C>           <C>              <C>
Net premiums and policyholder fees:

  Life and annuity                                                $ 7,388          $ 5,004       $  13,635        $  9,249
  Accident & health                                                61,716           52,482         124,910          94,725
                                                                  -------          -------       ---------        --------
  Net premiums                                                     69,104           57,486         138,545         103,974
Net investment income                                               6,360            5,866          12,677          11,773
Other income                                                          635               96             399             165
                                                                  -------          -------       ---------        --------
  Total revenue                                                    76,098           63,448         151,621         115,912
                                                                  -------          -------       ---------        --------

Policyholder benefits                                              49,757           42,571         101,887          78,867
Interest credited to policyholders                                  2,337            2,105           4,698           4,174
Change in deferred acquisition costs                               (6,924)          (4,943)        (15,340)         (8,574)
Amortization of present value of future profits                        68              138             143             171
Commissions and general expenses, net of allowances                25,387           18,225          51,279          32,866
                                                                  -------          -------       ---------        --------
  Total benefits, claims and other deductions                      70,626           58,096         142,667         107,504
                                                                  -------          -------       ---------        --------

  Segment income                                                  $ 5,473          $ 5,352       $   8,954        $  8,408
                                                                  =======          =======       =========        ========
</TABLE>

         The table below details the gross premiums and policyholder fees
collected for the major product lines in the Senior Market Brokerage segment and
the corresponding average amount of net premium retained after reinsurance. We
reinsure a substantial portion of our Senior Market Brokerage products to
unaffiliated third party reinsurers under various quota share coinsurance
agreements. Medicare supplement/select written premium is reinsured under quota
share coinsurance agreements ranging between 50% and 75% based upon the
geographic distribution of the underlying policies. We have also acquired
various blocks of Medicare supplement premium, which are 100% reinsured under
quota share coinsurance agreements. Under our reinsurance agreements, we
reinsure the claims incurred and commissions on a pro rata basis and receive
additional expense allowances for policy issue, administration and premium
taxes. In 2002 and 2003, we increased our retention on new Medicare
supplement/select business, causing the percentage of net retained premium to
increase as seen below. Additionally, the recapture of the Transamerica
treaties, effective April 1, 2003, and the new life business for Guarantee
Reserve, effective July, 1, 2003, increased the net retained premium. Beginning
in 2004, all new Medicare supplement/select business is 100% retained.

                                       39
<PAGE>



<TABLE>
<CAPTION>
                                                                      2004                              2003
                                                         ----------------------------       ---------------------------
                                                           GROSS               NET           GROSS               NET
THREE MONTHS ENDED JUNE 30,                              PREMIUMS            RETAINED       PREMIUMS           RETAINED
---------------------------                              --------            --------       --------           --------
                                                                                (In thousands)
<S>                                                      <C>                 <C>            <C>                <C>
Medicare supplement/select                               $ 109,408              52%         $ 105,244             45%
Other senior supplemental health                             6,707              61%             6,769             60%
Other health                                                 2,691              36%             3,844             32%
Senior life insurance                                        5,476              80%             3,478             70%
Other life                                                   4,041              75%             3,363             65%
                                                         ---------                          ---------
Total gross premiums                                     $ 128,323              54%         $ 122,698             47%
                                                         =========                          =========
</TABLE>

<TABLE>
<CAPTION>
                                                                   2004                               2003
                                                         --------------------------         -------------------------
                                                          GROSS              NET             GROSS             NET
SIX MONTHS ENDED JUNE 30,                                PREMIUMS         RETAINED          PREMIUMS        RETAINED
-------------------------                                --------         --------          --------        --------
                                                                                 (In thousands)
<S>                                                      <C>              <C>               <C>             <C>
Medicare supplement/select                               $ 225,133           51%            $ 216,046          39%
Other senior supplemental health                            13,045           62%               13,263          60%
Other health                                                 5,242           36%                7,352          33%
Senior life insurance                                       10,524           76%                6,070          65%
Other life                                                   7,384           76%                6,864          77%
                                                         ---------                          ---------
Total gross premiums                                     $ 261,329           53%            $ 249,595          42%
                                                         =========                          =========
</TABLE>

Three Months ended June 30, 2004 and 2003

         Senior Market Brokerage segment second quarter 2004 results increased
$0.1 million, or 2%, to $5.5 million compared to 2003.

         REVENUES. Gross direct and assumed premium written increased $5.6
million, or 4.6%, over the second quarter of 2003. Medicare supplement/select
premiums increased $4.2 million, or 4%, as a result of continued new sales, rate
increases and better than assumed persistency. Senior life insurance premium
increased by $2.0 million, or 57%, due to organic growth, as well as the
addition of the premium written by the Guarantee Reserve marketing organization.
These increases were partially offset by a decrease of $1.2 million, or 30%, in
other health, primarily as a result of the normal lapsation of the run-off block
of major medical business.

         Net premiums for the second quarter of 2004 increased by $11.6 million,
or 20%, compared to the same period of 2003. Net premiums grew faster than gross
premiums primarily as a result of our decision to reinsure fewer premiums and
retain more risk on our new business. This is reflected in the increase in the
percentage of the net amount of premium retained to 54% in 2004 from 47% in
2003.

         Approximately $4.2 million in annuity deposits were received during the
three months ended June, 30, 2004 compared to $16.2 million during 2003. Annuity
deposits are not considered premiums for reporting in accordance with generally
accepted accounting principles.

         Net investment income increased by $0.5 million compared to the second
quarter of 2003, due to an increase in the segment's invested assets of
approximately $82 million, partially offset by an overall decline in investment
yields.

         BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits, including
the change in reserves, increased by approximately $7.2 million, or 16%,
compared to the second quarter of 2003. The increase is due primarily to the
increase in our net retained business as a result of the increase in our net
retained new business premium. However, the overall loss ratios for the segment
improved to 72% for the second quarter of 2004 from 74% for the second quarter
of 2003. The loss ratios for our Medicare supplement/select business improved to
69.4% for the second quarter of 2004 from 70.0% in 2003.

                                       40
<PAGE>

         Interest credited to policyholders increased by $0.4 million, or 22%,
compared to the three months ended June 30, 2003 due to the continued increase
in annuity balances.

         The increase in deferred acquisition costs in the second quarter of
2004 was approximately $2.0 million more than in the second quarter of 2003. The
increase was driven by the increase in new life business written, as well as our
higher retention on new business. Acquisition costs for life business are
incurred on annualized premium written, including the $7.0 million of annualized
premium written by the Guarantee Reserve marketing organization. Acquisition
costs for annuities are based on the amount deposited, which is not considered
premiums for reporting in accordance with generally accepted accounting
principles.

         Commissions and other operating expenses increased by $7.2 million, or
39%, in the second quarter of 2004 compared to 2003. The following table details
the components of commission and other operating expenses:

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,                                          2004                2003
---------------------------                                    ----------------     -------------
                                                                         (In thousands)
<S>                                                            <C>                  <C>
Commissions                                                    $         19,856     $       20,641
Other operating costs                                                    16,990             14,824
Reinsurance allowances                                                  (11,459)           (17,240)
                                                               ----------------     --------------
Commissions and general expenses, net of allowances            $         25,387     $       18,225
                                                               ================     ==============
</TABLE>

         The ratio of commissions to gross premiums decreased to 15.5% during
the second quarter of 2004, from 16.8% in 2003, as a result of the growth of the
in force renewal premium from better persistency and rate increases. Other
operating costs as a percentage of gross premiums increased to 13.2% during the
second quarter of 2004 compared to 12.1% in 2003, primarily as a result of the
Guarantee Reserve business which generally has higher costs of acquisition
compared to the segment's other lines of business. Commission and expense
allowances received from reinsurers as a percentage of the premiums ceded
decreased to 19.3% during the second quarter of 2004 compared to 26.4% in 2003,
primarily due to the reduction in new business ceded and the affects of normal
lower commission allowances on a growing base of renewal ceded business.

Six Months ended June 30, 2004 and 2003

         Senior Market Brokerage segment first six months 2004 results increased
$0.5 million, or 7%, to $9.0 million compared to 2003.

         REVENUES. Gross direct and assumed premium written increased $11.7
million, or 4.7%, over the first six months of 2003. Medicare supplement/select
premiums increased $9.1 million, or 4.2 %, over the first six months of 2003 as
a result of continued new sales, rate increases and better than assumed
persistency. Senior life insurance premium increased by $4.5 million, or 73%,
due to organic growth, as well as the addition of the premium written by the
Guarantee Reserve marketing organization. These increases were partially offset
by a decrease of $2.1 million, or 29%, in other health, primarily as a result of
the normal lapsation of the run-off block of major medical business.

         Net premiums for the first six months of 2004 increased by $34.6
million, or 33%, compared to the same period of 2003. Net premiums grew faster
than gross premiums primarily as a result of the recapture of the Transamerica
treaties and our decision to reinsure fewer premiums and retain more risk on our
new business. This is reflected in the increase in the percentage of the net
amount of premium retained to 53% in 2004 from 42% in 2003.

         Approximately $12.0 million in annuity deposits were received during
the six months ended June 30, 2004 compared to $26.5 million during 2003.
Annuity deposits are not considered premiums for reporting in accordance with
generally accepted accounting principles.

                                       41
<PAGE>

         Net investment income increased by $0.9 million compared to the first
six months of 2003, due to an increase in the segment's invested assets of
approximately $82 million, partially offset by an overall decline in investment
yields.

         BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits, including
the change in reserves, increased by approximately $22.8 million, or 29%,
compared to the first six months of 2003. The increase is due primarily to the
increase in our net retained business as a result of the recapture of the
Transamerica treaties and the increase in our net retained new business premium.
However, the overall loss ratios for the segment improved to 74% for the first
six months of 2004 from 76% for the first six months of 2003. The loss ratios
for our Medicare supplement/select business improved to 69.8% for the first six
months of 2004 from 71.3% in 2003.

         Interest credited to policyholders increased by $0.7 million, or 18%,
compared to the six months ended June 30, 2003 due to the continued increase in
annuity balances.

         The increase in deferred acquisition costs in the first six months of
2004 was approximately $6.8 million more than in the first six months of 2003.
The increase was driven by the increase in new life business written, as well as
our higher retention on new business. Acquisition costs for life business are
incurred on annualized premium written, including the $14.4 million of
annualized premium written by the Guarantee Reserve marketing organization.
Acquisition costs for annuities are based on the amount deposited, which is not
considered premiums for reporting in accordance with generally accepted
accounting principles.

         Commissions and other operating expenses increased by $18.4 million, or
56%, in the first six months of 2004 compared to 2003. The following table
details the components of commission and other operating expenses:



<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,                                           2004            2003
-------------------------                                      -------------    ------------
                                                                       (In thousands)
<S>                                                            <C>              <C>
Commissions                                                    $      38,692    $     41,546
Other operating costs                                                 34,466          30,298
Reinsurance allowances                                               (21,876)        (38,978)
                                                               -------------    ------------
Commissions and general expenses, net of allowances            $      51,279    $     32,866
                                                               =============    ============
</TABLE>

         The ratio of commissions to gross premiums decreased to 14.8% during
the first six months of 2004, from 16.6% in 2003, as a result of the growth of
the in force renewal premium from better persistency and rate increases. Other
operating costs as a percentage of gross premiums increased to 13.2% during the
first six months of 2004 compared to 12.1% in 2003, primarily as a result of the
Guarantee Reserve business which generally has higher costs of acquisition
compared to the segment's other lines of business. Commission and expense
allowances received from reinsurers as a percentage of the premiums ceded
decreased to 17.8% during the first six months of 2004 compared to 26.8% in
2003, primarily due to the reduction in new business ceded, the recapture of the
Transamerica treaties, and the effects of normal lower commission allowances on
a growing base of renewal ceded business.

                                       42
<PAGE>

SEGMENT RESULTS - MEDICARE ADVANTAGE

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED               SIX MONTHS ENDED
                                                                        JUNE 30,                         JUNE 30,
                                                               ---------------------------      --------------------------
                                                                  2004             2003            2004            2003
                                                               ----------       ----------      ----------      ----------
                                                                                      (In thousands)
<S>                                                            <C>              <C>             <C>             <C>
Net premiums                                                   $   11,937       $        -      $   11,937      $        -
Net investment income                                                  21                -              21               -
                                                               ----------       ----------      ----------      ----------
  Total revenue                                                    11,958                -          11,958               -
                                                               ----------       ----------      ----------      ----------
Medical expenses                                                    8,642                -           8,642               -
Amortization of intangible assets                                     266                -             266               -
Commissions and general expenses                                    2,212                -           2,212               -
                                                               ----------       ----------      ----------      ----------
  Total benefits, claims and other deductions                      11,120                -          11,120               -
                                                               ----------       ----------      ----------      ----------
  Segment income                                                      838                -             838               -

Depreciation, amortization and interest                               266                              266
                                                               ----------       ----------      ----------      ----------
Earnings before interest, taxes, depreciation
   and amortization(1)                                         $    1,104       $        -      $    1,104      $        -
                                                               ==========       ==========      ==========      ==========
</TABLE>

(1)  In addition to segment income, we also evaluate the results of our Medicare
     Advantage segment based on earnings before interest, taxes, depreciation
     and amortization ("EBITDA"). EBITDA is a common alternative measure of
     performance used by investors, financial analysts and rating agencies. It
     is also a measure that is included in the fixed charge ratio required by
     the covenants for our outstanding bank debt. Accordingly, these groups use
     EBITDA, along with other measures, to estimate the value of a company and
     evaluate the Company's ability to meet its debt service requirements. While
     we consider EBITDA to be an important measure of comparative operating
     performance, it should not be construed as an alternative to segment income
     or cash flows from operating activities (as determined in accordance with
     generally accepted accounting principles).

         The Medicare Advantage segment includes the operations of Heritage and
our other initiatives in Medicare managed care, including our Medicare Advantage
private fee-for-service plans. Heritage generates its revenues and profits from
three sources. First, Heritage owns an interest in SelectCare of Texas, a health
plan that offers coverage to Medicare beneficiaries under a contract with the
federal government's Centers for Medicare & Medicaid Services, ("CMS"). Next,
Heritage operates three separate Management Service Organizations ("MSO's") that
manage the business of SelectCare of Texas and two affiliated Independent
Physician Associations ("IPA's"). Last, Heritage participates in the profits
derived from these IPA's.

         The components of the revenues and results for the segment for the one
month since acquisition or inception are as follows:

<TABLE>
<CAPTION>
                                                                                SEGMENT
                                                             REVENUES           INCOME
                                                           -----------        ----------
                                                                     (in thousands)
<S>                                                        <C>                <C>
Health Plan                                                $    11,829        $      247
Affiliated IPA's                                                 8,083               579

MSO's and Corporate                                              1,932               303
Private Fee-for Service                                            125              (291)
  Eliminations                                                 (10,011)                -
                                                           -----------        ----------
  Total                                                    $    11,958        $      838
                                                           ===========        ==========
</TABLE>

Intrasegment revenues are reported on a gross basis in each of the above
components of the Medicare Advantage segment. These intrasegment revenues are
eliminated in the consolidation for the

                                       43
<PAGE>
segment totals. The eliminations include premiums received by the IPA's from
the Health Plan totalling $8.1 million and Management fees received by the MSO's
from the Health Plan and the IPA's totalling $1.9 million.

         Heritage operates a health plan through SelectCare of Texas, LLC
("SelectCare"), a provider sponsored organization ("PSO"). SelectCare is a
Medicare Advantage coordinated care plan operating in Beaumont and Houston,
Texas, which had 16,100 members as of May 28, 2004 (the date of acquisition) and
receives its premiums primarily from CMS. SelectCare makes capitated risk
payments to four IPA's in the Houston and Beaumont regions, two of which are
affiliated IPAs. In addition, SelectCare retains the risk for certain other
types of care, primarily out of area emergency transplants. In the month of
June, SelectCare had 16,500 members enrolled, revenues of $11.8 million and had
a medical loss ratio of 85.4%.

         Heritage participates in the profits from the two affiliated IPA's that
receive capitated payments from SelectCare. During the month of June, the
affiliated IPA's managed the care of 13,400 SelectCare members, Heritage earned
$0.6 million on the $8.1 million in fees received from SelectCare.

         Heritage owns three MSO's that provide comprehensive management
services to SelectCare and its affiliated IPAs as part of long-term management
agreements. Services provided include strategic planning, provider network
services, marketing, finance and accounting, enrollment, claims processing,
information systems, utilization review, credentialing and quality management.
During the month of June, these MSO's earned $0.3 million of income on $1.9
million of fees collected.

         Starting in the month of June, American Progressive, an insurance
subsidiary of Universal American, began enrolling members in its private fee for
service product, a Medicare Advantage program that allows its member to have
more flexibility in the delivery of their health care services than other
Medicare Advantage plans. In addition to premium received from CMS, American
Progressive receives modest premium payments from the members as well. In June,
American Progressive had 120 members enrolled, collecting $0.1 million of
premium from CMS and the members, and a medical loss ratio of 80%. In addition,
American Progressive incurred approximately $0.3 million in start-up expenses.

SEGMENT RESULTS - ADMINISTRATIVE SERVICES

<TABLE>
<CAPTION>
                                                                 THREE MONTHS                      SIX MONTHS
                                                                 ENDED JUNE 30,                   ENDED JUNE 30,
                                                             -----------------------          ---------------------
                                                              2004            2003            2004             2003
                                                             -------        --------         ------        --------
                                                                                 (In thousands)
<S>                                                          <C>             <C>             <C>           <C>
Affiliated Fee Revenue
   Medicare supplement                                       $ 7,079         $ 5,723         $14,281       $11,637
   Long term care                                                712             647           1,405         1,319
   Life insurance                                              1,048             196           2,102           388
   Other                                                         790              88           1,382           169
                                                             -------         -------         -------       -------
   Total Affiliated Revenue                                    9,629           6,654          19,170        13,513
                                                             -------         -------         -------       -------
Unaffiliated Fee Revenue
   Medicare supplement                                         2,164           2,220           4,505         4,406
   Long term care                                              1,518           1,626           2,921         4,366
   Non-insurance products                                        379             450             778           726
   Other                                                         261             521             545         1,266
                                                             -------         -------         -------       -------
   Total Unaffiliated Revenue                                  4,322           4,817           8,749        10,764
                                                             -------         -------         -------       -------
Service fee and other income                                  13,950          11,471          27,919        24,277
Net investment income                                              3              28               6            31
                                                             -------         -------         -------       -------
   Total revenue                                              13,953          11,499          27,925        24,308
                                                             -------         -------         -------       -------
Amortization of present value of future profits                  105              87             209           175
General expenses                                              10,515           8,780          21,229        18,936
                                                             -------         -------         -------       -------
   Total expenses                                             10,620           8,867          21,438        19,111
                                                             -------         -------         -------       -------
   Segment income                                              3,333           2,632           6,487         5,197

Depreciation, amortization and interest                          534             517           1,069           978
                                                             -------         -------         -------       -------
     Earnings before interest, taxes, depreciation
       and amortization                                      $ 3,867         $ 3,149         $ 7,556       $ 6,175
                                                             =======         =======         =======       =======
</TABLE>

(1)  In addition to segment income, we also evaluate the results of our
     Administrative Services segment based on earnings before interest, taxes,
     depreciation and amortization ("EBITDA"). EBITDA is a common alternative
     measure of performance used by investors, financial analysts and rating
     agencies. It is also a measure that is included in the fixed charge ratio
     required by the covenants for our outstanding bank debt. Accordingly, these
     groups use EBITDA, along with other measures, to estimate the value of a
     company and evaluate the Company's ability to meet its debt service
     requirements. While we consider EBITDA to be an important measure of
     comparative operating performance, it should not be construed as an
     alternative to segment income or cash flows from operating activities (as
     determined in accordance with generally accepted accounting principles).

         Included in unaffiliated revenue are fees received to administer
certain business of our insurance subsidiaries that is 100% reinsured to an
unaffiliated reinsurer, which amounted to $2.9 million in the six

                                       44
<PAGE>

months ended June 30, 2004 and $3.5 million in for the same period of 2003.
These fees, together with the affiliated revenue, were eliminated in
consolidation.

Three months ended June 30, 2004 and 2003

         Administrative Services segment income improved by $0.7 million, or
27%, compared to the second quarter of 2003. This improvement is primarily a
result of the growth in premiums managed. Earnings before interest, taxes,
depreciation and amortization ("EBITDA") for this segment increased $0.7
million, or 23%, compared to the second quarter of 2003.

         Administrative Services fee revenue increased by $2.5 million, or 22%,
as compared to the second quarter of 2003. Affiliated service fee revenue
increased by $2.5 million compared to the second quarter of 2003 as a result of
the increase in Medicare Supplement/Select business in force at our insurance
subsidiaries, including Pyramid, for which CHCS began providing service
effective January 1, 2004, and fees from the administration of the life
insurance products sold by the Guarantee Reserve marketing organization that was
acquired in July 2003. Unaffiliated service fee revenue was relatively unchanged
from the second quarter of 2003. General expenses for the segment increased by
$1.7 million, or 20%, due primarily to the increase in business.

Six months ended June 30, 2004 and 2003

         Administrative Services segment income improved by $1.3 million, or
25%, compared to the first six months of 2003. This improvement is primarily a
result of the growth in premiums managed. EBITDA for this segment increased $1.4
million, or 22%, compared to the first six months of 2003.

         Administrative Services fee revenue increased by $3.6 million, or 15%,
as compared to the first quarter of 2003. Affiliated service fee revenue
increased by $4.9 million compared to the six months of 2003 as a result of the
increase in Medicare Supplement/Select business in force at our insurance
subsidiaries, including Pyramid, for which CHCS began providing service,
effective January 1, 2004, and fees from the administration of the life
insurance products sold by the Guarantee Reserve marketing organization that was
acquired in July 2003. Unaffiliated service fee revenue decreased by
approximately $1.2 million primarily due to the reduction in the fees from the
underwriting work we performed for the consortium that is offering long term
care to employees of the federal government and their families. The initial
enrollment period for this program, for which we performed underwriting, began
in the third quarter of 2002 and ended during the first quarter of 2003. General
expenses for the segment increased by $2.3 million, or 12%, due primarily to the
increase in business.

SEGMENT RESULTS - CORPORATE

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

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED                 SIX MONTHS ENDED
                                                                     JUNE 30,                         JUNE 30,
                                                             -----------------------          -----------------------
                                                               2004            2003             2004            2003
                                                             -------         -------          -------         -------
                                                                                 (In thousands)
<S>                                                          <C>             <C>              <C>             <C>
Interest cost of acquisition financing                       $ 1,762         $ 1,257          $ 3,285         $ 2,073
Early extinguishment of debt                                       -               -                -           1,766
Amortization of capitalized loan origination fees                164             114              287             243
Stock-based compensation expense                                  23              91               46             182
Other parent company expenses, net                               825             782            1,641           1,530
                                                             -------         -------          -------         -------

  Segment loss                                               $ 2,774         $ 2,244          $ 5,259         $ 5,794
                                                             =======         =======          =======         =======
</TABLE>

                                       45
<PAGE>

Three Months ended June 30, 2004 and 2003

         The loss from the Corporate segment increased by $0.5 million, or 24%,
compared to the second quarter of 2003. The increase was due to higher interest
cost as a result of an increase in the amount of the debt outstanding during the
quarter, relating to the amendment of our credit facility in connection with our
acquisition of Heritage, offset in part, by a reduction in the weighted average
interest rates, as compared to the same period of 2003. Our combined outstanding
debt was $178.7 million at June 30, 2004 compared to $105.0 million at June 30,
2003. The weighted average interest rate on our loan payable decreased to 3.9%
in 2004 from 4.3% in 2003. The weighted average interest rate on our other long
term debt increased slightly to 6.3% for the six months ended June 30, 2004 and
6.0% for the same period of 2003. See "Liquidity and Capital Resources" for
additional information regarding our loan payable and other long term debt.

Six Months ended June 30, 2004 and 2003

         The loss from the Corporate segment decreased by $0.5 million, or 9%,
compared to the first six months of 2003. During the first six months of 2003,
the segment reported a charge relating to the early extinguishment of debt that
was incurred during the first quarter of 2003 that did not recur in 2004. In
connection with the acquisition of Pyramid Life, we refinanced our debt. The
early extinguishment of the existing debt resulted in the immediate amortization
of the related capitalized loan origination fees, resulting in a pre-tax expense
of approximately $1.8 million. Partially offsetting this was an increase in
interest costs, as noted above.

LIQUIDITY AND CAPITAL RESOURCES

         Our capital is used primarily to support the retained risks and growth
of our insurance company subsidiaries and health plan and to support our parent
company as an insurance holding company. In addition, we use capital to fund our
growth through acquisitions of other companies, blocks of insurance or
administrative service business.

         We require cash at our parent company to meet our obligations under our
credit facility and our outstanding debentures held by our subsidiary,
Pennsylvania Life. In January 2002, our parent company issued a debenture to
Pennsylvania Life in conjunction with the transfer of the business of
Pennsylvania Life's Canadian Branch to Penncorp Life (Canada). We anticipate
funding the repayment of the debenture from dividends of Penncorp Life (Canada).
We also require cash to pay the operating expenses necessary to function as a
holding company (applicable insurance department regulations require us to bear
our own expenses), and to meet the costs of being a public company.

         We believe that our current cash position, the availability of our
$15.0 million revolving credit facility, the expected cash flows of our
administrative service company and management service organizations (acquired in
the acquisition of Heritage) and the surplus note interest payments from
American Exchange (as explained below) can support our parent company
obligations for the foreseeable future. However, there can be no assurance as to
our actual future cash flows or to the continued availability of dividends from
our insurance company subsidiaries.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

         Credit Facility, as Amended in May 2004

         In connection with the acquisition of Pyramid Life (see Note 3 -
Business Combinations), the Company obtained an $80 million credit facility (the
"Credit Agreement") on March 31, 2003 to repay the then existing loan and
provide funds for the acquisition of Pyramid Life. The Credit Agreement
consisted of a $65 million term loan which was drawn to fund the acquisition and
a $15 million revolving loan facility. The Credit Agreement initially called for
interest at the London Interbank Offering Rate ("LIBOR") for one, two or three
months, at the option of the Company, plus 300 basis points. Effective March 31,
2004, the spread over LIBOR was reduced to 275 basis points in accordance with
the terms of the Credit Agreement. Principal repayments were scheduled over a
five-year period with a final maturity date of March 31, 2008. The Company
incurred loan origination fees of approximately $2.1 million, which were
capitalized and are being amortized on a straight-line basis over the life of
the Credit Agreement.

                                       46
<PAGE>

         In accordance with the Credit Agreement, 50% of the net proceeds from
the $30 million Trust Preferred securities issued in May 2003 (see Note 11 -
Other Long Term Debt) were used to pay down the term loan. In October 2003, $6.0
million of the proceeds from an additional $20 million Trust Preferred offering
was used to further reduce the outstanding balance of the term loan. A waiver
was requested and received to limit the required repayment from the proceeds of
the Trust Preferred offering to $6.0 million. Future scheduled principal
payments were reduced as a result of these repayments, primarily in 2006 and
2007. As of the end of the March 31, 2004, the outstanding balance of the term
loan was $36.4 million.

         In connection with the acquisition of Heritage on May 28, 2004 (see
Note 3 - Business Combinations), the Company amended the Credit Agreement by
increasing the facility to $120 million from $80 million (the "Amended Credit
Agreement"), including an increase in the term loan portion to $105 million from
$36.4 million (the balance outstanding at May 28, 2004) and maintaining the $15
million revolving loan facility. None of the revolving loan facility has been
drawn as of June 30, 2004. Under the Amended Credit Agreement, the spread over
LIBOR was reduced to 225 basis points. Principal repayments are scheduled at
$5.3 million per year over a five-year period with a final payment of $78.9
million due upon maturity on May 28, 2009. The Company incurred additional loan
origination fees of approximately $2.1 million, which were capitalized and are
being amortized on a straight-line basis over the life of the Amended Credit
Agreement along with the continued amortization of the origination fees incurred
in connection with the Credit Agreement. The Company pays an annual commitment
fee of 50 basis points on the unutilized revolving loan facility. The
obligations of the Company under the Amended Credit Facility are guaranteed by
WorldNet Services Corp., CHCS Services Inc., CHCS Inc., Quincy Coverage
Corporation, Universal American Financial Services, Inc., Heritage, HHS-HPN
Network, Inc., Heritage Health Systems of Texas, Inc., PSO Management of Texas,
LLC, HHS Texas Management, Inc. and HHS Texas Management LP (collectively the
"Guarantors") and secured by substantially all of the assets of each of the
Guarantors. In addition, as security for the performance by the Company of its
obligations under the Amended Credit Facility, the Company, WorldNet Services
Corp., CHCS Services Inc., Heritage and HHS Texas Management, Inc., have each
pledged and assigned substantially all of their respective securities (but not
more than 65% of the issued and outstanding shares of voting stock of any
foreign subsidiary), all of their respective limited liability company and
partnership interests, all of their respective rights, title and interest under
any service or management contract entered into between or among any of their
respective subsidiaries and all proceeds of any and all of the foregoing.

         The Amended Credit Facility requires the Company and its subsidiaries
to meet certain financial tests, including a minimum fixed charge coverage
ratio, a minimum risk based capital test and a minimum consolidated net worth
test. The Amended Credit Facility also contains covenants, which among other
things, limit the incurrence of additional indebtedness, dividends, capital
expenditures, transactions with affiliates, asset sales, acquisitions, mergers,
prepayments of other indebtedness, liens and encumbrances and other matters
customarily restricted in such agreements.

         The Amended Credit Facility contains customary events of default,
including, among other things, payment defaults, breach of representations and
warranties, covenant defaults, cross-acceleration, cross-defaults to certain
other indebtedness, certain events of bankruptcy and insolvency and judgment
defaults.

         Due to the variable interest rate for this Credit Agreement, the
Company would be subject to higher interest costs if short-term interest rates
rise.

         The Company made regularly scheduled principal payments of $3.1 million
and paid $1.0 million in interest and fees in connection with its credit
facilities during the six months ended June 30, 2004. During the six months
ended June 30, 2003, the Company made regularly scheduled principal payments of
$2.8 million and paid $1.6 million in interest and fees in connection with its
credit facilities

                                       47
<PAGE>

         The following table shows the schedule of principal payments (in
thousands) remaining on the Amended Credit Agreement, as of June 30, 2004, with
the final payment in May 2009:

<TABLE>
<S>                                 <C>
2004 (Remainder of year)            $       2,625
2005                                        5,250
2006                                        5,250
2007                                        5,250
2008                                        5,250
2009                                       80,063
                                    -------------
                                    $     103,688
                                    =============
</TABLE>

         2003 Refinancing of Debt

         In January 2003, the Company made a scheduled principal payment of $2.8
million on its then current credit facility, and in March, 2003 made an
additional principal payment of $5.0 million from a portion of the proceeds from
the issuance of Trust Preferred securities (see Note 11 - Other Long Term Debt).
These payments reduced the outstanding balance on its then current credit
facility to $42.9 million, which was repaid on March 31, 2003 from the proceeds
of the Credit Agreement obtained in connection with the acquisition of Pyramid
Life. The early extinguishment of the then existing debt resulted in the
immediate amortization of the related capitalized loan origination fees,
resulting in a pre-tax expense of approximately $1.8 million.

         The Company has formed statutory business trusts, which exist for the
exclusive purpose of issuing trust preferred securities representing undivided
beneficial interests in the assets of the trust, investing the gross proceeds of
the trust preferred securities in junior subordinated deferrable interest
debentures of the Company (the "Junior Subordinated Debt") and engaging in only
those activities necessary or incidental thereto. In accordance with the
adoption of FIN 46R, the Company has deconsolidated the trusts. For further
discussion of the adoption of FIN 46R, see Note 2 - Recent and Pending
Accounting Pronouncements.

         Separate subsidiary trusts of the Company (the "Trusts") have issued a
combined $75.0 million in thirty year trust preferred securities (the "Capital
Securities") as of June 30, 2004, as detailed in the following table:

<TABLE>
<CAPTION>
  Maturity                   Amount                                        Spread           Rate as of
    Date                     Issued            Term                      Over LIBOR        June 30, 2004
    ----                 --------------        ----                    --------------      -------------
                         (In thousands)                                (Basis points)
<S>                      <C>               <C>                         <C>                 <C>
December 2032               $ 15,000       Fixed/Floating                   400(1)             6.7%
March 2033                    10,000       Floating                         400                5.1%
May 2033                      15,000       Floating                         420                5.5%
May 2033                      15,000       Fixed/Floating                   410(2)             7.4%
October 2033                  20,000       Fixed/Floating                   395(3)             7.0%
                            --------
                            $ 75,000
                            ========
</TABLE>

     (1) Effective September, 2003, the Company entered into a swap agreement
         whereby it will pay a fixed rate of 6.7% in exchange for a floating
         rate of LIBOR plus 400 basis points. The swap contract expires in
         December 2007.

     (2) The rate on this issue is fixed at 7.4% for the first five years, after
         which it is converted to a floating rate equal to LIBOR plus 410 basis
         points.

     (3) Effective April 29, 2004, the Company entered into a swap agreement
         whereby it will pay a fixed rate of 6.98% in exchange for a floating
         rate of LIBOR plus 395 basis points. The swap contract expires in
         October 2008.

         The Trusts have the right to call the Capital Securities at par after
five years from the date of issuance. The proceeds from the sale of the Capital
Securities, together with proceeds from the sale by the Trusts of their common
securities to the Company, were invested in thirty-year floating rate Junior
Subordinated Debt of the Company. From the proceeds of the trust preferred
securities, $26.0 million was used to pay down debt during 2003. The balance of
the proceeds has been used, in part to fund acquisitions, to provide capital to
the Company's insurance subsidiaries to support growth and to be held for
general corporate purposes.

                                       48
<PAGE>

         The Capital Securities represent an undivided beneficial interest in
the Trusts' assets, which consist solely of the Junior Subordinated Debt.
Holders of the Capital Securities have no voting rights. The Company owns all of
the common securities of the Trusts. Holders of both the Capital Securities and
the Junior Subordinated Debt are entitled to receive cumulative cash
distributions accruing from the date of issuance, and payable quarterly in
arrears at a floating rate equal to the three-month LIBOR plus a spread. The
floating rate resets quarterly and is limited to a maximum of 12.5% during the
first sixty months. Due to the variable interest rate for these securities, the
Company would be subject to higher interest costs if short-term interest rates
rise. The Capital Securities are subject to mandatory redemption upon repayment
of the Junior Subordinated Debt at maturity or upon earlier redemption. The
Junior Subordinated Debt is unsecured and ranks junior and subordinate in right
of payment to all present and future senior debt of the Company and is
effectively subordinated to all existing and future obligations of the Company's
subsidiaries. The Company has the right to redeem the Junior Subordinated Debt
after five years from the date of issuance.

         The Company has the right at any time, and from time to time, to defer
payments of interest on the Junior Subordinated Debt for a period not exceeding
20 consecutive quarters up to each debenture's maturity date. During any such
period, interest will continue to accrue and the Company may not declare or pay
any cash dividends or distributions on, or purchase, the Company's common stock
nor make any principal, interest or premium payments on or repurchase any debt
securities that rank equally with or junior to the Junior Subordinated Debt. The
Company has the right at any time to dissolve the Trusts and cause the Junior
Subordinated Debt to be distributed to the holders of the Capital Securities.
The Company has guaranteed, on a subordinated basis, all of the Trusts'
obligations under the Capital Securities including payment of the redemption
price and any accumulated and unpaid distributions to the extent of available
funds and upon dissolution, winding up or liquidation but only to the extent the
Trusts have funds available to make such payments. The Capital Securities have
not been and will not be registered under the Securities Act of 1933, as amended
(the "Securities Act"), and will only be offered and sold under an applicable
exemption from registration requirements under the Securities Act.

         The Company paid $2.2 million in interest in connection with the Junior
Subordinated Debt during the six months ended June 30, 2004, and paid $0.4
million during the six months ended June 30, 2003.

         Lease Obligations

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

<TABLE>
<S>                                   <C>
2004 (Remainder of year)              $ 1,194
2005                                    2,426
2006                                    2,275
2007                                    2,293
2008                                    2,196
Thereafter                              7,337
                                     --------
            Totals                   $ 17,721
                                     ========
</TABLE>

         In addition to the above, Pennsylvania Life and Penncorp Life (Canada)
are the named lessees on approximately 57 properties occupied by our career
agents for use as field offices. Our career agents reimburse Pennsylvania Life
and Penncorp Life (Canada) the actual rent for these field offices. The total
annual rent obligation for these field offices is approximately $905,000.

                                       49
<PAGE>

         Obligations of the Parent Company to Affiliates

         In January 2002, our parent company issued an $18.5 million 8.5%
debenture to Pennsylvania Life in connection with the transfer of the business
of Pennsylvania Life's Canadian Branch to Penncorp Life (Canada). The debenture
is scheduled to be repaid in full by the second quarter of 2005. Our parent
company repaid principal of $11.6 million through December 31, 2003, reducing
the outstanding balance to $6.9 million. During the six months ended June 30,
2004, the parent holding company repaid principal of $1.2 million. Our parent
holding company paid $0.3 million in interest on these debentures during the six
months ended June 30, 2004 and $0.6 million in the same period of 2003. The
interest on these debentures is eliminated in consolidation. Dividends from
Penncorp Life (Canada) funded the interest and principal paid on the debenture
to date and it is anticipated that they will fund all future payments made on
this debenture.

         Penncorp Life (Canada) is a Canadian insurance company. Canadian law
provides that a life insurer may pay a dividend after such dividend declaration
has been approved by its board of directors and upon at least 10 days prior
notification to the Superintendent of Financial Institutions. Such a dividend is
limited to retained net income (based on Canadian GAAP) for the preceding two
years, plus net income earned for the current year. In considering approval of a
dividend, the board of directors must consider whether the payment of such
dividend would be in contravention of the Insurance Companies Act of Canada.
During the first quarter of 2004, Penncorp Life (Canada) paid dividends of
C$26.7 million (approximately US$20.0 million) to Universal American in 2004,
relating to 2003 net income. The amount of the dividend was larger than normal
due to a benefit received by Penncorp Life (Canada) from an actuarial experience
study that allowed Penncorp Life (Canada) to reduce its policy reserves at
December 31, 2003 on a Canadian GAAP basis. The actuarial experience study did
not have an impact on Penncorp Life (Canada)'s policy reserves on a U.S. GAAP
basis. This dividend was used primarily to fund a portion of the cost of the
acquisition of Heritage. During the second quarter of 2004, Penncorp Life
(Canada) paid dividends of C$1.8 million (US$1.3 million) relating to net income
for the first quarter of 2004. We anticipate that Penncorp Life (Canada) will be
able to pay dividends equal to its net income earned during the remainder of
2004.

         Administrative Service Company

         Liquidity for our administrative service company is measured by its
ability to pay operating expenses. The primary source of liquidity is fees
collected from clients. We believe that the sources of cash for our
administrative service company exceed scheduled uses of cash and results in
amounts available to dividend to our parent holding company. We measure the
ability of the administrative service company to pay dividends based on its
earnings before interest, taxes, depreciation and amortization ("EBITDA").
EBITDA for our administrative services segment was $7.6 million for the six
months ended June 30, 2004.

         Insurance Subsidiary - Surplus Note

         Cash generated by our insurance company subsidiaries will be made
available to our holding company, principally through periodic payments of
principal and interest on the surplus note owed to our holding company by our
subsidiary, American Exchange Life. As of June 30, 2004, the principal amount of
the surplus note was $59.4 million. The note bears interest to our parent
holding company at LIBOR plus 325 basis points. We anticipate that the surplus
note will be primarily serviced by dividends from Pennsylvania Life, a wholly
owned subsidiary of American Exchange, and by tax-sharing payments among the
insurance companies that are wholly owned by American Exchange and file a
consolidated Federal income tax return. American Exchange made principal
payments totaling $5.1 million during the six months ended June 30, 2004. Our
parent holding company made capital contributions to American Exchange amounting
to $3.5 million during the six months ended June 30, 2004. No principal payments
were made during the same period of 2003. American Exchange paid $1.3 million in
interest on the surplus notes to our holding company during the six months ended
June 30, 2004 and, $1.5 million for the same period of 2003. The interest on
these debentures is eliminated in consolidation.

                                       50
<PAGE>

         In March 2004, Pennsylvania Life declared and paid a dividend in the
amount of $10.6 million to American Exchange. American Exchange made capital
contributions of $4.0 million to American Progressive and $5.0 million to Union
Bankers during the six months ended June 30, 2004.

         During the six months ended June 30, 2003, no dividends were declared
or paid by the U.S. insurance company subsidiaries to American Exchange. On
March 31, 2003, American Exchange received a capital contribution from its
parent in the amount of $26.0 million. American Exchange, in turn, made capital
a contribution of $26.0 million to Pennsylvania Life, primarily relating to the
acquisition of Pyramid Life.

         Dividend payments by our U.S insurance companies to our holding company
or to intermediate subsidiaries are limited by, or subject to the approval of
the insurance regulatory authorities of each insurance company's state of
domicile. Such dividend requirements and approval processes vary significantly
from state to state. Pennsylvania Life was able to and did pay ordinary
dividends of $10.6 million to American Exchange in March 2004. Pyramid Life is
able to pay ordinary dividends of up to $1.5 million to Pennsylvania Life (its
direct parent) with prior notice to the Kansas Insurance Department and
Marquette would be able to pay ordinary dividends of up to $0.2 million to
Constitution (its direct parent) without the prior approval from the Texas
Insurance Department in 2004. American Exchange, American Pioneer, American
Progressive and Union Bankers had negative earned surplus at June 30, 2004 and
are not be able to pay dividends in 2004 without special approval. We do not
expect that our other insurance subsidiaries will be able to pay ordinary
dividends in 2004.

         Insurance Subsidiaries

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

         Liquidity is also affected by unscheduled benefit payments including
death benefits, benefits under accident and health insurance policies and
interest-sensitive policy surrenders and withdrawals. The amount of surrenders
and withdrawals is affected by a variety of factors such as credited interest
rates for similar products, general economic conditions and events in the
industry that affect policyholders' confidence. Although the contractual terms
of substantially all of our in force life insurance policies and annuities give
the holders the right to surrender the policies and annuities, we impose
penalties for early surrenders. As of June 30, 2004 we held reserves that
exceeded the underlying cash surrender values of our net retained in force life
insurance and annuities by $31.5 million. Our insurance subsidiaries, in our
view, have not experienced any material changes in surrender and withdrawal
activity in recent years.

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

         The net yields on our cash and invested assets decreased to 5.0% for
the six months ended June 30, 2004 from 5.4% in the same period of 2003. A
portion of these securities are held to support the liabilities for policyholder
account balances, which liabilities are subject to periodic adjustments to their
credited interest rates. The credited interest rates of the interest-sensitive
policyholder account balances are determined by us based upon factors such as
portfolio rates of return and prevailing market rates and typically follow the
pattern of yields on the assets supporting these liabilities.

                                       51
<PAGE>

         Our insurance subsidiaries are required to maintain minimum amounts of
capital and surplus as required by regulatory authorities. Each of our insurance
subsidiaries' statutory capital and surplus exceeds its respective minimum
requirement. However, substantially more than such minimum amounts are needed to
meet statutory and administrative requirements of adequate capital and surplus
to support the current level of our insurance subsidiaries' operations.
Additionally, the National Association of Insurance Commissioners ("NAIC")
imposes regulatory risk-based capital ("RBC") requirements on life insurance
enterprises. At June 30, 2004, all of our insurance subsidiaries maintained
ratios of total adjusted capital to RBC in excess of the "authorized control
level". The combined statutory capital and surplus, including asset valuation
reserve, of our U.S. insurance subsidiaries totaled $122.2 million at June 30,
2004 and $110.5 million at June 30, 2003. Statutory net income for the six
months ended June 30, 2004 was $3.8 million, which included net realized gains
of $0.1 million, and for the six months ended June 30, 2003 was $5.1 million,
which included net realized gains of $0.4 million.

         Penncorp Life (Canada) reports to Canadian regulatory authorities based
upon Canadian statutory accounting principles that vary in some respects from
U.S. statutory accounting principles. Penncorp Life (Canada)'s net assets based
upon Canadian statutory accounting principles were C$58.8 million (US$43.6
million) as of June 30, 2004 and were C$59.8 million (US$44.4 million) as of
June 30, 2003. Net income based on Canadian generally accepted accounting
principles was C$4.4 million (US$3.3 million) for the six months ended June 30,
2004 and was C$4.1 million (US$2.8 million) for the six months ended June 30,
2003. Penncorp Life (Canada) maintained a Minimum Continuing Capital and Surplus
Requirement Ratio ("MCCSR") in excess of the minimum requirement at June 30,
2004.

         Investments

         Our investment policy is to balance the portfolio duration to achieve
investment returns consistent with the preservation of capital and maintenance
of liquidity adequate to meet payment of policy benefits and claims. We invest
in assets permitted under the insurance laws of the various states in which we
operate. Such laws generally prescribe the nature, quality of and limitations on
various types of investments that may be made. We do not currently have
investments in partnerships, special purpose entities, real estate, commodity
contracts, or other derivative securities. We currently engage the services of
three investment advisors under the direction of the management of our insurance
company subsidiaries and in accordance with guidelines adopted by the Investment
Committees of their respective boards of directors. Conning Asset Management
Company manages the portfolio of all of our United States subsidiaries, except
for the portfolio of Pyramid Life, which is managed by Hyperion Capital. MFC
Global Investment Management manages our Canadian portfolio. We invest primarily
in fixed maturity securities of the U.S. Government and its agencies and in
corporate fixed maturity securities with investment grade ratings of "BBB-"
(Standard & Poor's Corporation), "Baa3" (Moody's Investor Service) or higher.
Our current policy is not to invest in derivative programs or other hybrid
securities, except for GNMA's, FNMA's and investment grade corporate
collateralized mortgage obligations.

         As of June 30, 2004, 99.3% of our fixed maturity investments had
investment grade ratings from Standard & Poor's Corporation or Moody's Investor
Service. There were no non-income producing fixed maturities as of June 30,
2004. During the six months ended June 30, 2004, we did not write down the value
of any fixed maturity securities. During the six months ended June 30, 2003, we
wrote down the value of certain fixed maturity securities by $0.2 million. In
each case, these write-downs represent our estimate of other than temporary
declines in value and were included in net realized gains (losses) on
investments in our consolidated statements of operations.

         As of June 30, 2004, our insurance company subsidiaries held cash and
cash equivalents totaling $81.4 million, as well as fixed maturity securities
that could readily be converted to cash with carrying values (and fair values)
of $1.2 billion.

RECENT AND PENDING ACCOUNTING PRONOUNCEMENTS

         Refer to Consolidated Financial Statements Note 2 - Recent and Pending
Accounting Pronouncements.

                                       52
<PAGE>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         In general, market risk relates to changes in the value of financial
instruments that arise from adverse movements in interest rates, equity prices
and foreign exchange rates. We are exposed principally to changes in interest
rates that affect the market prices of our fixed income securities as well as
the cost of our variable rate debt. Additionally, we are exposed to changes in
the Canadian dollar that affects the translation of the financial position and
the results of operations of our Canadian subsidiary from Canadian dollars to
U.S. dollars.

         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
insurance liabilities generally arise over relatively long periods of time,
which typically permits ample time to prepare for their settlement.

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

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

         The sensitivity analysis of interest rate risk assumes an instantaneous
shift in a parallel fashion across the yield curve, with scenarios of interest
rates increasing and decreasing 100 and 200 basis points from their levels as of
June 30, 2004, and with all other variables held constant. A 100 basis point
increase in market interest rates would result in a pre-tax decrease in the
market value of our fixed income investments of $68.5 million and a 200 basis
point increase in market interest rates would result in $134.6 million decrease.
Similarly, a 100 basis point decrease in market interest rates would result in a
pre-tax increase in the market value of our fixed income investments of $74.3
million and a 200 basis point decrease in market interest rates would result in
a $151.9 million increase.

         Debt

         We pay interest on our term loan and a portion of our trust preferred
securities based on the London Inter Bank Offering Rate ("LIBOR") for one, two
or three months. Due to the variable interest rate for this loan, the Company
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 $15.0 million of the trust preferred securities for a five
year period through the contractual terms of the security at inception and an
additional $35.0 million through the use of interest rate swaps.

         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.

                                       53
<PAGE>

         The sensitivity analysis of interest rate risk assumes scenarios
increases or decreases in LIBOR of 100 and 200 basis points from their levels as
of June 30, 2004, and with all other variables held constant. The following
table summarizes the impact of changes in LIBOR, based on the weighted average
balance outstanding and the weighted average interest rates for the six months
ended June 30, 2004.

<TABLE>
<CAPTION>
                                                                 Effect of Change in LIBOR on Pre-tax Income for
                                                                       the six months ended June 30, 2004
                                                                 -----------------------------------------------
                                Weighted       Weighted
                                 Average        Average       200 Basis      100 Basis     100 Basis     200 Basis
 Description of Floating        Interest        Balance         Point          Point         Point         Point
        Rate Debt                 Rate        Outstanding      Decrease      Decrease      Increase      Increase
        ---------                 ----        -----------      --------      --------      --------      --------
                                                                        (in millions)
<S>                             <C>           <C>             <C>            <C>           <C>           <C>
Loan Payable                     4.00%          $48.2          $0.5          $     0.3     $     (0.3)   $     (0.5)
Other long term debt             5.34%          $25.0           0.2                0.1           (0.1)         (0.2)
                                                               ----          ---------     ----------    ----------
Total                                                          $0.7          $     0.4     $     (0.4)   $     (0.7)
                                                               ====          =========     ==========    ==========
</TABLE>

         We anticipate that the weighted average balance outstanding of our
floating rate loan payable will increase to $75.8 million for the year ending
December 31, 2004, as a result of the amendment of our credit agreement in
connection with the acquisition of Heritage.

         As noted above, we have fixed the interest rate on $50 million of our
$178.7 million of total debt outstanding, leaving $128.7 million of the debt
exposed to rising interest rates. To mitigate the negative impact of rising
interest rates on our debt, as of June 30, 2004 we have approximately $85.1
million of cash, $26.1 million in short duration floating rate investment
securities and $24.1 million of fixed income securities maturing by December 31,
2004 totaling $135.3 million, all of which will be positively impacted by rising
interest rates.

         Currency Exchange Rate Sensitivity

         Portions of our operations are transacted using the Canadian dollar as
the functional currency. As of and for the six months ended June 30, 2004,
approximately 11% of our assets, 10% of our revenues, excluding realized gains,
and 14% of our income before realized gains and taxes were derived from our
Canadian operations. As of and for the six months ended June 30, 2003,
approximately 13% of our assets, 13% of our revenues, excluding realized gains,
and 22% of our income before realized gains and taxes were derived from our
Canadian operations. Accordingly, our earnings and shareholder's equity are
affected by fluctuations in the value of the U.S. dollar as compared to the
Canadian dollar. Although this risk is somewhat mitigated by the fact that both
the assets and liabilities for our foreign operations are denominated in
Canadian dollars, we are still subject to translation gains and losses.

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

         A 10% strengthening of the U.S. dollar relative to the Canadian dollar,
as compared to the actual average exchange rate for the six months ended June
30, 2004, would have resulted in a decrease in our income before realized gains
and taxes of approximately $0.5 million for the six months ended June 30, 2004
and a decrease in our shareholders' equity of approximately $2.6 million at June
30, 2004. A 10% weakening of the U.S. dollar relative to the Canadian dollar
would have resulted in an increase in our income before realized gains and taxes
of approximately $0.6 million for the six months ended June 30, 2004 and an
increase in shareholders' equity of approximately $3.1 million at June 30, 2004.
Our sensitivity analysis of the effects of changes in foreign currency exchange
rates does not factor in any potential change in sales levels, local prices or
any other variables.

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

                                       54
<PAGE>

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

         Our management evaluated, with the participation of our principal
executive and principal financial officers, the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of June
30, 2004. Based on their evaluation, our principal executive and principal
financial officers concluded that our disclosure controls and procedures were
effective as of June 30, 2004.

         Change in Internal Control Over Financial Reporting

         There has been no change in our internal control over financial
reporting (as defined in Rules 13a - 15(f) and 15d - 15(f) under the Exchange
Act) that occurred during the quarter ended June 30, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.

                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

          The Company has litigation in the ordinary course of business,
including claims for medical, disability and life insurance benefits, and in
some cases, seeking punitive damages. Management and counsel believe that after
reserves and liability insurance recoveries, none of these will have a material
adverse effect on the Company

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

Stock Repurchases

<TABLE>
<CAPTION>
                                                          (c)Total Number    ((d) Maximum Number of
                           (a) Total                         of Shares        Shares (or Approximate
                           Number of                     Purchased as Part       Dollar Value) of
                             Shares       (b) Average       of Publicly       Shares That May Yet Be
                          Repurchased      Price Paid     Announced Plans       Purchased Under the
        Period                (1)          Per Share        or Programs          Plans or Programs
-----------------------   -------------   -------------  -------------------  ------------------------
<S>                       <C>             <C>            <C>                  <C>
April 2004                     95          $ 11.69               95                   715,554
May 2004                      160          $ 10.89              160                   715,394
June 2004                   1,676            11.47            1,676                   713,718
</TABLE>

          (1) All shares were purchased in private transactions.

Sales of Securities not registered under the Securities Act

During the Company's fiscal quarter ended June 30, 2004, the Company issued
shares of its Common Stock on the dates and in the amounts set forth below to
employees, as annual stock awards for performance rendered to the Company
pursuant to the Company's 1998 Incentive Compensation Plan. Each of these shares
was reissued from the Company's treasury stock. No proceeds were received by the
Company in connection with the issuance of such shares. Each of these issuances
was exempt from registration under the Securities Act pursuant to Section 4(2)
thereof. The issuances did not involve any public offering and each employee
received shares which were legended to indicate that such shares are not
registered under the Securities Act and can not be transferred in the absence of
such a registration or an exemption from registration. These share vest ratably
over a four year period. Each employee who received such shares is a member of
the Company's management.

<TABLE>
<CAPTION>
 DATE OF                       NUMBER
ISSUANCE                     OF SHARES
--------                     ---------
<S>                          <C>
April 15, 2004               79,132
</TABLE>

                                       55
<PAGE>

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

                  None

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

         a.       The annual meeting of the stockholders of Universal American
                  Financial Corp. was held on May 26, 2004.

         b.       All proposals were approved.

         c.       All director nominees were elected.

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

                  Our shareholders voted on a proposal to amend our certificate
                  of incorporation to increase the authorized shares of common
                  stock from 80,000,000 to 100,000,000.

<TABLE>
<CAPTION>
   FOR*                    BROKER NON-VOTES        AGAINST        ABSTAIN
<S>                       <C>                      <C>            <C>
40,225,890                 6,145,074               1,150,561      5,403
</TABLE>

                  Our shareholders voted on a proposal to increase the number of
                  shares of common stock issuable under our 1998 Incentive
                  Compensation Plan by 2,500,000 shares.

<TABLE>
<CAPTION>
   FOR                     BROKER NON-VOTES        AGAINST        ABSTAIN
<S>                        <C>                     <C>            <C>
35,752,196                 6,145,074               5,161,583      468,076
</TABLE>

ELECTION OF DIRECTORS:

<TABLE>
<CAPTION>
                                         VOTES            VOTES
      DIRECTOR                          RECEIVED         WITHHELD
<S>                                    <C>              <C>
Richard A. Barasch                     46,281,539       1,245,390
Bradley E. Cooper                      47,463,909          63,020
Mark M. Harmeling                      47,167,262         359,667
Bertram Harnett                        46,578,672         948,257
Linda H. Lamel                         47,167,019         359,910
Eric W. Leathers                       47,459,315          62,777
Patrick J. McLaughlin                  47,167,262         359,667
Robert A. Spass                        47,464,152          62,777
Robert F. Wright                       47,167,262         359,667
</TABLE>

ITEM 5.  OTHER INFORMATION
                  None

                                       56
<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         a.  Exhibits

<TABLE>
<S>      <C>
3        Certificate of Amendment, dated June 7, 2004, to the Company's
         Restated Certificate of Incorporation

11       Computation of Per Share Earnings

         Data required by Statement of Financial Accounting Standards No. 128,
         Earnings Per Share, is provided in Note 4 to the Consolidated Financial
         Statements in this report

31.1     Certification of Chief Executive Officer pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002.

31.2     Certification of Chief Financial Officer pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002.

32.1     Certification of Chief Executive Officer pursuant to Section 906 of the
         Sarbanes-Oxley Act of 2002.

32.2     Certification of Chief Financial Officer pursuant to Section 906 of the
         Sarbanes-Oxley Act of 2002.
</TABLE>

         b. Reports on Form 8-K during the quarter ended June 30, 2004

                  1.       Form 8-K filed on May 7, 2004 regarding the press
                           release announcing results of operations and
                           financial condition for the period ended March 31,
                           2004.

                  2.       Form 8-K filed on June 1, 2004 regarding the press
                           release announcing the completion of the acquisition
                           of Heritage Health Systems, Inc. and the amended and
                           restated credit agreement dated as of May 28, 2004.

SIGNATURE

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

                                              UNIVERSAL AMERICAN FINANCIAL CORP.

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

Date:  August 9, 2004

                                       57