Quantitative and Qualitative Disclosures About Market Risk

Market risk relates, broadly, to changes in the value of financial instruments that arise from adverse movements in interest rates, equity prices and foreign exchange rates. The Company is exposed principally to changes in interest rates that affect the market prices of its fixed income securities.

Interest Rate Risk

The Company could experience economic losses if it was required to liquidate fixed income securities during periods of rising and/or volatile interest rates. However, the Company attempts to mitigate its exposure to adverse interest rate movements through a combination of active portfolio management and by staggering the maturities of its fixed income investments to assure sufficient liquidity to meet its obligations and to address reinvestment risk considerations. The Company's insurance liabilities are generally long tailed in nature, which generally permits ample time to prepare for their settlement. To date, the Company has not utilized various financial risk management tools on its investment securities, such as interest rate swaps, forwards, futures and options to modify its exposure to changes in interest rates. However, the Company may consider them in the future.

The Company is aware that certain classes of mortgage-backed securities are subject to significant prepayment risk due to the fact that in periods of declining interest rates, individuals may refinance higher rate mortgages to take advantage of the lower rates then available. The Company monitors investment portfolio mix to mitigate this risk.

Sensitivity Analysis

The Company regularly conducts various analyses to gauge the financial impact of changes in interest rate on its financial condition. The ranges selected in these analyses reflect management's assessment as being reasonably possible over the succeeding twelve-month period. The magnitude of changes modeled in the accompanying analyses should, in no manner, 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 the Company's 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 at December 31, 2000, and with all other variables held constant. A 100 and 200 basis point increase in market interest rates would result in a pre-tax decrease in the market value of the Company's fixed income investments of $38.7 million and $75.4 million, respectively. Similarly, a 100 and 200 basis point decrease in market interest rates would result in a pretax increase in the market value of the Company's fixed income investments of $40.2 million and $83.1 million, respectively.

Foreign Currency Sensitivity

Portions of Universal American's operations are transacted utilizing the Canadian dollar as the functional currency. Approximately 14.1%, 20.0% and 35.6% of Universal American's assets, revenues and operating income before taxes, as of and for the twelve months ended December 31, 2000, respectively, were derived from the Canadian operations. As of and for the year ended December 31, 1999, approximately 13.7%, 16.1% and 23.7% of Universal American's assets, revenues and operating income before taxes, respectively, were derived from Canadian operations. Accordingly, Universal American's earnings and business equity are affected by fluctuations in the value of the U.S. dollar as compared to the Canadian dollar. Although this risk is somewhat mitigated by the fact that both the assets and liabilities for Universal American's foreign operations are denominated in Canadian dollars, Universal American is still subject to translation losses.

Universal American periodically conducts various analyses to gauge the financial impact of changes in the foreign currency exchange rate on their financial condition. The ranges selected in these analyses reflect management's assessment as being reasonably possible over the succeeding twelve-month period. The magnitude of changes modeled in the following analysis should, in no manner, be construed as a prediction of future economic events, but rather as a simple illustration of the potential impact of such events on Universal American's financial results.

At December 31, 2000, a 10% strengthening of the U.S. dollar relative to the Canadian dollar would result in a decrease to the operating income before taxes of approximately $1.1 million and a decrease in equity of $5.4 million. Universal American's sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in any potential change in sales levels or local prices.