Introduction

The following discussion and analysis presents a review of our financial condition as of December 31, 2012 and our results of operations for the years ended December 31, 2012, 2011 and 2010. As used in this report, except as otherwise indicated, references to the "Company, "we," "our," and "us" are to
(i) Universal American Corp., a Delaware corporation (formerly known as Universal American Spin Corp., "Universal American") and its subsidiaries following the closing of the Part D Transaction on April 29, 2011 and
(ii) Universal American Corp, a New York corporation (now known as Caremark Ulysses Holding Corp., "Old Universal American") and its subsidiaries prior to the closing of the Part D Transaction on April 29, 2011.

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 in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause our actual results to differ materially from management's expectations. Factors that could cause such differences include those set forth under Part I, Item 1A-Risk Factors.

Overview

Through our health insurance, and managed care subsidiaries, we primarily serve the growing Medicare population by providing Medicare Advantage and Medicare Supplement insurance products. In addition, with the acquisition of APS Healthcare, we now provide a variety of healthcare services, including case management and care coordination, clinical quality and utilization review and behavioral health services to Medicaid agencies and other third parties. Approximately 25% of the over 65 year old population in the United States is currently enrolled in Medicare Advantage plans. In addition, we believe there is an opportunity to address the high cost of healthcare for the remaining 75% of the Medicare population enrolled in traditional fee-for-service Medicare and have joined with primary-care provider groups, hospitals, integrated delivery systems, and a variety of other health care providers to form thirty-one Accountable Care Organizations, or ACOs, pursuant to the Medicare Shared Saving Program, or Shared Savings Program All payers of healthcare costs, from the Federal and state governments to corporations and individuals, are incurring rising healthcare costs and we believe we can apply our capabilities and experience in controlling these costs while improving health outcomes.

On March 2, 2012, we acquired APS Healthcare, Inc., known as APS Healthcare, for $222.3 million. APS Healthcare provides specialty healthcare solutions primarily to Medicaid agencies. APS Healthcare offers a broad range of healthcare solutions, including case management and care coordination, clinical quality and utilization review, and behavioral health services that enable its customers to improve the quality of care and reduce healthcare costs. We are now actively pursuing opportunities in the growing Medicaid market, including dual eligibles and people who need long-term care.

Our Strategy

The principal components of our business strategy are to:

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º Employ our medical management capabilities to improve the health and well-being of those we serve and reduce healthcare costs.

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º Work in collaboration with healthcare providers to help them assume and manage risk, in order to achieve measurably better quality and lower cost.

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º Engage the people we serve to help them make smart and economic choices about their healthcare.

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º Continue to build our Medicare Advantage business and expand our Healthy Collaboration® model.

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º Expand our relationships with health care providers both within and outside our Medicare Advantage footprint to further develop existing and additional ACOs.

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º Acquire and develop additional capabilities to participate in the growing Medicaid market, especially the dual eligible and long-term care sectors.

Emerging Opportunities in Healthcare

We believe that attractive growth opportunities exist in providing products, particularly health insurance, to the growing senior market. At present, approximately 51 million Americans are eligible for Medicare, the Federal program that offers basic hospital and medical insurance to people over 65 years old and some disabled people under the age of 65. According to the U.S. Census Bureau, more than 2 million Americans turn 65 in the United States each year, and this number is expected to grow as the so-called baby boomers continue to turn 65. In addition, many large employers that traditionally provided medical and prescription drug coverage to their retirees have begun to curtail these benefits. Finally, the passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, known as the MMA, increased the healthcare options available to Medicare beneficiaries through the expansion of Medicare managed care plans through the Medicare Advantage program. We intend to continue to build our Medicare Advantage business and expand our Healthy Collaboration® model.

In March 2010, President Obama signed into law The Patient Protection and Affordable Care Act and The Healthcare and Education Reconciliation Act of 2010, which we collectively refer to as the Affordable Care Act. The Affordable Care Act established Accountable Care Organizations as a tool to improve quality and lower costs through increased care coordination in the Medicare Fee-for-Service program, which covers approximately 75% of the Medicare recipients, approximately 36 million eligible Medicare beneficiaries. In January 2012, one of our subsidiaries participated in the filing of multiple applications to participate in the ACO program, including one covering our Southeast Texas physicians and other markets outside our existing Medicare Advantage footprint.

CMS established the Shared Savings Program to facilitate coordination and cooperation among providers to improve the quality of care for Medicare Fee-For-Service (FFS) beneficiaries and reduce unnecessary costs. Eligible providers, hospitals, and suppliers may participate in the Shared Savings Program by creating or participating in an Accountable Care Organization (ACO).

The Shared Savings Program is designed to improve beneficiary outcomes and increase value of care by (1) promoting accountability for the care of Medicare FFS beneficiaries; (2) requiring coordinated care for all services provided under Medicare FFS; and (3) encouraging investment in infrastructure and redesigned care processes. The Shared Savings Program will reward ACOs that lower their growth in health care costs while meeting performance standards on quality of care and putting patients first. Under the final MSSP rules, Medicare will continue to pay individual providers and suppliers for specific items and services as it currently does under the FFS payment methodologies. The Shared Savings Program rules require CMS to develop a benchmark for savings to be achieved by each ACO if the ACO is to receive shared savings or for ACOs that have elected to accept responsibility for losses. An ACO that meets the program's quality performance standards will be eligible to receive a share of the savings to the extent its assigned beneficiary medical expenditures are below its own medical expenditure benchmark provided by CMS.

We have partnered with primary-care provider groups, hospitals, integrated delivery systems, and a variety of other health care providers to form 31 ACOs which have been approved by the CMS for

participation in the Shared Savings Program. We estimate that these 31 ACOs currently include approximately 3,000 participating providers with approximately 324,000 assigned Medicare fee-for-service beneficiaries covering portions of thirteen States both within and outside our current Medicare Advantage footprint, including Southeast Texas and upstate New York. We will provide these ACOs with care coordination, analytics and reporting, technology and other administrative capabilities to enable participating providers to deliver better care, improved health and lower healthcare costs for their Medicare fee-for-service beneficiaries.

Established in 1965, Medicaid is the largest publicly funded program in the United States, and provides health insurance to low-income families and individuals with disabilities. Authorized by Title XIX of the Social Security Act, Medicaid is an entitlement program funded jointly by the federal and state governments and administered by the states. The majority of funding is provided at the federal level. Each state establishes its own eligibility standards, benefit packages, payment rates and program administration within federal standards. Eligibility is based on a combination of household income and assets, often determined by an income level relative to the federal poverty level. Historically, children have represented the largest eligibility group.

Due to the Medicaid expansion provisions under the Affordable Care Act, CMS projects that Medicaid expenditures will increase from approximately $450 billion in 2012 to approximately $900 billion by 2020. In addition, as part of the Affordable Care Act, approximately 20 million additional people are expected to qualify for Medicaid beginning in 2014.

A portion of Medicaid beneficiaries are dual eligibles, low-income seniors and people with disabilities who are enrolled in both Medicaid and Medicare. Based on CMS and Kaiser Family Foundation data, we estimate there are approximately 9 million dual eligible enrollees with annual spending of approximately $320 billion. Only a small portion of the total spending on dual eligibles is administered by managed care organizations. Dual eligibles tend to consume more healthcare services due to their tendency to have more chronic health issues. We believe this represents a significant opportunity for companies like ours that have the capabilities to effectively manage this difficult population.

Healthy Collaboration® Strategy

Our Healthy Collaboration® strategy sets out a model of improving the quality of care to our members on a cost-efficient basis through an active partnership with our providers. We believe we can improve medical outcomes through a series of collaborative initiatives with our health care providers including clinically sound benefit design (where applicable), medical management, care coordination, population health management , long term supportive services and integrated care management systems. Our goal is to create mutually beneficial and interdependent collaborative arrangements with our providers. We believe provider compensation arrangements should not only help providers to be paid for complex care coordination, but also help align their interests with our objective of improving clinical outcomes and controlling unnecessary cost.

We provide medical management services, information and analysis, and other support services to enable our health care partners to serve their patients better. We rely heavily on the strong physician leadership of each network to help us achieve the clinical goals that support the mission of the organization.

Healthcare Reform

The Affordable Care Act enacted 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 significant provisions of the Affordable Care Act that will impact our business include, among others, establishment of ACO's, reduced Medicare Advantage reimbursement rates, implementation of quality bonus for Star Ratings, stipulated minimum medical loss ratios, non-deductible federal premium taxes assessed to health insurers and coding intensity adjustments with mandatory minimums. The health care reform legislation is discussed more fully in the "Risk Factors" section of this report.

In June 2012, the United States Supreme Court upheld the constitutionality of the Affordable Care Act, with one limited exception relating to its Medicaid expansion provision. The Supreme Court held that States could not be required to expand Medicaid or risk the loss of federal funding for existing Medicaid programs. Beginning in January 2014, Medicaid coverage will be expanded to all individuals under age 65 with incomes up to 133% of the federal poverty level, subject to the States' elections. The federal government will pay the entire costs for Medicaid coverage for newly eligible beneficiaries for three years, from 2014 through 2016. The federal share declines to 95% in 2017, 94% in 2018, 93% in 2019, and 90% in 2020 and subsequent years.

Special Dividend

On November 1, 2012, our Board of Directors approved the payment of a special cash dividend of $1.00 per share to each holder of our outstanding common stock. This special cash dividend was paid on November 19, 2012 to shareholders of record as of November 12, 2012. The cumulative dividend payment was $88.2 million. In addition, pursuant to the terms of our 2011 Omnibus Equity Award Plan, the exercise price on outstanding stock options was reduced by the amount of the dividend, $1.00 per share. We also established a liability for the dividends related to unvested restricted stock, which will be paid out as the restricted stock vests. For further discussion, see Note 22, Other Operational Disclosures-Special Dividends in the Notes to consolidated financial statements.

A portion of this special cash dividend is a return of capital for Federal tax purposes and is not currently taxable. The return of capital portion reduces the holder's basis in their Universal American Corp. common stock. The breakdown is as follows:

                          Return of capital       23.36 %
                          Qualified dividend      76.64 %

                                                 100.00 %

Membership

    The following table presents our membership in Medicare Advantage products
as of December 31:

                    Membership                   2012      2011
                                                 (in thousands)
                    HMO                            56.0      59.5
                    PPO                            16.7      19.8
                    Network PFFS                   43.1      52.3
                    Non-network PFFS (Rural)       18.4      28.9

                    Total Membership              134.2     160.5

Medicare Advantage membership decreased 26,300 compared to December 31, 2011 principally as a result of service area reductions and our decision to focus our efforts in core markets.

Segment Overview

Our business segments are based on product offerings and consist of

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º Senior Managed Care-Medicare Advantage, and

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º Traditional Insurance.

Our remaining segment, Corporate & Other, includes the activities of our holding company, along with our remaining senior administrative services operations, start-up and operating costs associated with our ACOs and the operations of APS Healthcare since its acquisition on March 2, 2012. See Note 25-Business Segment Information in the Notes to consolidated financial statements for a description of our segments.

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 commissions earned by agency subsidiaries in our Corporate & Other segment from insurance subsidiaries in our Traditional segment and for services provided by APS Healthcare to our Senior Managed Care-Medicare Advantage segment.

Results of Operations-Consolidated Overview

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

                                                    For the year ended December 31,
                                                     2012         2011(1)      2010(1)
 Senior Managed Care-Medicare Advantage(2)        $    92,775     $  72,664   $ 145,871
 Traditional Insurance(2)                              18,065        15,694       2,130
 Corporate & Other(2)                                 (49,810 )     (79,325 )   (28,268 )
 Net realized gains on investments(2)                  16,604           841       6,575

 Income before provision for income taxes(2)           77,634         9,874     126,308
 Provision for income taxes                            24,601         7,167      38,665

 Income from continuing operations                     53,033         2,707      87,643
 (Loss) income from discontinued operations(3)              -       (50,908 )   101,618

 Net income (loss)                                $    53,033     $ (48,201 ) $ 189,261

 Earnings (loss) per common share (diluted):
 Continuing operations                            $      0.61     $    0.03   $    1.11
 Discontinued operations                                    -         (0.63 )      1.29

 Net income (loss)                                $      0.61     $   (0.60 ) $    2.40

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º Change in accounting principle-the retrospective adoption of ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. (see Note 4-Recently Issued and Pending Accounting Pronouncements in the Notes to consolidated financial statements for additional detail);

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º Correction-to correct the accounting related to our recording of certain reserves and deferred acquisition costs in our Traditional Insurance segment along with the related deferred income tax impact; and

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º Other-in connection with the restatement, to record adjustments in their proper period for items that are not considered material but were previously corrected out-of-period.

For additional information see Note 2-Basis of Presentation-Adjustments to Financial Statements in the Notes to consolidated financial statements.

º (2)
º 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. This differs from U.S. generally accepted accounting principles, which reflects the effect of realized gains and losses in the determination of net income. The schedule above reconciles our segment income to net income (loss) in accordance with U.S. generally accepted accounting principles.

º (3)
º Includes after-tax transaction costs of $10.7 million or $0.13 per diluted share and $2.6 million or $0.03 per diluted share in 2011 and 2010, respectively. (See Note 23-Discontinued Operations in the Notes to consolidated financial statements).

Income from continuing operations for the year ended December 31, 2012 was $53.0 million, or $0.61 per diluted share, compared to $2.7 million, or $0.03 per diluted share for the year ended December 31, 2011. These amounts include realized investment gains, net of taxes, of $10.8 million, or $0.12 per diluted share and $0.5 million, or $0.01 per diluted share in 2012 and 2011, respectively.

Our Senior Managed Care-Medicare Advantage segment generated income before income taxes of $92.8 million for the year ended December 31, 2012, an increase of $20.1 million compared to the year ended December 31, 2011. The increase in earnings was driven by the medical benefit ratio improving to 80.6% for the full year 2012 compared to 82.0% for 2011 and a decrease in our administrative expense ratio from 15.5% in 2011 to 15.0% in 2012. This was partially offset by lower membership in all products resulting in an expected 22% decrease in member months for the full year 2012 compared to 2011. For the year ended December 31, 2012, there was $27.4 million of net favorable prior year development compared to $22.8 million for the year ended December 31, 2011. The current year also included $7.9 million of investment in STARs rating improvement programs.

Our Traditional Insurance segment generated income before taxes of $18.1 million for 2012; an increase of $2.4 million compared to 2011. The increase in earnings is driven by an improvement in the underwriting performance of the Medicare Supplement business and a reduction in commissions and general expenses, which was partially offset by the continued decline of our insurance-in-force, particularly in the Senior Market and Specialty Health lines.

The loss before income taxes from our Corporate & Other segment decreased by $29.5 million for the year ended December 31, 2012 compared to 2011. This was primarily due to 2011 charges of $22.0 million for restructuring costs, $15.6 million related to impairment of an intangible asset related to our Career distribution channels that were closed in the fourth quarter of 2011 and an $8.6 million charge to stock-based compensation expense related to accelerated vesting of equity awards in connection with the Part D Transaction, partially offset by $21.7 million of start-up and operating costs relating to the development of our ACO business and higher debt service costs incurred in 2012.

Our effective tax rate on continuing operations was 31.7% for 2012, compared with 72.6% for 2011. The effective tax rate in 2012 was favorably impacted by the recognition of certain state tax benefits, partially offset by the limitation on the deductibility of executive compensation for health insurers enacted in the Affordable Care Act. The high effective tax rate in 2011 was driven by our low pre-tax income that magnified the effective rate impact of revenue based state taxes on lines of business for which revenues were relatively constant year-over-year and permanent non-deductible

items. Excluding non-recurring tax benefits (discussed below), revenue-based state taxes and certain items that arose in connection with the 338(h)(10) election, the effective tax rate was 41.1% in 2012, compared with 44.0% in 2011, with permanent items of $1.2 million contributing 11.9% to the rate in 2011.

Income taxes include non-recurring tax benefits (expenses) of $7.3 million and ($0.4) million for the years ended December 31, 2012 and 2011, respectively. The 2012 benefit primarily relates to acceptance of amended returns for prior years that removed certain revenues from revenue-based state taxes that resulted in a reserve release of $2.6 million and the recording of a receivable of $3.6 million. In addition, the 2012 benefit includes a $1.2 million reserve release related to items on which the statute of limitations has expired. 2011 includes $0.9 million of state tax refunds, partially offset by the write-off of a $1.3 million deferred tax asset for net operating loss carryforwards that were terminated by the Section 338(h)(10) election.

Discontinued operations include the results of operations related to our Medicare Part D business and related corporate items that were transferred to CVS Caremark in connection with the closing of the Part D Transaction on April 29, 2011. See Note 1-Organization and Company Background and 23-Discontinued Operations in the Notes to consolidated financial statements for further information. We had a loss from discontinued operations of $50.9 million or $0.63 per diluted share for the year ended December 31, 2011, which represented the four months of operations prior to closing of the Part D Transaction as well as $10.7 million after-tax of transaction expenses. The benefits design of the Part D business results in significant seasonality in financial results, resulting in losses in the early part of the year, followed by profits in the latter part of the year.

Income from continuing operations for the year ended December 31, 2011 was $2.7 million, or $0.03 per diluted share, compared to $87.6 million, or $1.11 per diluted share for the year ended December 31, 2010. These amounts include realized investment gains, net of taxes, of $0.5 million, or $0.01 per diluted share and $4.3 million, or $0.05 per diluted share in 2011 and 2010, respectively.

Our Senior Managed Care-Medicare Advantage segment generated income before income taxes of $72.7 million for the year ended December 31, 2011, a decrease of $73.2 million compared to the year ended December 31, 2010. The decrease in earnings was driven by lower membership in all products resulting in an expected 41% decrease in member months for the full year 2011 compared to 2010 as a result of our service area reduction due to MIPAA legislation and a resulting increase in our administrative expense ratio from 12.4% in 2010 to 15.5% in 2011. This decrease was partially offset by the medical benefit ratio improving to 82.0% for the full year 2011 compared to 83.7% for 2010. For the year ended December 31, 2011, there was $22.8 million of net favorable prior year development compared to $38.2 million for the year ended December 31, 2010.

Our Traditional Insurance segment generated income before taxes of $15.7 million for 2011, an increase of $13.6 million compared to 2010. The increase in earnings is driven by increased net investment income, primarily due to a change in the mix of assets caused by the sale of our Part D business and investing of our cash and cash equivalents into higher yielding fixed maturity securities, as well as a decrease in net amortization of deferred acquisition costs and general expenses. This improvement was partially offset by the continued decline of our insurance-in-force, particularly in the Senior Market and Specialty Health lines.

The loss before income taxes from our Corporate & Other segment increased by $51.1 million for the year ended December 31, 2011 compared to 2010. This was primarily due to charges in 2011 for restructuring costs of $22.0 million, $15.6 million related to impairment of an intangible asset related to our Career distribution channels that were closed in the fourth quarter of 2011 and an $8.6 million