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Table of Contents

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



FORM 10-Q

(Mark One)    

ý

 

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

For the quarterly period ended March 31, 2011

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                         

Commission file Number: 0-11321



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

New York
(State or other jurisdiction of
incorporation or organization)
  11-2580136
(I.R.S. Employer
Identification No.)

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

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



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

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

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

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller reporting company o

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

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

Class of Common Stock   Outstanding at
April 25, 2011
$0.01 par value   75,780,740 shares


TABLE OF CONTENTS

 
  Item   Description   Page  

PART I

 

Financial Information

       

 
1
 

Financial Statements:

       

     

Consolidated Balance Sheets

   
3
 

     

Consolidated Statements of Operations—Three Months

   
4
 

     

Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)

   
5
 

     

Consolidated Statements of Cash Flows

   
6
 

     

Notes to Consolidated Financial Statements

   
7
 

 
2
 

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

   
26
 

 
3
 

Quantitative and Qualitative Disclosures About Market Risk

   
37
 

 
4
 

Controls and Procedures

   
38
 

PART II

 

Other Information

       

 
1
 

Legal Proceedings

   
40
 

 
1A
 

Risk Factors

   
40
 

 
2
 

Unregistered Sales of Equity Securities and Use of Proceeds

   
40
 

 
3
 

Defaults Upon Senior Securities

   
40
 

 
4
 

(Removed & Reserved)

   
40
 

 
5
 

Other Information

   
40
 

 
6
 

Exhibits

   
40
 

     

Signatures

   
41
 

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

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

        This report, including, without limitation, the information set forth or incorporated by reference under Part II, Item 1A "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and oral statements made from time to time by our executive officers contains "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, known as the PSLRA. Statements in this report that are not historical facts are hereby identified as forward-looking statements and are intended to be covered by the safe harbor provisions of the PSLRA. They can be identified by the use of the words "believe," "expect," "predict," "project," "potential," "estimate," "anticipate," "should," "intend," "may," "will," and similar expressions or variations of such words, or by discussion of future financial results and events, strategy or risks and uncertainties, trends and conditions in the Company's business and competitive strengths, all of which involve risks and uncertainties.

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

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

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PART I

ITEM 1—FINANCIAL STATEMENTS (Unaudited)

        


UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except number of shares)

 
  March 31,
2011
  December 31,
2010
 

ASSETS

             

Investments:

             
 

Fixed maturities available for sale, at fair value (amortized cost: 2011, $1,256,233; 2010, $1,388,604;)

  $ 1,264,567   $ 1,398,498  
 

Other invested assets

    1,454     1,409  
           
   

Total investments

    1,266,021     1,399,907  

Cash and cash equivalents

    83,343     65,444  

Accrued investment income

    11,731     12,455  

Deferred policy acquisition costs

    142,452     144,750  

Reinsurance recoverables—life

    584,265     590,253  

Reinsurance recoverables—health

    124,601     127,931  

Due and unpaid premiums

    168,070     53,332  

Present value of future profits and other amortizing intangible assets

    139,057     144,241  

Goodwill and other indefinite lived intangible assets

    525,673     525,674  

Income taxes receivable

    18,289      

CMS contract deposit receivables

    17,737     196,584  

Other Part D receivables

    290,260     214,183  

Advances to agents

    31,650     37,022  

Other assets

    155,504     144,234  
           
   

Total assets

  $ 3,558,653   $ 3,656,010  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

             

LIABILITIES

             

Reserves and other policy liabilities—life

  $ 577,407   $ 582,248  

Reserves for future policy benefits—health

    408,679     407,312  

Policy and contract claims—health

    397,351     374,539  

Premiums received in advance

    11,385     16,410  

Loan payable

    232,022     232,872  

Other long-term debt

    110,000     110,000  

Amounts due to reinsurers

    5,998     6,710  

Income taxes payable

        48,983  

Deferred income tax payable

    62,178     61,794  

Other Part D payables

    87,666     107,031  

Other liabilities

    199,989     205,417  
           
   

Total liabilities

    2,092,675     2,153,316  
           

Commitments and contingencies (Note 12)

             

STOCKHOLDERS' EQUITY

             

Preferred Stock (Authorized: 3 million shares):

             
 

Series A Preferred Stock (Authorized: 300,000 shares, issued and outstanding: 42,105 shares, liquidation value 2011, $96,463; 2010, $86,105)

    42     42  
 

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

         

Common stock—voting (Authorized: 200 million shares, issued and outstanding: 2011, 79.3 million shares; 2010, 78.6 million shares)

    793     786  

Common stock—non-voting (Authorized 30 million shares)

         

Additional paid-in capital

    807,841     801,155  

Accumulated other comprehensive loss

    (2,628 )   (2,469 )

Retained earnings

    702,371     734,598  

Less: Treasury Stock (2011, 3.5 million shares; 2010, 2.9 million shares)

    (42,441 )   (31,418 )
           
   

Total stockholders' equity

    1,465,978     1,502,694  
           
     

Total liabilities and stockholders' equity

  $ 3,558,653   $ 3,656,010  
           

See Notes to unaudited Consolidated Financial Statements.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2011 and 2010

(Unaudited)

(in thousands, per share amounts in dollars)

 
  2011   2010  
 

Net premium and policyholder fees earned

  $ 1,227,823   $ 1,497,448  
 

Net investment income

    13,103     10,797  
 

Fee and other income

    1,148     4,813  
 

Realized loss:

             
   

Total other-than-temporary impairment losses on securities

        (131 )
   

Portion of loss recognized in other comprehensive income

         
           
     

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

        (131 )
     

Realized loss, excluding other-than-temporary impairment losses on securities

    (236 )   (153 )
           
 

Net realized loss on investments

    (236 )   (284 )
           
     

Total revenues

    1,241,838     1,512,774  
           

Benefits, claims and expenses:

             
 

Claims and other benefits

    1,126,821     1,334,773  
 

Change in deferred acquisition costs

    2,298     2,984  
 

Amortization of present value of future profits and other amortizing intangible assets

    5,184     5,937  
 

Commissions

    19,876     30,798  
 

Reinsurance commissions and expense allowances

    (3,195 )   (4,639 )
 

Interest expense

    4,675     5,013  
 

Other operating costs and expenses

    137,896     139,334  
           
     

Total benefits, claims and expenses

    1,293,555     1,514,200  
           

Loss before income taxes

    (51,717 )   (1,426 )
 

Benefit from income taxes

    (19,490 )   (2,827 )
           

Net (loss) income

  $ (32,227 ) $ 1,401  
           

(Loss) earnings per common share:

             
 

Basic

  $ (0.41 ) $ 0.02  
           
 

Diluted

  $ (0.41 ) $ 0.02  
           

Weighted average shares outstanding:

             

Weighted average common shares outstanding

    77,390     84,895  
     

Less weighted average treasury shares

    (3,092 )   (11,274 )
           

Basic weighted shares outstanding

    74,298     73,621  

Weighted average common equivalent of preferred shares outstanding

    4,211     4,211  
     

Effect of dilutive securities

        306  
           

Diluted weighted shares outstanding

    78,509     78,138  
           

See Notes to unaudited Consolidated Financial Statements.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended March 31, 2011 and 2010

(Unaudited)

(in thousands)

 
  Preferred
Stock
Series A
  Common
Stock
  Additional
Paid-In
Capital
  Accumulated
Other
Comprehensive
(Loss) Income
  Retained
Earnings
  Treasury
Stock
  Total  

2010

                                           

Balance at January 1, 2010

  $ 42   $ 879   $ 880,709   $ (7,915 ) $ 709,695   $ (133,946 ) $ 1,449,464  

Net income

                    1,401         1,401  

Other comprehensive income

                3,482             3,482  
                                           

Comprehensive income

                                        4,883  
                                           

Issuance of common stock

        2     1,368                 1,370  

Stock based compensation

            1,573                 1,573  

Retire Treasury stock

        (100 )   (98,959 )           99,059      

Treasury shares purchased, at cost

                        (1,256 )   (1,256 )

Treasury shares reissued

            4,706             8,961     13,667  
                               

Balance at March 31, 2010

  $ 42   $ 781   $ 789,397   $ (4,433 ) $ 711,096   $ (27,182 ) $ 1,469,701  
                               

2011

                                           

Balance at January 1, 2011

  $ 42   $ 786   $ 801,155   $ (2,469 ) $ 734,598   $ (31,418 ) $ 1,502,694  

Net loss

                    (32,227 )       (32,227 )

Other comprehensive loss

                (159 )           (159 )
                                           

Comprehensive loss

                                        (32,386 )
                                           

Issuance of common stock

        7     5,258                 5,265  

Stock based compensation

            1,498                 1,498  

Treasury shares purchased, at cost

                        (10,786 )   (10,786 )

Treasury shares reissued

            (70 )           (237 )   (307 )
                               

Balance at March 31, 2011

  $ 42   $ 793   $ 807,841   $ (2,628 ) $ 702,371   $ (42,441 ) $ 1,465,978  
                               

See Notes to unaudited Consolidated Financial Statements.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2011 and 2010

(Unaudited)

(in thousands)

 
  2011   2010  

Cash flows from operating activities:

             

Net (loss) income

  $ (32,227 ) $ 1,401  

Adjustments to reconcile net income to cash provided by operating activities, net of balances sold:

             

Deferred income taxes

    470     (4,599 )

Realized losses on investments

    236     284  

Amortization of intangible assets

    5,184     5,936  

Net amortization of bond premium

    2,250     791  

Depreciation expense

    3,248     4,667  

Changes in operating assets and liabilities:

             
 

Deferred policy acquisition costs

    2,298     2,984  
 

Reserves and other policy liabilities—life

    (4,841 )   (8,501 )
 

Reserves for future policy benefits—health

    1,367     938  
 

Policy and contract claims—health

    22,812     124,627  
 

Reinsurance balances

    8,606     7,716  
 

Due and unpaid/advance premium, net

    (119,763 )   (150,692 )
 

Income taxes payable/receivable

    (67,272 )   (22,840 )
 

Other Part D (payables)/receivables

    (95,442 )   (106,727 )
 

Other, net

    (3,136 )   (13,031 )
           
   

Cash used in operating activities

    (276,210 )   (157,046 )
           

Cash flows from investing activities:

             

Proceeds from sale or redemption of fixed maturity investments

    466,977     44,631  

Cost of fixed maturity investments purchased

    (336,727 )   (6,269 )

Purchase of fixed assets

    (2,711 )   (2,641 )

Other investing activities

    (5,697 )   (388 )
           
   

Cash provided by investing activities

    121,842     35,333  
           

Cash flows from financing activities:

             

Net proceeds from issuance of common and preferred stock, net of tax effect

    5,265     1,370  

Cost of treasury stock purchases

    (10,786 )   (1,256 )

Dividends paid to stockholders

    (209 )    

Receipts from CMS contract deposits

    1,099,562     990,103  

Withdrawals from CMS contract deposits

    (920,715 )   (778,355 )

Principal repayment on loan payable and other long-term debt

    (850 )   (832 )
           
   

Cash provided by financing activities

    172,267     211,030  
           

Net increase in cash and cash equivalents

    17,899     89,317  

Cash and cash equivalents at beginning of year

    65,444     856,958  
           

Cash and cash equivalents at end of year

  $ 83,343   $ 946,275  
           

See Notes to unaudited Consolidated Financial Statements.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION AND COMPANY BACKGROUND

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

        On December 30, 2010, we entered into (i) an Agreement and Plan of Merger (the "CVS Agreement") with CVS Caremark Corporation ("CVS Caremark") and Ulysses Merger Sub, L.L.C., an indirect wholly-owned subsidiary of CVS Caremark, to provide for the purchase of our Medicare Part D Business by CVS Caremark and (ii) a Separation Agreement with Universal American Spin Corp., a newly-formed wholly-owned subsidiary of the Company ("Newco"), to provide for the separation of our Medicare Part D Business from our remaining businesses, which include our Medicare Advantage and Traditional Insurance businesses. We refer to the sale of our Medicare Part D Business to CVS Caremark and related transactions as the "Part D Transaction" or the "Transactions."

        Pursuant to the CVS Agreement, CVS Caremark will pay Universal American shareholders $1.25 billion plus the excess capital in the entities that operate our Medicare Part D Business as of December 31, 2010, less the amount of our outstanding debt and trust preferred securities and certain other amounts. On April 27, 2010, the Company's shareholders approved the adoption of the CVS Agreement. Of the shares voted at the special meeting, over 99% were cast in favor of adoption of the CVS Agreement, representing approximately 90% of the total shares outstanding and entitled to vote. We expect to close the Part D Transaction on Friday April 29, 2011. Shareholders as of the close of trading on April 29, 2011 will receive $14.00 in cash and one share of New Universal American, a Delaware corporation that will own and operate all of the Company's non-Medicare Part D businesses, including the Medicare Advantage and Traditional Insurance businesses. At the closing, New Universal American will be renamed "Universal American Corp." and its shares will be listed on the New York Stock Exchange and trade under the ticker symbol: UAM.

        In connection with the closing of the Part D Transaction, Old Universal American intends to make an election under Section 338(h)(10) of the Internal Revenue Code to realize its higher tax basis in the assets of New Universal American. In order to qualify to make the Section 338(h)(10) election and increase cash proceeds to shareholders, on April 26, 2011 the Company entered into a Stock Purchase Agreement to sell $40 million of New Universal American preferred stock at the closing of the Part D Transaction. For further description of the preferred stock, see Note 15—Subsequent Events in the Notes to Consolidated Financial Statements.

2. BASIS OF PRESENTATION

        We have prepared the accompanying Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, for interim reporting in accordance with

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. BASIS OF PRESENTATION (Continued)


Article 10 of the Securities and Exchange Commission's Regulation S-X. Accordingly, they do not include all of the disclosures normally required by U.S. GAAP or those normally made in an annual report on Form 10-K. For the insurance and health plan subsidiaries, U.S. GAAP differs from statutory accounting practices prescribed or permitted by regulatory authorities. We have eliminated all material intercompany transactions and balances. The interim financial information in this report is unaudited, but in the opinion of management, includes all adjustments, including normal, recurring adjustments necessary to present fairly the financial position and results of operations for the periods reported. For further information, the reader of this quarterly report on Form 10-Q should refer to our annual report on Form 10-K for the year ended December 31, 2010, that was filed with the Securities and Exchange Commission, or the SEC, on March 1, 2011. The results of operations for the three months ended March 31, 2011 and 2010 are not necessarily indicative of the results to be expected for the full year.

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

        Significant Accounting Policies:    For a description of existing significant accounting policies, see Note 2—Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2010.

3. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS

        Deferred Acquisition Costs:    On September 29, 2010, ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts was ratified by the Financial Accounting Standards Board, known as FASB. The ASU amends FASB ASC Topic 944, Financial Services—Insurance. This guidance changes the accounting for costs associated with acquiring or renewing insurance contracts in response to diversity in practice in the capitalization of those costs. Under the new guidance, deferrable costs will be limited to incremental direct costs of a successful contract acquisition incurred with independent third parties and the portion of the total employee compensation and payroll-related fringe benefits related to time spent performing specified acquisition activities (e.g., underwriting, policy issuance and processing) for successful acquisition efforts. Companies will have a choice between prospective and retrospective adoption; the election must be made at the reporting entity level. The new guidance will be effective for fiscal years beginning after December 15, 2011. Management has not yet determined the impact of adoption of this new guidance on our consolidated financial position or results of operations.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. RECENTLY ISSUED AND PENDING ACCOUNTING PRONOUNCEMENTS (Continued)

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

4. INVESTMENTS

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

 
  March 31, 2011  
Classification
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Gross
Unrealized
OTTI(1)
  Fair
Value
 
 
  (in thousands)
 

U.S. Treasury securities and U.S. Government obligations

  $ 39,829   $ 207   $ (92 ) $   $ 39,944  

Government sponsored agencies

    22,182     1,222     (108 )       23,296  

Other political subdivisions

    141,090     379     (3,147 )       138,322  

Corporate debt securities

    529,121     12,972     (3,679 )       538,414  

Foreign debt securities

    97,398     1,230     (538 )       98,090  

Residential mortgage-backed securities

    243,639     7,807     (2,172 )       249,274  

Commercial mortgage-backed securities

    91,525     125     (1,924 )       89,726  

Other asset-backed securities

    91,449     2,128     (3,130 )   (2,946 )   87,501  
                       

  $ 1,256,233   $ 26,070   $ (14,790 ) $ (2,946 ) $ 1,264,567  
                       

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(Unaudited)

4. INVESTMENTS (Continued)

 

 
  December 31, 2010  
Classification
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Gross
Unrealized
OTTI(1)
  Fair
Value
 
 
  (in thousands)
 

U.S. Treasury securities and U.S. Government obligations

  $ 75,543   $ 247   $ (598 ) $   $ 75,192  

Government sponsored agencies

    81,097     1,954     (88 )       82,963  

Other political subdivisions

    154,348     350     (3,514 )       151,184  

Corporate debt securities

    585,629     13,883     (4,252 )       595,260  

Foreign debt securities

    104,554     888     (808 )       104,634  

Residential mortgage-backed securities

    197,033     8,468     (1,364 )       204,137  

Commercial mortgage-backed securities

    91,674     151     (2,102 )       89,723  

Other asset-backed securities

    98,726     2,965     (2,896 )   (3,390 )   95,405  
                       

  $ 1,388,604   $ 28,906   $ (15,622 ) $ (3,390 ) $ 1,398,498  
                       

(1)
Other-than-temporary impairments.

        At March 31, 2011, gross unrealized losses on mortgage-backed and asset-backed securities totaled $10.2 million, consisting primarily of unrealized losses of $5.8 million on subprime residential mortgage loans, as discussed below, $2.4 million related to other residential mortgage-backed securities and $1.4 million related to obligations of commercial mortgage-backed securities. The fair value of a majority of the subprime securities is depressed due to the expected deterioration of collectability of the underlying mortgages. The fair value of the other securities is primarily due to changes in interest rates. Management and the Investment Committee have evaluated these holdings, with input from our investment managers, and do not believe further other-than-temporarily impairment to be warranted.

        The amortized cost and fair value of fixed maturity investments at March 31, 2011 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
  Amortized
Cost
  Fair
Value
 
 
  (in thousands)
 

Due in 1 year or less

  $ 51,211   $ 52,790  

Due after 1 year through 5 years

    441,957     448,781  

Due after 5 years through 10 years

    306,267     307,216  

Due after 10 years

    30,185     29,279  

Mortgage and asset-backed securities

    426,613     426,501  
           

  $ 1,256,233   $ 1,264,567  
           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

        The fair value and unrealized loss as of March 31, 2011 and December 31, 2010 for fixed maturities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are shown below:

 
  Less than 12 Months   12 Months or Longer   Total  
March 31, 2011
  Fair
Value
  Gross
Unrealized
Losses
and OTTI
  Fair
Value
  Gross
Unrealized
Losses
and OTTI
  Fair
Value
  Gross
Unrealized
Losses
and OTTI
 
 
  (in thousands)
 
 

U.S. Treasury securities and U.S. Government obligations

  $ 16,960   $ (92 ) $   $   $ 16,960   $ (92 )
 

Government sponsored agencies

    4,604     (108 )           4,604     (108 )
 

Other political subdivisions

    120,827     (3,147 )           120,827     (3,147 )
 

Corporate debt securities

    234,040     (3,583 )   1,007     (96 )   235,047     (3,679 )
 

Foreign debt securities

    41,275     (538 )           41,275     (538 )
 

Residential mortgage-backed securities

    119,500     (1,753 )   732     (419 )   120,232     (2,172 )
 

Commercial mortgage-backed securities

    68,700     (1,005 )   1,919     (919 )   70,619     (1,924 )
 

Other asset-backed securities

    37,302     (559 )   15,535     (5,517 )   52,837     (6,076 )
                           
 

Total fixed maturities

  $ 643,208   $ (10,785 ) $ 19,193   $ (6,951 ) $ 662,401   $ (17,736 )
                           

Total number of securities in an unrealized loss position

                                  245  
                                     

 

 
  Less than 12 Months   12 Months or Longer   Total  
December 31, 2010
  Fair
Value
  Gross
Unrealized
Losses
and OTTI
  Fair
Value
  Gross
Unrealized
Losses
and OTTI
  Fair
Value
  Gross
Unrealized
Losses
and OTTI
 
 
  (in thousands)
 
 

U.S. Treasury securities and U.S. Government obligations

  $ 39,345   $ (598 ) $   $   $ 39,345   $ (598 )
 

Government sponsored agencies

    48,057     (88 )           48,057     (88 )
 

Other political subdivisions

    139,968     (3,514 )           139,968     (3,514 )
 

Corporate debt securities

    260,968     (4,162 )   1,014     (90 )   261,982     (4,252 )
 

Foreign debt securities

    68,776     (808 )           68,776     (808 )
 

Residential mortgage-backed securities

    61,774     (1,280 )   813     (84 )   62,587     (1,364 )
 

Commercial mortgage-backed securities

    65,375     (1,011 )   1,813     (1,091 )   67,188     (2,102 )
 

Other asset-backed securities

    29,657     (496 )   15,561     (5,790 )   45,218     (6,286 )
                           
 

Total fixed maturities

  $ 713,920   $ (11,957 ) $ 19,201   $ (7,055 ) $ 733,121   $ (19,012 )
                           

Total number of securities in an unrealized loss position

                                  236  
                                     

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

Subprime Residential Mortgage Loans

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

        As of March 31, 2011, we held subprime securities with par values of $22.1 million, an amortized cost of $21.6 million and a fair value of $15.7 million representing approximately 1.2% of our cash and invested assets, with collateral comprised substantially of first lien mortgages in senior or senior mezzanine level tranches, with an average Standard & Poor's, or equivalent, rating of A+.

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

Vintage Year
  Amortized
Cost
  Fair
Value
  Gross
Unrealized
Losses & OTTI
 
 
  (in thousands)
 

2003

  $ 184   $ 77   $ (107 )

2004

    201     86     (115 )

2005

    14,174     11,803     (2,371 )

2006

    7,000     3,749     (3,251 )
               

Totals

  $ 21,559   $ 15,715   $ (5,844 )
               

        We continuously review our subprime holdings stressing multiple variables, such as cash flows, prepayment speeds, default rates and loss severity, and comparing current base case loss expectations to the loss required to incur a principal loss, or breakpoint. We expect delinquency and loss rates in the subprime mortgage sector to continue to increase in the near term but at a decreasing rate. Those securities with a greater variance between the breakpoint and base case can withstand this further deterioration. Based on the analysis of the remaining subprime holdings at March 31, 2011, we do not believe these holdings are other-than-temporarily impaired.

        During the quarter ended March 31, 2011, we did not recognize any other-than-temporary impairment on any securities. During the quarter ended March 31, 2010, we recognized OTTI of $131,000.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENTS (Continued)

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

 
  For the three months
ended March 31,
 
 
  2011   2010  
 
  (in thousands)
 

Realized gains:

             
 

Fixed maturities

  $ 2,773   $ 568  
 

Other

    2      
           

    2,775     568  
           

Realized losses:

             
 

Fixed maturities, excluding OTTI

    (2,770 )   (721 )
 

OTTI on fixed maturities

        (131 )
 

Interest rate swap

    (241 )    
           

    (3,011 )   (852 )
           

Net realized gains (losses)

  $ (236 ) $ (284 )
           

        The amount of other-than-temporary impairments recognized in earnings on securities for which a portion of the other-than-temporary impairments related to other factors was recognized in accumulated other comprehensive income (loss) remained consistent with prior periods for the three months ended March 31, 2011 and 2010 at $1.2 million and $7.8 million, respectively.

5. FAIR VALUE MEASUREMENTS

        We carry fixed maturity investments, equity securities and interest rate swaps at fair value in our Consolidated Financial Statements. These fair value disclosures consist of information regarding the valuation of these financial instruments, followed by the fair value measurement disclosure requirements of Fair Value Measurements and Disclosures Topic, ASC 820-10.

    Fair Value Disclosures

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

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

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

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(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

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

        The following table presents our assets and liabilities that are carried at fair value by hierarchy levels, as of March 31, 2011 (in thousands):

 
  Total   Level 1   Level 2   Level 3  

Assets:

                         

Fixed maturties, available for sale

  $ 1,264,567   $   $ 1,261,831   $ 2,736  
                   

Liabilities:

                         

Interest rate swaps

  $ 12,894   $   $ 12,894   $  
                   

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

    Determination of fair values

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

    Valuation of Fixed Maturities

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

    reported trades,

    benchmark yields,

    issuer spreads,

    bids,

    offers, and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

    estimated cash flows and prepayment speeds.

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

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

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

    Interest rate swaps

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. FAIR VALUE MEASUREMENTS (Continued)

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

 
  Fixed
Maturities
 
 
  (in thousands)
 

Fair value as of December 31, 2010

  $ 7,238  

Sales

    (765 )

Transfer Out(3)

    (3,727 )

Realized Gain/Loss

    1  

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

    (11 )
       

Fair value as of March 31, 2011

  $ 2,736  
       

(1)
AOCI: Accumulated other comprehensive income

(2)
Unrealized gains/losses represent losses from changes in values of Level 3 financial instruments only for the periods in which the instruments are classified as Level 3.

(3)
Transfer of four securities from Level 3 to Level 2 due to observable inputs.

6. EARNINGS PER COMMON SHARE COMPUTATION

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

        For the three months ended March 31, 2011 and 2010, we allocated earnings between common and participating preferred stock as follows:

 
  Three months ended
March 31,
 
 
  2011   2010  
 
  (in thousands)
 

Net (loss) income attributable to common stock

  $ (30,499 ) $ 1,325  

Undistributed (loss) income allocated to participating preferred stock

    (1,728 )   76  
           

Net (loss) income

  $ (32,227 ) $ 1,401  
           

        The calculation of the diluted loss per common share for the quarter ended March 31, 2011, presented in the consolidated statements of operations excludes 1,456,000 common stock equivalents from stock options and unvested restricted stock that are potentially dilutive because to include them would be antidilutive when reporting a net loss.

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(Unaudited)

7. SHARE REPURCHASE PLAN

        We have approved share repurchase plans that have authorized us to repurchase up to $175 million of shares of our common stock. Through December 31, 2009, we had repurchased 13.4 million shares of our common stock for an aggregate amount of $132.7 million, under these programs. There have been no share repurchases since December 31, 2009 under these programs. As of March 31, 2011, we have $42.3 million that remains available to repurchase additional shares under these plans. However, share repurchases are also limited by the remaining available restricted payments under our 2007 Credit Facility, as amended, which limits share repurchases, dividends and other restricted payments to an aggregate of $300 million. Currently, we have $11.2 million remaining available under this restricted payment limit. We are not obligated to repurchase any specific number of shares under the programs or to make repurchases at any specific time or price.

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

 
  For the three months ended March 31,  
 
  2011   2010  
 
  Shares   Amount   Weighted
Average
Cost Per
Share
  Shares   Amount   Weighted
Average
Cost Per
Share
 

Treasury stock, beginning of year

    2,945,848   $ 31,418   $ 10.67     13,538,081   $ 133,946   $ 9.89  

Retirement of treasury stock

                (10,000,000 )   (99,059 )   9.91  

Shares repurchased

    508,166     10,786     21.23     85,148     1,256     14.75  

Shares distributed in the form of employee bonuses

    23,340     237     10.16     (956,640 )   (8,961 )   9.37  
                               

Treasury stock, end of year

    3,477,354   $ 42,441   $ 12.21     2,666,589   $ 27,182   $ 10.19  
                               

        As a result of our share repurchase program we had accumulated 13.5 million shares of common stock in treasury as of December 31, 2010. We retired 10 million shares on March 15, 2010, reducing treasury stock by $99.1 million and reducing additional paid-in-capital by $95.6 million and retained earnings by $3.4 million, with no impact on total consolidated stockholders' equity.

8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

 
  March 31,
2011
  December 31,
2010
 
 
  (in thousands)
 

Net unrealized gains on investments

  $ 11,284   $ 13,284  

Gross unrealized OTTI

    (2,946 )   (3,390 )

Fair value of interest rate swap

    (12,381 )   (13,693 )

Deferred income tax benefit on the above

    1,415     1,330  
           
 

Total accumulated other comprehensive loss

  $ (2,628 ) $ (2,469 )
           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

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

 
  Three months ended March 31,  
 
  2011   2010  
 
  Before Tax
Amount
  Tax Expense
(Benefit)
  Net of Tax
Amount
  Before Tax
Amount
  Tax Expense
(Benefit)
  Net of Tax
Amount
 
 
  (in thousands)
 

Net unrealized (loss) gain arising during the period (net of deferred acquisition costs)

  $ (1,792 ) $ (627 ) $ (1,165 ) $ 6,263   $ 2,192   $ 4,071  

Reclassification adjustment for losses included in income

    (236 )   (83 )   (153 )   (284 )   (99 )   (185 )
                           

Net unrealized (loss) gain arising during the period

    (1,556 )   (544 )   (1,012 )   6,547     2,291     4,256  

Cash flow hedge

    1,312     459     853     (1,190 )   (416 )   (774 )
                           
 

Other comprehensive (loss) gain

  $ (244 ) $ (85 ) $ (159 ) $ 5,357   $ 1,875   $ 3,482  
                           

9. STOCK-BASED COMPENSATION

        We have various stock-based incentive plans for our employees, non-employee directors and agents. We issue shares upon the exercise of options granted under these plans. Detailed information for activity in our stock-based incentive plans can be found in Note 21—Stock-Based Compensation in the Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2010.

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

 
  Three Months Ended
March 31,
 
 
  2011   2010  
 
  (in thousands)
 

Stock-based compensation expense by type:

             
   

Stock options

  $ 1,587   $ 1,572  
   

Restricted stock awards

    1,850     1,833  
           

Total stock-based compensation expense

    3,437     3,405  

Tax benefit recognized

    678     1,192  
           
 

Stock-based compensation expense, net of tax

  $ 2,759   $ 2,213  
           

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(Unaudited)

9. STOCK-BASED COMPENSATION (Continued)

    Stock Option Awards

        We recognize compensation cost for share-based payments to employees and non-employee directors based on the grant date fair value of the award, which we amortize over the grantees' service period in accordance with the provisions of Compensation-Stock Compensation Topic, ASC 718-10. We use the Black-Scholes valuation model to value employee stock options.

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

 
  Quarter ended
March 31, 2010

Weighted-average grant date fair value

  $5.41

Risk free interest rates

  1.87%-2.13%

Dividend yields

  0.0%

Expected volatility

  54.49%-54.91%

Expected lives of options (in years)

  3.3-3.8

        During the quarter ended March 31, 2011, we did not grant any new stock option awards.

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

        A summary of option activity for the three months ended March 31, 2011 is set forth below:

 
  Options
(in thousands)
  Weighted
Average
Exercise
Price
 

Outstanding, January 1, 2011

    5,564   $ 12.97  

Granted

         

Exercised

    (648 )   12.11  

Forfeited or expired

    (43 )   12.56  
             

Outstanding, March 31, 2011

    4,873   $ 13.09  
             

Exercisable, March 31, 2011

    3,516   $ 13.20  
             

        The total intrinsic value of options exercised during the first three months of 2011 was $6.0 million and the total intrinsic value of options exercised during the first three months of 2010 was $1.0 million. As of March 31, 2011, the total compensation cost related to non-vested awards not yet recognized was $6.5 million, which we expect to recognize over a weighted average period of 0.9 years.

        We received proceeds of $7.8 million from the exercise of stock options during the first three months of 2011 and proceeds of $1.2 million from the exercise of stock options during the first three months of 2010. ASC 718-10 also requires us to report the benefits of tax deductions in excess of recognized compensation cost as a financing cash flow. We recognized $2.6 million of financing cash flows for these excess tax deductions for the three months ended March 31, 2011 and $0.2 million for the three months ended March 31, 2010.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. STOCK-BASED COMPENSATION (Continued)

    Employee and Director Restricted Stock Awards

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

Non-vested Restricted Stock
  Shares
(in thousands)
  Weighted
Average
Grant-Date
Fair Value
 

Non-vested at beginning of period

    897   $ 13.41  

Granted

         

Vested

    (235 )   12.86  

Forfeited

    (18 )   12.91  
           

Non-vested at end of period

    644   $ 13.63  
           

        The total fair value of shares of restricted stock vested during the three months ended March 31, 2011 was $4.8 million and the total fair value of shares of restricted stock vested during the three months ended March 31, 2010 was $1.8 million.

        During 2009, the Board of Directors approved a performance share award program for certain of our officers. In general, the performance shares vest at the end of a three-year period. The actual number of shares earned at the conclusion of the vesting period can vary from 0% to 150% of the target award, based on our total shareholder return relative to a group of peer companies that were selected prior to the award. Compensation expense is recognized on a straight line basis over the vesting period. Prior to vesting, previously recognized compensation expense may be reversed in the event a grantee resigns, however, once the vesting date is reached, previously recognized expense may not be changed, even if the actual award varies from the target. In connection with this program, we awarded 449,900 performance shares to officers during 2010. We did not award any performance shares during the quarter ended March 31, 2011.

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. MEDICARE PART D

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

 
  March 31, 2011   December 31, 2010  
Plan Year
  Reinsurance/
Low-income
Cost
Subsidy(1)
  Risk
Corridor(2)
  Total
Due from (to)
CMS
  Reinsurance/
Low-income
Cost
Subsidy(1)
  Risk
Corridor(2)
  Total
Due from (to)
CMS
 
 
  (in thousands)
 

2011

  $ (189,272 ) $ 87,983   $ (101,289 ) $   $   $  

2010

    174,932     (26,156 )   148,776     164,583     (24,479 )   140,104  

2009(3)

    347     (317 )   30     329     (317 )   12  

2008(3)

    3,340     (71 )   3,269     3,283     (99 )   3,184  

2007(4)

    21,627     12,017     33,644     21,627     12,138     33,765  

2006(4)

    6,763     3,024     9,787     6,762     3,274     10,036  
                           

Total due (to) from CMS

  $ 17,737   $ 76,480   $ 94,217   $ 196,584   $ (9,483 ) $ 187,101  
                           

(1)
Amounts reported in CMS contract deposit receivables in the Consolidated Balance Sheets.

(2)
Amounts reported in Due and unpaid premiums in the Consolidated Balance Sheets.

(3)
Amounts reported for the 2009 and 2008 plan years are 100% reserved and reported within Claims Reserves.

(4)
In December 2010, CMS announced that the 2006 and 2007 plan years will be reopened and settled based upon PDEs submitted to CMS through January 30, 2011.

11. DERIVATIVE INSTRUMENTS—CASH FLOW HEDGE

        On December 4, 2007, we entered into two separate interest rate swap agreements, one with Citibank, N.A. and one with Calyon Corporate and Investment Bank, on a total notional amount of $250 million, where we pay an average locked-in fixed rate of 4.14% and receive a floating rate based on LIBOR to hedge the variability of cash flows to be paid under our credit facility. At inception, we determined that the critical terms of the hedging instrument and the hedged forecasted transaction were the same and we designated these swaps as cash flow hedges, with changes in the fair value reflected in other comprehensive income and the unrealized loss on these hedges in accumulated other comprehensive income. We perform periodic assessments of hedge effectiveness by verifying and documenting whether the critical terms of the hedging instrument and the forecasted transaction have changed during the period, rather than by quantifying the relevant changes in cash flows.

        Due primarily to the $78.1 million debt prepayment made in the third quarter of 2010 and subsequent scheduled principal payments, the outstanding principal balance on the hedged Credit Facility was reduced to $232.0 million at March 31, 2011, $18.0 million lower than the original $250 million notional amounts on the swaps. As a result, this portion of the swaps was deemed ineffective and the notional amount on one of the swaps was decreased by $18.0 million, $0.9 million in the first quarter of 2011. In addition, we evaluated the likelihood of additional debt paydowns prior to the scheduled maturity of the Credit Facility and the related interest rate swaps in September 2012, and

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

11. DERIVATIVE INSTRUMENTS—CASH FLOW HEDGE (Continued)


in the first quarter of 2011 we recorded a realized loss of $0.2 million on the portion of the swaps that would be considered ineffective as hedges.

        The unrealized loss on the effective portion of the swap totaling $12.4 million and $13.7 million at March 31, 2011 and 2010, respectively is reflected in accumulated other comprehensive loss. The combined fair value of these swaps was a $12.9 million liability at March 31, 2011 and a $14.0 million liability at December 31, 2010. We have reflected this fair value in other liabilities.

        In connection with the swap transaction executed with Citibank, N.A., we are required to post collateral when we are in a net liability position. The collateral amount required is based on the fair value of the swap including net accrued interest less a $1 million threshold amount as determined by our credit rating of BB+. Should we be downgraded or cease to be rated by S&P or Moody's, the threshold amount would be reduced to zero and we would need to post $1 million in additional collateral. This collateral is reflected in cash and cash equivalents and was $5.3 million as of March 31, 2011 and $6.1 million as of December 31, 2010. The swap agreements and our credit facility are described in more detail in Note 15—Derivative Instruments—Interest Rate Swaps and Note 13—Loan Payable in the Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2010.

12. COMMITMENTS AND CONTINGENCIES

    Legal Proceedings

        Plaintiff Arthur Tsutsui filed a shareholder derivative action (the "Tsutsui Action") on December 30, 2005, in the Supreme Court for New York State, Westchester County. The remaining defendants in Tsutsui v. Barasch, et al., index no. 05-22523, are officers Richard A. Barasch and Robert A. Waegelein, former officer Gary W. Bryant, as well as the three directors affiliated with Capital Z Partners who were sitting on our board of directors as of the time the complaint was filed. The Tsutsui Action alleged that the same alleged misstatements that were the subject of earlier shareholder actions, which have now all been dismissed or voluntarily withdrawn, constituted a breach of fiduciary duty by the officer defendants and the directors that caused the Company to sustain damages. The Tsutsui Action also sought recovery of any proceeds derived by the officer and director defendants from the sale of our stock that the plaintiff claims was in breach of their fiduciary duties. The parties have entered into a stipulation of settlement to resolve the action which was approved by the Court on April 15, 2011. As previously disclosed, under the terms of the Stipulation of Settlement, the Company has agreed to enhance existing corporate governance provisions concerning trades in the Company's stock by officers and directors and will pay $450,000 to plaintiff's counsel for attorneys' fees.

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

    Government Regulations

        In July 2009 and March 2010, we received subpoenas from the Department of Health and Human Services, Office of Inspector General, known as HHS-OIG, requesting documents related to marketing,

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

12. COMMITMENTS AND CONTINGENCIES (Continued)

sales and enrollment practices for our Today's Health Medicare HMO Plans which are offered in the State of Wisconsin. We are cooperating with HHS-OIG in connection with their investigation.

        Laws and regulations governing Medicare and other state and federal healthcare and insurance programs are complex and subject to significant interpretation. As part of the recent healthcare reform legislation, CMS has been exercising increased oversight and regulatory authority over our Medicare businesses. Compliance with such laws and regulations is subject to CMS audit, other governmental review and investigation and significant interpretation. There can be no assurance that we will be found to be in compliance with all such laws and regulations in connection with these audits, reviews and investigations. Failure to be in compliance can subject us to significant regulatory action including significant fines, penalties or operating restrictions on our business, including, without limitation, suspension of our ability to market to and enroll new members in our Medicare plans and exclusion from Medicare and other state and federal healthcare programs. On November 19, 2010, CMS notified us that we were suspended from marketing to and enrolling new members in our Medicare Advantage plans, effective December 5, 2010. According to CMS, the suspension relates primarily to agent oversight and market conduct issues and will remain in effect until CMS is satisfied that we have corrected the issues and they are not likely to recur. The suspension does not affect current members in our Medicare Advantage plans, nor does it affect the marketing, enrollment or membership in our stand-alone Medicare Prescription Drug plans. We are working diligently to resolve these issues with CMS as quickly as possible. Further, on February 25, 2011, we received the final performance audit and inspection report from CMS with respect to its audit of our Medicare Advantage and Medicare Part D contracts conducted during 2010. The audit report noted deficiencies with respect to both our Medicare Advantage and Medicare Part D contracts, including prescription drug formulary administration, coverage determinations and appeals, grievances, enrollment and disenrollment, premium billing and compliance plan deficiencies. On April 25, 2011, we filed with CMS a summary of the corrective actions that were taken with respect to these audit findings. Failure to correct the deficiencies noted in the February 25, 2011 audit report or to otherwise be in compliance with applicable laws and regulations could result in CMS imposing additional sanctions on us including penalties, fines or other operating restrictions, including termination of our right to participate in the Medicare program, which could have a material adverse effect on our business, financial condition and results of operations.

13. BUSINESS SEGMENT INFORMATION

        Our business segments are based on product and consist of

    Senior Managed Care—Medicare Advantage,

    Medicare Part D, and

    Traditional Insurance.

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

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

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

13. BUSINESS SEGMENT INFORMATION (Continued)

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

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

 
  Three months ended March 31,  
 
  2011   2010  
 
  Revenues   Income(Loss)
Before
Income Taxes
  Revenues   Income(Loss)
Before
Income Taxes
 
 
  (in thousands)
 

Senior Managed Care—Medicare Advantage

  $ 519,057   $ 6,407   $ 785,047   $ 47,603  

Medicare Part D

    647,692     (43,399 )   644,220     (31,986 )

Traditional Insurance

    74,611     (78 )   80,289     (5,699 )

Corporate & Other

    683     (14,411 )   9,187     (11,060 )

Intersegment revenues

    31         (5,685 )    

Adjustments to segment amounts:

                         
 

Net realized losses(1)

    (236 )   (236 )   (284 )   (284 )
                   

Total

  $ 1,241,838   $ (51,717 ) $ 1,512,774   $ (1,426 )
                   

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

14. OTHER DISCLOSURES

        Income Taxes:    Our effective tax rate was a benefit of 37.7% for the first quarter of 2011, compared to a benefit of 198.3% for the first quarter of 2010. The change in the effective rate for the three months ended March 31, 2011 compared with the same period in 2010 is attributable to $0.5 million of non-recurring tax benefits recognized during the first quarter of 2011 compared to $2.3 million recognized in the first quarter of 2010. The 2011 benefits were primarily related to state income tax refunds. The 2010 benefits were recognized upon the completion of examinations by the Internal Revenue Service and were attributable to pre-acquisition tax returns of MemberHealth, Inc.

        Reinsurance:    We evaluate the financial condition of our reinsurers and monitor concentrations of credit risk to minimize our exposure to significant losses from reinsurer insolvencies. We are obligated to pay claims in the event that a reinsurer to whom we have ceded an insured claim fails to meet its obligations under the reinsurance agreement. As of March 31, 2011, all of our primary reinsurers were rated "A-" (Excellent) or better by A.M. Best with the exception of one reinsurer. For that reinsurer,

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UNIVERSAL AMERICAN CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14. OTHER DISCLOSURES (Continued)


which is not rated, a trust containing assets at 106% of reserve levels is maintained. We do not know of any instances where any of our reinsurers have been unable to pay any policy claims on any reinsured business.

        Sale of CHCS:    On April 26, 2010, we entered into an agreement to sell the outstanding common stock of CHCS, our administrative services company, to Patni Americas, Inc, a wholly-owned subsidiary of Patni Computer Systems Limited (NYSE: PTI), for $6.0 million in cash, subject to an adjustment for any net working capital remaining at CHCS on the closing date. The transaction closed on June 9, 2010, with an effective date of April 1, 2010. The operations of CHCS are included in consolidated results up to the effective date of the sale. The total consideration was approximately $7.5 million. Our carrying value of the assets disposed of in connection with the sale of CHCS was approximately $7.1 million, including $4.4 million of goodwill. We recognized an immaterial loss on the disposition after consideration of transaction costs of approximately $0.3 million.

15. SUBSEQUENT EVENTS

        On April 26, 2011, the Company and UAC Holding Inc., a wholly-owned subsidiary of the Company (together with the Company, the "Sellers"), entered into a Stock Purchase Agreement to sell 1,600,000 shares of Series A Mandatorily Redeemable Preferred Stock to be issued by Universal American Spin Corp., a wholly-owned subsidiary of the Company ("New Universal American"), par value $0.01 per share, with a liquidation preference of $25.00 per share (the "Series A Preferred Stock"), for an aggregate purchase price of $40 million. The sale of the shares of Series A Preferred Stock by the Sellers is conditioned upon the satisfaction or waiver of all of the conditions to the closing of the Company's sale of its Medicare Part D business (the "Part D Transaction") to CVS Caremark Corporation ("CVS Caremark") set forth in the Agreement and Plan of Merger, dated December 30, 2010, by and among the Company, CVS Caremark and Ulysses Merger Sub, L.L.C., as amended on March 30, 2011 (the "CVS Agreement"). The issuance by New Universal American, and the subsequent sale by the Sellers, of the shares of Series A Preferred Stock is expected to occur on April 29, 2011.

        Dividends on the Series A Preferred Stock are cumulative from the date of original issue and will be payable quarterly in arrears on the 30th day of January, April, July and October of each year, commencing July 2011, when, as and if declared by New Universal American's board of directors. Dividends will be payable out of amounts legally available therefor at a rate equal to 8.50% per annum of the stated liquidation preference.

        At the sixth anniversary of the date of the issuance of the Series A Preferred Stock, the Series A Preferred Stock will be redeemed in whole, out of amounts legally available therefore, at a redemption price of $25.00 per share plus an amount equal to all accumulated and unpaid dividends thereon to the date of redemption, whether or not declared.

        The proceeds from the sale of the Series A Preferred Stock by the Sellers will be used to pay a portion of the existing indebtedness of the Company at the closing of the Part D Transaction, thereby increasing the cash payment to the Company's shareholders.

        The shares of Series A Preferred Stock will be completed through a private placement to the purchasers as accredited investors and pursuant to the exemptions from the registration requirements of the Securities Act of 1933, as amended, provided by Section 4(2) thereof and Regulation D promulgated thereunder.

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

Introduction

        The following discussion and analysis presents a review of our financial condition as of March 31, 2011 and our results of operations for the three months ended March 31, 2011 and 2010. You should read the following analysis of our consolidated results of operations and financial condition in conjunction with the Consolidated Financial Statements and related consolidated Footnotes included elsewhere in this quarterly report on Form 10-Q as well as the Consolidated Financial Statements and related consolidated Footnotes and the Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2010. You should also read the following analysis in conjunction with the Risk Factors contained in our annual report on Form 10-K for the year ended December 31, 2010, as supplemented by the risk factors set forth in Part II, Item 1A "Risk Factors" below.

Part D Sale Transaction

    We expect to close the sale of our Medicare Part D business to CVS Caremark on April 29, 2011. Shareholders are expected to receive $14.00 per share in cash and one share of New Universal American common stock.

Membership

        The following table presents our membership in Medicare Advantage and Part D segments as of March 31, 2011 and 2010.

 
  As of March 31,  
Membership by Segment
  2011   2010  
 
  (in thousands)
 

Medicare Advantage

             
 

PFFS

    89     199  
 

Network-based (HMO and PPO)

    84     88  
           
   

Total Medicare Advantage

    173     287  
   

Total Part D

    1,850     1,877  
           

Total Membership

    2,023     2,164  
           

        Medicare Advantage membership decreased 114,000 compared to March 31, 2010. This decline was expected, as we were required to terminate approximately 60,000 members as a result of the network requirements of the Medicare Improvements for Patients and Providers Act of 2008, known as MIPPA. Further, due to lapsation and the limited ability to add new members during the 2011 Annual Election Period as a result of CMS sanctions, membership declined by an additional 54,000 members.

Healthcare Reform

        In March 2010, President Obama signed into law The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010 (which we collectively refer to as the "Affordable Care Act") which enacts significant changes to various aspects of the U.S. health insurance industry. There are many important provisions of the legislation that will require additional guidance and clarification in form of regulations and interpretations in order to fully understand the impact of the legislation on our overall business, which we expect to occur over the next several years. Certain aspects of the Affordable Care Act are currently being challenged in the judicial system. In addition,

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Congress may withhold the funding necessary to implement the new reforms or attempt to replace the legislation with amended provisions or repeal it altogether.

        Certain significant provisions of the Affordable Care Act that will impact our business include, among others, reduced Medicare Advantage reimbursement rates, gradual closing of the coverage gap, or "donut hole" on Medicare Part D, implementation of quality bonus for Star Ratings, stipulated minimum medical loss ratios, shortened annual enrollment period, non-deductible federal premium taxes assessed to health insurers, coding intensity adjustments with mandatory minimums and a limitation on the federal tax deductibility of compensation earned by individuals. The Health Care Reform Legislation is discussed more fully under Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2010.

Results of Operations—Consolidated Overview

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

 
  Three months ended
March 31,
 
 
  2011   2010  
 
  (in thousands)
 

Senior Managed Care—Medicare Advantage(1)

  $ 6,407   $ 47,603  

Medicare Part D(1)

    (43,399 )   (31,986 )

Traditional Insurance(1)

    (78 )   (5,699 )

Corporate(1)

    (14,411 )   (11,060 )

Net realized losses on investments(1)

    (236 )   (284 )
           

Losses before provision for income taxes(1)

    (51,717 )   (1,426 )
 

Benefit from income taxes

    (19,490 )   (2,827 )
           

Net (loss) income

  $ (32,227 ) $ 1,401  
           

(Loss) earnings per common share (diluted)

  $ (0.41 ) $ 0.02  
           

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

    Three months ended March 31, 2011 and 2010

        Our net loss for the three months ended March 31, 2011 was $32.2 million, or $0.41 per diluted share, compared to net income of $1.4 million, or $0.02 per diluted share for the three months ended March 31, 2010. Our effective tax rate was a benefit of 37.7% for the first quarter of 2011 compared with a benefit of 198.3% for the first quarter of 2010. The effective rate for the three months ended March 31, 2011 includes $0.5 million of non-recurring tax benefits recognized during the first quarter of 2011 compared to $2.3 million recognized in the first quarter of 2010. The 2011 benefits were primarily related to state income tax refunds. The 2010 benefits were recognized upon the completion of examinations by the Internal Revenue Service and were attributable to pre-acquisition tax returns of MemberHealth, Inc. Excluding the non-recurring tax benefits, our effective tax rate was 36.8% and 36.9% for the three months ended March 31, 2011 and 2010, respectively.

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        Our Senior Managed Care—Medicare Advantage segment generated income before income taxes of $6.4 million for the three months ended March 31, 2011, a decrease of $41.2 million compared to the three months ended March 31, 2010. The decrease in earnings was driven by a 37% decrease in the member months for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 caused by the decline in membership along with a 220 basis point increase in the medical expense ratio, primarily related to unfavorable prior period development reported in 2011, compared with favorable prior period development in 2010. In addition, 2011 included approximately $4.0 million of expenses incurred in corrective actions addressing items noted by CMS in their sanctions.

        Our Medicare Part D segment generated a loss before income taxes of $43.4 million for the first quarter of 2011, compared to a loss of $32.0 million for the first quarter of 2010, an increase of $11.4 million. The impact from increased seasonality caused by the change in the 2011 benefit design noted above and an increase in general expenses accounted for the increase in loss before income taxes and was partially offset by the lower amount of negative prior period development of $2.4 million in the first quarter of 2011, compared to $4.1 million in negative prior period development with respect to the first quarter of 2010.

        The loss before income taxes for our Traditional Insurance segment decreased by $5.6 million compared to the three months ended March 31, 2010, driven by higher net investment income, improved benefit ratios in the specialty health line of business and lower expenses.

        The loss before income taxes from our Corporate & Other segment increased by $3.4 million for the first quarter of 2011 compared to the first quarter of 2010. This was due primarily to $2.1 million of transaction-related costs incurred in 2011 in connection with the sale of Part D to CVS Caremark along with $1.5 million related to the loss of earnings from our TPA which was sold in the second quarter of 2010.

Segment Results—Senior Managed Care—Medicare Advantage

 
  Three months ended
March 31,
 
 
  2011   2010  
 
  (in thousands)
 

Net premiums

  $ 511,252   $ 777,831  

Net investment and other income

    7,805     7,216  
           
 

Total revenue

    519,057     785,047  
           

Medical expenses

    434,059     643,369  

Amortization of intangible assets

    999     1,140  

Commissions and general expenses

    77,592     92,935  
           
 

Total benefits, claims and other deductions

    512,650     737,444  
           

Segment income before income taxes

  $ 6,407   $ 47,603  
           

        Our Senior Managed Care—Medicare Advantage segment includes the operations of our Medicare coordinated care Plans including PPOs and HMOs as well as our rural and network-based PFFS business, which provides coverage to Medicare beneficiaries in 45 states. Our HMOs offer coverage to Medicare beneficiaries primarily in Southeastern Texas and the area surrounding Dallas/Ft. Worth, 15 counties in Oklahoma and 4 counties in Wisconsin.

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    Three months ended March 31, 2011 and 2010

        Our Senior Managed Care—Medicare Advantage segment generated income before income taxes of $6.4 million for the three months ended March 31, 2011, a decrease of $41.2 million compared to the three months ended March 31, 2010. The decrease in earnings was driven by a 37% decrease in the member months for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 caused by the decline in membership along with a 220 basis point increase in the medical expense ratio.

        Membership.    Membership in our Medicare Advantage plans declined by 114,000 members from March 31, 2010 to March 31, 2011. As a result of the network requirements of MIPPA, we were required to terminate approximately 60,000 members as of January 1, 2011. Further, due to lapsation and the limited ability to add new members during the 2011 Annual Election Period as a result of the CMS sanctions, membership declined by an additional 54,000 members, resulting in membership of approximately 173,000 as of March 31, 2011.

        Net Premiums.    Net premiums for the Senior Managed Care—Medicare Advantage segment decreased by $266.6 million compared to the three months ended March 31, 2010, primarily due to the decline in membership and related lower member months. In addition, our ongoing chart review process resulted in a $3.1 million favorable premium adjustment related to 2010 risk scores recorded during the first quarter 2011 compared to a $13.4 million favorable adjustment of 2009 risk scores recorded during the first quarter 2010.

        Medical expenses.    Medical expenses decreased by $209.3 million compared to the first quarter of 2010, as a result of the decrease in member months. The medical expense ratio increased to 84.9% for the first quarter of 2011 from 82.7% for the same period in 2010. During the first quarter of 2011, there were $6.1 million net unfavorable items related to prior periods compared to $7.7 million of favorable development in the first quarter of 2010 in addition to the net premium adjustments discussed above.

        Commissions and general expenses.    Commissions and general expenses for the three months ended March 31, 2011 decreased $15.3 million compared to the three months ended March 31, 2010, primarily as the result of the decreased level of membership. The ratio of commissions and general expenses to net premiums increased to 15.2% in the first quarter of 2011 compared to 11.9% in first quarter of 2010, primarily as a result of lower scale and expenses of approximately $4.0 million incurred in corrective actions addressing items noted by CMS in their sanctions.

Segment Results—Medicare Part D

 
  Three months ended
March 31,
 
 
  2011   2010  
 
  (in thousands)
 

Direct and assumed premiums

  $ 561,478   $ 539,029  

Risk corridor adjustment/government reinsurance

    86,305     104,023  
           

Direct and assumed premiums after risk corridor adjustment

    647,783     643,052  

Ceded premiums

    (125 )   58  
           
 

Net premiums

    647,658     643,110  

Net investment and other income

    34     1,110  
           
 

Total revenue

    647,692     644,220  
           

Pharmacy benefits

    637,585     628,998  

Amortization of intangibles

    4,012     4,012  

Commissions and general expenses

    49,494     43,196  
           
 

Total benefits, claims and other deductions

    691,091     676,206  
           

Segment loss before income taxes

  $ (43,399 ) $ (31,986 )
           

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

        Primarily as a result of a change we made to our enhanced plan benefit design for the 2011 plan year, we expect to experience a greater degree of seasonality in our Medicare Part D segment throughout 2011 as compared to 2010, with a higher loss expected in the first quarter followed by a shift toward higher seasonal profitability expected for the remainder of the year, namely in the fourth quarter. For a discussion of the accounting for our Medicare Part D segment—see Note 3 of the Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2010.

    Three months ended March 31, 2011 and 2010

        Our Medicare Part D segment generated a loss before income taxes of $43.4 million for the first quarter of 2011, compared to a loss of $32.0 million for the first quarter of 2010, an increase of $11.4 million. The impact from increased seasonality caused by the change in the 2011 benefit design noted above and an increase in general expenses accounted for the increase in loss before income taxes and was partially offset by the lower amount of negative prior period development of $2.4 million in the first quarter of 2011, compared to $4.1 million in negative prior period development with respect to the first quarter of 2010.

        Net Premiums.    Direct and assumed premiums, excluding risk corridor for the first quarter of 2011, increased by $22.4 million, or 4.1%, versus the first quarter of 2010. The increase in direct and assumed premiums, excluding risk corridor, was primarily attributable to an increase in member premium rates and risk-adjusted direct subsidy rates paid by CMS, and was partially offset by a decrease in membership of 27,000 members. The increase in member premium rates was attributable to the bids we submitted for the 2011 Plan year that contained higher rates, which is directly related to the corresponding increase in benefit cost trend and a planned bid increase in benefits offered to members in our enhanced plans. Risk-adjusted direct subsidy rates increased as a result of a change in methodology pertaining to the CMS recalibration of the prescription drug hierarchical condition category for 2011. Risk-adjusted rates are determined by CMS based upon the member's health status and are described in further detail in Note 3 of the Notes to Consolidated Financial Statements in our annual report on Form 10-K for the year ended December 31, 2010.

        The risk corridor adjustment calculation compares the target amount of prescription drug costs (limited to costs under the standard coverage as defined by CMS) less rebates in our annual Plan bid to actual experience. The $17.7 million decrease in risk corridor adjustment for the first quarter of 2011 versus the comparable period in 2010 was primarily attributed to favorable pharmacy benefits experience realized on our standard plan versus the bid. See further discussion of the risk corridor adjustment under "Critical Accounting Policies" in our annual report on Form 10-K for the year ended December 31, 2010.

        Pharmacy Benefits.    Pharmacy benefits for the first quarter of 2011, increased by $8.6 million, or 1.4%, compared to the first quarter of 2010, and the ratio of pharmacy benefits to net premium after risk corridor adjustment was 98.4% and 97.8% for the first quarters of 2011 and 2010, respectively. Pharmacy benefits increased as a percentage of net premiums due to price increases imposed by pharmaceutical manufacturers which are customary and were consistent with historical experience.

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        Commissions and general expenses.    Commissions and general expenses for the first quarter of 2011 totaled $49.5 million, or 8.8% of direct and assumed premium, excluding risk corridor compared to $43.2 million, or 8.0%, for the comparable period in 2010. The increase in the ratio of commissions and general expenses to net premium, excluding risk corridor was attributable to planned investment in operating improvements scheduled for 2011.

Segment Results—Traditional Insurance

 
  Three months ended
March 31,
 
 
  2011   2010  
 
  (in thousands)
 

Net premiums

  $ 68,862   $ 76,505  

Net investment income

    5,738     3,243  

Other income

    11     541  
           
 

Total revenue

    74,611     80,289  

Policyholder benefits

    55,175     62,405  

Change in deferred acquisition costs

    2,298     2,984  

Amortization of intangible assets

    174     716  

Commissions and general expenses, net of allowances

    17,042     19,883  
           
 

Total benefits, claims and other deductions

    74,689     85,988  
           

Segment loss before income taxes

  $ (78 ) $ (5,699 )
           

    Three months ended March 31, 2011 and 2010

        The loss before income taxes for our Traditional Insurance segment decreased by $5.6 million compared to the three months ended March 31, 2010, driven by higher net investment income, improved benefit ratios in the specialty health line of business and lower expenses.

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

Premium

 
  Three months ended March 31,  
 
  2011   2010  
 
  Gross   Ceded   Net   Gross   Ceded   Net  
 
  (in thousands)
 

Senior market

  $ 67,953   $ (16,472 ) $ 51,481   $ 78,680   $ (19,485 ) $ 59,195  

Specialty health

    15,708     (2,186 )   13,522     17,126     (2,525 )   14,601  

Life insurance and annuity

    17,662     (13,803 )   3,859     16,158     (13,449 )   2,709  
                           
 

Total premium

  $ 101,323   $ (32,461 ) $ 68,862   $ 111,964   $ (35,459 ) $ 76,505  
                           

        Revenue.    Net premium declined by $7.6 million or 10.0% from the first quarter of 2010. This is primarily the result of the continued effect of lapsation on our Medicare supplement and specialty health in-force business, offset partially by the increase in our retained senior life block of business. Net investment income increased by $2.5 million due to a higher overall portfolio yield resulting from a restructuring of the investment portfolio beginning in mid-2010.

        Policyholder benefits.    Policyholder benefits declined by $7.2 million, or 11.6%, compared to the first quarter of 2010. This decline was principally due to the overall decline of insurance in-force in the senior market and specialty health lines of business, as well as improvement in the specialty health policyholder benefit ratios. For the three months ended March 31, 2011, the policyholder benefit ratio

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for specialty health declined to 94.8%, compared with 101.6% for the same period last year due to lower frequency and severity of new claims. The Medicare supplement policyholder benefit ratio increased to 78.7%, compared with 77.5% for the same period last year primarily as a result of prior period development. Additionally, the net amortization of deferred acquisition costs decreased $0.7 million compared to the same period last year, driven by the continued lapsation of the blocks of business discussed above.

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

 
  Three months ended
March 31,
 
 
  2011   2010  
 
  (in thousands)
 

Commissions

  $ 9,706   $ 11,516  

Other operating costs

    11,482     13,884  

Reinsurance allowances

    (4,146 )   (5,517 )
           

Commissions and general expenses, net of allowances

  $ 17,042   $ 19,883  
           

        Total commissions and general expenses, net of allowances, decreased by $2.8 million compared to the first quarter of 2010. Commission expense decreased $1.8 million compared to the same period in the prior year, due to the continued aging of our in-force renewal premium which pays lower commissions as the duration of the policies increase and the decline in the amount of business in-force. Other operating costs decreased $2.4 million for the quarter ended March 31, 2011, compared to the first quarter of 2010. This is primarily due to savings associated with the outsourcing of certain administrative services previously provided by our CHCS subsidiary that was sold during the second quarter of 2010, as well as cost reductions implemented to align with the lower levels of business in-force. Allowances received from reinsurers decreased $1.4 million for the first quarter of 2011 from the first quarter of 2010. This is primarily due to the reduction in-inforce and corresponding decrease in expense allowances in addition to lower commission allowances as a result in the reduction of gross commissions as discussed above.

Segment Results—Corporate & Other

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

 
  Three months ended
March 31,
 
 
  2011   2010  
 
  (in thousands)
 

Interest expense

  $ 4,675   $ 5,013  

Amortization of capitalized loan origination fees

    504     380  

Stock-based compensation expense

    3,437     3,405  

Other parent company expenses, net revenues

    5,595     3,599  

Net loss (gain)—Senior Administrative Services

    200     (1,337 )
           
 

Segment loss before income taxes

  $ 14,411   $ 11,060  
           

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

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    Three months ended March 31, 2011 and 2010

        The loss before income taxes from our Corporate & Other segment increased by $3.4 million, or 30%, for the first quarter of 2011 compared to the first quarter of 2010. This was due primarily to $2.1 million of transaction-related costs incurred in 2011 in connection with the sale of Part D to CVS Caremark along with $1.5 million related to the loss of earnings from our TPA which was sold in the second quarter of 2010.

Liquidity and Capital Resources

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

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

    surplus note payments and dividends from and capital contributions to our insurance and HMO subsidiaries;

    the cash flows of our other subsidiaries, including our PBM subsidiary and our HMO third-party administrator;

    debt principal and interest payments and access to $150 million under the revolving portion of our Credit Facility;

    payment of dividends to shareholders.

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

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

        At March 31, 2011, we held cash and cash equivalents totaling $83 million and fixed maturity securities that could readily be converted to cash with carrying values of $1,265 million at our insurance companies and HMO subsidiaries. We believe that this level of liquidity is sufficient to meet our obligations and pay expenses.

        In 2007, our wholly-owned subsidiary, The Pyramid Life Insurance Company issued $60.0 million of surplus notes payable to our parent company, which bear interest at an average fixed rate of 7.5%. The Notes are repayable beginning March 29, 2009 provided that capital and surplus are sufficient to maintain risk-based capital levels of 450% or greater in the immediate prior year end. At December 31, 2010, Pyramid's risk-based capital ratio was below 450%, and therefore no payments of principal or interest have been made or accrued to date.

        Capital contributions to and dividends from our Insurance subsidiaries are made through our unregulated holding company, UAC Holding, Inc. ("UACH"). UACH did not make capital contributions to the insurance subsidiaries during the first three months of 2011. In March 2011, our

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wholly-owned subsidiary, Constitution Life Insurance Company, declared and accrued a dividend of $11.7 million to UACH. The dividend was subsequently paid in April 2011.

        Capital contributions to and dividends from our HMO subsidiaries are made through our managed care holding company, Heritage Health Systems, Inc.("HHSI"). In March 2011, HHSI made a capital contribution of $360,000 to Today's Options of Oklahoma, Inc. No dividends were declared by or paid to HHSI from its subsidiaries during the first quarter of 2011.

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

        Debt principal and interest—Credit Facility, Swaps and Other Long Term Debt.    We currently have a credit facility consisting of a $350 million term loan and a $150 million revolver (the "2007 Credit Facility"). This Credit Facility has customary covenants and requirements including a leverage ratio test, minimum risk based capital requirements for our insurance companies and, under certain conditions, the ability to pose limitations on certain investments, dispositions and our ability to make restricted payments. We are in compliance with all covenants in the Credit Agreement.

        The credit facility, as amended, provides us with the ability to make a total of $300 million of restricted payments, in exchange for prepayments of Term Loan principal and increases in borrowing spreads. In August 2010, we announced and paid a special cash dividend totaling $156 million and, per the terms of the July 2010 Amendment, made prepayments of term loan principal of $78 million. As of March 31, 2011, $232.0 million was outstanding under the term loan agreement and the weighted average interest rate on the term loan portion of the credit facility was 1.43%. All $232.0 million of the term loan outstanding has been swapped from a LIBOR-based floating rate to an average fixed rate of 4.14% (see Note 11 Derivative Instruments—Cash Flow Hedges and the ensuing paragraph), resulting in a total blended interest rate of 5.26% as of March 31, 2011. We pay a commitment fee on the unutilized revolving loan facility at an annualized rate of 25 basis points. We had not drawn on the revolving loan facility as of the date of this report. We made regularly scheduled principal payments totaling $0.6 million, principal payments of $0.2 million in connection with restricted payments and interest payments totaling $0.8 million during the three months ended March 31, 2011.

        On December 4, 2007, we entered into two separate interest rate swap agreements on a total notional amount of $250 million, where we pay an average locked-in fixed rate of 4.14% and receive a floating rate based on LIBOR. In the first three months of 2011, we paid a net amount of $2.3 million in association with these swap agreements. Due primarily to the $78 million debt prepayment made in the third quarter of 2010, the outstanding principal balance on the hedged Credit Facility was reduced to $232.0 million at March 31, 2011; $18.0 million lower than the original $250 million notional amounts on the swaps. As a result, this portion of the swaps was deemed ineffective and the notional amount on one of the swaps was decreased by $18.0 million, $0.9 million in the first quarter of 2011, to $107.0 million. In addition, we evaluated the likelihood of additional debt paydowns prior to the scheduled maturity of the Credit Facility and the related interest rate swaps in September 2012, and realized a loss of $0.2 million on this ineffective portion of the swap in the first quarter of 2011. No other terms of the swaps were changed.

        In 2003 and 2007, we formed statutory business trusts, in order to issue a combined $125.0 million in thirty year trust preferred securities, with $110 million currently outstanding. $60 million of these securities have floating interest rates based on LIBOR and are currently at an average rate of 4.37%. The remaining $50 million is fixed at 7.68% until March 2012. We made interest payments on the trust preferred securities totaling $1.6 million during the three months ended March 31, 2011.

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Investments

        We invest primarily in fixed maturity securities of the U.S. Government and its agencies, U.S. state and local governments, mortgage-backed securities and corporate fixed maturity securities with investment grade ratings of BBB- or higher by S&P or Baa3 or higher by Moody's Investor Service. As of March 31, 2011, approximately 98% of our fixed maturity investments had investment grade ratings from S&P or Moody's.

        In 2010, we began investing our cash in longer duration securities, including corporate bonds, asset-backed securities and municipal securities. As a result, cash equivalents represent approximately 10% of our portfolio at March 31, 2011 and December 31, 2010. In the aggregate, approximately 24% of our cash and invested assets are in securities backed by the U.S. government or its agencies, as compared with 26% at December 31, 2010. The aggregate credit quality of our total investment portfolio was AA at March 31, 2011 compared with AA- at December 31, 2010.

        The net yields on our cash and invested assets increased to 3.7% for the three months ended March 31, 2011, from 2.3% for the three months ended March 31, 2010. The overall increase in yield is primarily due to a change in the mix of assets from the investing of our cash and equivalents into higher yielding fixed maturity securities.

        For additional information on Liquidity and Capital Resources, please refer to our annual report on form 10-K for the year ended December 31, 2010.

Critical Accounting Policies

        There have been no changes in our critical accounting policies during the current quarter. For a description of significant accounting policies, see Note 3—Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2010.

    Policy and Contract Claims—Accident and Health Policies

        The following table presents the components of the change in our liability for policy and contract claims—health for the three months ended March 31, 2011:

 
  March 31,
2011
 
 
  (in thousands)
 

Balance at beginning of year

  $ 374,539  
 

Less reinsurance recoverable

    (14,337 )
       

Net balance at beginning of year

    360,202  
       

Incurred related to:

       
 

Current Year

    1,123,140  
 

Prior Year Development

    1,828  
       

Total Incurred

    1,124,968  
       

Paid related to:

       
 

Current Year

    808,686  
 

Prior Year

    289,385  
       

Total paid

    1,098,071  
       

Net balance at end of year

    387,099  
 

Plus reinsurance recoverable

    10,252  
       

Balance at end of period

  $ 397,351  
       

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        Policy and contract claims—health increased by $22.8 million at March 31, 2011 from December 31, 2010. This increase was primarily attributable to higher claims payable with regards to timing of the payment of claims and seasonality of the Part D business, offset in part by lower reserves due to lower membership for our Medicare Advantage business. Due to the nature of the plan design, the Medicare Part D business generally incurs higher claims experience in the first two quarters of the year while beneficiaries are in the deductible and initial coverage phases of the benefit design. As the beneficiary reaches the coverage gap and catastrophic phases of the benefit design, the Plan experiences lower claims liability which is generally in the last two quarters of the year.

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

        During the three months ended March 31, 2011, claim reserves settled for $1.8 million more than estimated at December 31, 2010. Prior period development represents less than 0.1% of the incurred claims recorded in 2010.

Sensitivity Analysis

        The following table illustrates the sensitivity of our accident and health IBNR payable at March 31, 2011 to identified reasonably possible changes to the estimated weighted average completion factors and health care cost trend rates. However, it is possible that the actual completion factors and health care cost trend rates will develop differently from our historical patterns and therefore could be outside of the ranges illustrated below.

Completion Factor(1):   Claims Trend Factor(2):  
(Decrease)
Increase
in Factor
  Increase
(Decrease) in
Net Health
IBNR
  (Decrease)
Increase
in Factor
  (Decrease)
Increase in
Net Health
IBNR
 
($ in thousands)
 
  -3%   $ 1,193     -3%   $ (9,388 )
  -2%     795     -2%     (6,259 )
  -1%     398     -1%     (3,129 )
  1%     (397 )   1%     3,129  
  2%     (795 )   2%     6,259  
  3%     (1,192 )   3%     9,388  

(1)
Reflects estimated potential changes in medical and other expenses payable, caused by changes in completion factors for incurred months prior to the most recent three months.

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

Effects of Recently Issued and Pending Accounting Pronouncements

        A summary of other recent and pending accounting pronouncements is provided in Note 3 of the Consolidated Financial Statements in the quarterly report on Form 10-Q under the caption "Recently Issued and Pending Accounting Pronouncements." We do not anticipate any material impact from the future adoption of the pending accounting pronouncements discussed in that Note.

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ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Investment Interest Rate Sensitivity

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

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

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

        The sensitivity analysis of interest rate risk assumes an instantaneous shift in a parallel fashion across the yield curve, with scenarios of interest rates increasing and decreasing 100 and 200 basis points from their levels as of March 31, 2011, and with all other variables held constant. The following table summarizes the impact of the assumed changes in market interest rates.

March 31, 2011   Effect of Change in Market Interest Rates on Fair Value
of Fixed Income Portfolio as of March 31, 2011
Fair Value of
Fixed Income Portfolio
  200 Basis
Point Decrease
  100 Basis
Point Decrease
  100 Basis
Point Increase
  200 Basis
Point Increase
 
  (in millions)

$1,264.6

  $99.7   $61.2   $(40.6)   $(92.9)

Debt

        We pay interest on our term loan and a portion of our trust preferred securities based on LIBOR over one, two, three or six month interest periods. Due to the variable interest rate, we would be subject to higher interest costs if short-term interest rates rise. We have attempted to mitigate our exposure to adverse interest rate movements by fixing the rate on a portion of our loan payable through the use of cash flow swaps and our trust preferred securities through the contractual terms of the security at inception. At March 31, 2011, we have fixed the rate on a total of $282.0 million, or 82%, of our debt, including all $232.0 million of our loan payable balance and $50 million of our trust preferred securities.

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

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

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2011, and with all other variables held constant. The following table summarizes the impact of changes in LIBOR.

 
   
   
  Effect of Change in LIBOR on Pre-tax Income
for the three months ended March 31, 2011
 
 
   
  Weighted
Average
Balance
Outstanding
 
Description of Floating Rate Debt
  Weighted
Average
Interest Rate
  200 Basis
Point
Decrease(1)
  100 Basis
Point
Decrease(1)
  100 Basis
Point
Increase
  200 Basis
Point
Increase
 
 
   
   
  (in millions)
 

Other long-term debt

    4.36 % $ 60.0   $ 0.1   $ 0.1   $ (0.2 ) $ (0.3 )
                               

(1)
During the first three months of 2011, the LIBOR rate on our other long term debt was approximately 30 basis points. As a result, for the purposes of this illustration, decreases in monthly rates over this period have been limited to the year to date average of 30 basis points on our other long term debt.

        As noted above, we have fixed the interest rate on $282.0 million of our $342.0 million of total debt outstanding, leaving $60 million of the debt exposed to rising interest rates, as of March 31, 2011. We had approximately $83 million of cash and cash equivalents as of March 31, 2011. We anticipate that any increase or decrease in the interest cost of our debt as a result of an increase in interest rates will be mitigated by an increase or decrease in the net investment income from our cash and cash equivalents.

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

ITEM 4—CONTROLS AND PROCEDURES

    Disclosure Controls and Procedures

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

    Inherent Limitations on Effectiveness of Controls

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

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

    Evaluation of Effectiveness of Controls

        We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2011, at a reasonable assurance level, to timely alert management to material information required to be included in our periodic filings with the Securities and Exchange Commission.

    Changes in Internal Control over Financial Reporting

        There were no changes in our internal controls over financial reporting during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II

ITEM 1—LEGAL PROCEEDINGS

        For information relating to litigation affecting us, please see Note 12—Commitments and Contingencies of the Notes to Consolidated Financial Statements in Part I—Item 1 of this report, which is incorporated into this Part II—Item 1—Legal Proceedings by reference.

ITEM 1A—RISK FACTORS

        Information concerning certain risks and uncertainties appears in Part I, Item 1A "Risk Factors" of the Company's annual report on Form 10-K for the year ended December 31, 2010. You should carefully consider these risks and uncertainties, which could materially affect our business, financial position and results of operations.

        There have been no material changes in our risk factors from those set forth in such SEC reports.

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

Issuer Purchases of Equity Securities

        We have approved share repurchase plans that have authorized us to repurchase up to $175 million of shares of our common stock. Through December 31, 2009, we had repurchased 13.4 million shares of our common stock for an aggregate amount of $132.7 million, under these programs. There have been no share repurchases since December 31, 2009 under these programs. As of March 31, 2011, we have $42.3 million that remains available to repurchase additional shares under these plans. However, share repurchases are also limited by the remaining available restricted payments under our 2007 Credit Facility, which, giving effect to the July 27, 2010 Amendment, limits share repurchases, dividends and other restricted payments to an aggregate of $300 million. Currently, we have $11.2 million remaining available under this restricted payment limit. We are not obligated to repurchase any specific number of shares under the programs or to make repurchases at any specific time or price.

Recent Sales of Unregistered Securities

        None.

ITEM 3—DEFAULTS UPON SENIOR SECURITIES

        None.

ITEM 4—(REMOVED & RESERVED)

ITEM 5—OTHER INFORMATION

        None.

ITEM 6—EXHIBITS

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

  31.1   Certification of Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

31.2

 

Certification of Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

32.1

 

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

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SIGNATURES

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


 

 

UNIVERSAL AMERICAN CORP.

April 28, 2011

 

/s/ RICHARD A. BARASCH  
   
Richard A. Barasch
Chief Executive Officer

April 28, 2011

 

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

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