2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

a. Basis of Presentation: The significant accounting policies followed by Universal American and subsidiaries that materially affect financial reporting are summarized below. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") which, as to the insurance subsidiaries, differ from statutory accounting practices prescribed or permitted by regulatory authorities. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting period. Accounts that the Company deems to be sensitive to changes in estimates include policy liabilities and accruals, deferred policy acquisition costs, present value of future profits and deferred taxes. As additional information becomes available or actual amounts become determinable, the recorded estimates may be revised and reflected in operating results. Actual results could differ from those estimates.

b. Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Universal American and its wholly-owned subsidiaries, including the operations of acquired companies from the date of their acquisition. All material intercompany transactions and balances have been eliminated.

c. Investments: The Company follows Financial Accounting Standards Board ("FASB") Statement No. 115, "Accounting for Certain Debt and Equity Securities" ("Statement No. 115"). Statement No. 115 requires that debt and equity securities be classified into one of three categories and accounted for as follows: Debt securities that the Company has the positive intent and the ability to hold to maturity are classified as "held to maturity" and reported at amortized cost. Debt and equity securities that are held for current resale are classified as "trading securities" and reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as held to maturity or as trading securities are classified as "available for sale" and reported at fair value. Unrealized gains and losses on available for sale securities are excluded from earnings and reported as accumulated other comprehensive income, net of tax and deferred policy acquisition cost adjustments.

As of December 31, 2000 and 1999, all fixed maturity securities were classified as available for sale and were carried at fair value, with the unrealized gain or loss, net of tax and other adjustments (deferred policy acquisition costs), included in accumulated other comprehensive income. Equity securities are carried at current fair value. Policy loans are stated at the unpaid principal balance. Short-term investments are carried at cost, which approximates fair value. Other invested assets include real estate, mortgage loans and collateral loans. The real estate and collateral loans are carried at cost, which is equal to the fair value of their estimated future cash flows at the date of acquisition. Mortgage loans are carried at the unpaid principal balance. Investment income is recorded when earned.

The Company regularly evaluates the carrying value of their investments based on current economic conditions, past credit loss experience and other circumstances. A decline in net realizable value that is other than temporary is recognized as a realized investment loss and a reduction in the cost basis of the investment in the period when such determination is made. The Company discounts expected cash flows in the computation of net realizable value of its investments, other than certain mortgage-backed securities. In those circumstances where the expected cash flows of residual interest and interest-only mortgage-backed securities, discounted at a risk-free rate of return, result in an amount less than the carrying value, a realized loss is reflected in an amount sufficient to adjust the carrying value of a given security to its fair value. Realized investment gains and losses on the sale of securities are based on the specific identification method.

d. Deferred Policy Acquisition Costs: The cost of acquiring new business, principally commissions and certain expenses of the agency, policy issuance and underwriting departments, all of which vary with, and are primarily related to the production of new and renewal business, have been deferred. These costs are being amortized in relation to the present value of expected gross profits on the policies arising principally from investment, mortality and expense margins for FASB Statement No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments", ("Statement No. 97") products and in proportion to premium revenue using the same assumptions used in estimating the liabilities for future policy benefits for FASB Statement No. 60, "Accounting and Reporting by Insurance Enterprises", ("Statement No. 60") products. Deferred policy acquisition costs are written off to the extent that it is determined that future policy premiums and investment income or gross profits would not be adequate to cover related losses and expenses. During the year ended December 31, 2000, the Company decided to exit the major medical line of business. This resulted in a reduction in the projected gross profits for that line of business and accordingly, deferred policy acquisition costs of $1.4 million were written off as of December 31, 2000. No deferred policy acquisition costs were written off for the years ended December 31, 1999 and 1998.

The Company has several reinsurance arrangements in place on its life and accident & health insurance risks (see Note 11). In the accompanying statement of operations, the Company reports commissions incurred on direct premium written and commission and expense allowances on reinsurance ceded on separate lines to correspond to the presentation of the premiums earned by the Company. In determining the amounts capitalized for deferred policy acquisition costs, the Company includes an amount for gross commissions and direct issue expenses, net of the related allowances received from the reinsurer on these costs.

Details with respect to deferred policy acquisition costs for the three years ended December 31, 2000, are as follows:

							 (In thousands)
Balance at January 1, 1998 . . . . . . . . . . . . . . . . . $  20,832
   Capitalized costs . . . . . . . . . . . . . . . . . . . .     8,792
   Adjustment relating to unrealized                                        
     gain (loss) on fixed maturities . . . . . . . . . . . .       (79)
   Amortization  . . . . . . . . . . . . . . . . . . . . . .    (5,262)

Balance at December 31, 1998 . . . . . . . . . . . . . . . .    24,283
   Capitalized costs . . . . . . . . . . . . . . . . . . . .    11,441
   Adjustment relating to unrealized                   
     gain (loss) on fixed maturities . . . . . . . . . . . .     4,509
   Foreign currency adjustment . . . . . . . . . . . . . . .        24
   Amortization  . . . . . . . . . . . . . . . . . . . . . .    (5,314)

Balance at December 31, 1999 . . . . . . . . . . . . . . . .    34,943
   Capitalized costs . . . . . . . . . . . . . . . . . . . .    24,200
   Adjustment relating to unrealized                   
     gain (loss) on fixed maturities . . . . . . . . . . . .    (2,209)
   Foreign currency adjustment . . . . . . . . . . . . . . .        (8)
   Amortization  . . . . . . . . . . . . . . . . . . . . . .    (6,866)
   Adjustment relating to the decision                 
     to exit the major medical line of business  . . . . . .    (1,409)

Balance at December 31, 2000 . . . . . . . . . . . . . . . . $  48,651 

e. Recognition of Revenues, Contract Benefits and Expenses for Investment and Universal Life Type Policies: Revenues for universal life-type policies and investment products consist of mortality charges for the cost of insurance, and surrender charges assessed against policyholder account balances during the period. Benefit claims incurred in excess of policyholder account balances are expensed. The liability for policyholder account balances for universal life-type policies and investment products under Statement No. 97 are determined following a "retrospective deposit" method. The retrospective deposit method establishes a liability for policy benefits at an amount determined by the account or contract balance that accrues to the benefit of the policyholder, which consists principally of policy account values before any applicable surrender charges. Premium receipts are not reported as revenues when the retrospective deposit method is used. Current credited interest rates for these products range from 3.0% to 7.3%.

f. Recognition of Premium Revenues and Policy Benefits for Accident & Health Insurance Products: Premiums are recorded when due and recognized as revenue over the period to which the premiums relate. Benefits and expenses associated with earned premiums are recognized as the related premiums are earned so as to result in recognition of profits over the life of the policies. This association is accomplished by recording a provision for future policy benefits and amortizing deferred policy acquisition costs. The liability for future policy benefits for accident and health policies consists of active life reserves and the estimated present value of the remaining ultimate net cost of incurred claims. Active life reserves include unearned premiums and additional reserves. The additional reserves are computed on the net level premium method using assumptions for future investment yield, mortality and morbidity experience. The assumptions are based on past experience. Claim reserves are established for future payments not yet due on incurred claims, primarily relating to individual disability insurance and group long-term disability insurance products. These reserves are established based on past experience and are continuously reviewed and updated with any related adjustments recorded to current operations. Claim liabilities represent policy benefits due but unpaid at year-end and primarily relates to individual health insurance products.

Activity in the accident and health policy and contract claim liability is as follows:

                                      2000       1999       1998   
                                             (In thousands)
Balance at beginning
   of year. . . . . . . . . . . . . $ 72,261   $ 24,332   $ 22,592
Less reinsurance
   recoverables . . . . . . . . . .  (36,231)   (19,076)   (17,034)

Net balance at
   beginning of year  . . . . . . .   36,030      5,256      5,558 

Balances acquired . . . . . . . . .        -     31,043        785

Incurred related to:
   Current year . . . . . . . . . .   59,700     58,163     18,044
   Prior years  . . . . . . . . . .      299       (395)      (782)
Total incurred  . . . . . . . . . .   59,999     57,768     17,262 

Paid related to:
   Current year . . . . . . . . . .   43,843     28,782     13,673
   Prior years  . . . . . . . . . .   17,631     29,320      4,676 
Total paid  . . . . . . . . . . . .   61,474     58,102     18,349 

Foreign currency adjustment . . . .     (173)        65          - 

Net balance at end of year  . . . .   34,382     36,030      5,256
Plus reinsurance
   recoverables . . . . . . . . . .   43,502     36,231     19,076 

Balance at end of year  . . . . . . $ 77,884   $ 72,261   $ 24,332 

g. Recognition of Premium Revenues and Policy Benefits for Traditional Life and Annuity Products: Premiums from traditional life and annuity policies with life contingencies generally are recognized as income when due. Benefits and expenses are matched with such income so as to result in the recognition of profits over the life of the contracts. This match is accomplished by means of the provision for liabilities for future policy benefits and the deferral and subsequent amortization of policy acquisition costs.

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

i. Reinsurance Accounting: Recoverables under reinsurance contracts are included in total assets as amounts due from reinsurers rather than net against the related policy asset or liability. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies.

j. Foreign Currency Translation: The financial statement accounts of the Company's Canadian operations, which are denominated in Canadian dollars, are translated into U.S. dollars as follows: (i) Canadian currency assets and liabilities are translated at the rates of exchange as of the balance sheet dates and the related unrealized translation adjustments are included as a component of accumulated other comprehensive income, and (ii) revenues, expenses and cash flows, expressed in Canadian dollars, are translated using a weighted average of exchange rates for each period presented.

k. Earnings Per Common Share: Basic EPS excludes dilution and is computed by dividing income available to common shareholders, (after deducting the dividends redemption accrual on the Series C and Series D Preferred Stock), by the weighted average number of shares outstanding for the period. Diluted EPS gives the dilutive effect of the stock options, warrants and Series B, C and D Preferred Stock outstanding during the year. As of December 31, 2000 and 1999, there were 2,513,100 and 2,479,500 stock options, respectively, not included in the diluted EPS computation because they were antidilutive. A reconciliation of the numerators and the denominators of the basic and diluted EPS for the years ended December 31, 2000, 1999 and 1998 is as follows:

		                   	   For the Year Ended
			        	   December 31, 2000                   
 				  Income          Shares       Per Share
                               (Numerator)    (Denominator)     Amount   
                              (In thousands, per share amounts in dollars)
Common stock outstanding 	  	  	  46,761
Less: Treasury shares                   	     (31)  

Basic EPS
Net income applicable
   to common shareholders        $  22,885        46,730       $   0.49  

Effect of Dilutive Securities
Incentive stock options                            1,766
Director stock option                                115
Treasury stock purchased
   from proceeds of
   exercise of options                            (1,496)  

Diluted EPS
Net income applicable
   to common shareholders
   plus assumed conversions      $  22,885        47,115       $   0.49  



                   	         For the Year Ended December 31, 1999
 				  Income          Shares       Per Share
                               (Numerator)    (Denominator)     Amount   
                              (In thousands, per share amounts in dollars)

Net income                       $   9,813
Less: Redemption
   accrual on Series C
   Preferred Stock                    (180)

Basic EPS
Net income applicable
   to common shareholders            9,633        23,212      $   0.42  

Effect of Dilutive Securities
Series B Preferred Stock                           1,037
Series C Preferred Stock               180           544
Series D Preferred Stock                             744
Nonregistered warrants                             1,993
Registered warrants                                  614
Incentive stock options                            1,261
Director stock option                                 93
Treasury stock purchased
   from proceeds of exercise
   of options and warrants                          (937)

Diluted EPS
Net income applicable
   to common shareholders
   plus assumed conversions      $   9,813        28,561       $   0.34  



		                 For the Year Ended December 31, 1998
 				  Income          Shares       Per Share
                               (Numerator)    (Denominator)     Amount   
                              (In thousands, per share amounts in dollars)

Net income                       $   2,608
Less: Redemption accrual
   on Series C Preferred Stock        (434)

Basic EPS
Net income applicable
   to common shareholders            2,174         7,533       $   0.29  

Effect of Dilutive Securities
Series B Preferred Stock             1,778
Series C Preferred Stock               434         2,176
Series D Preferred Stock                               -
Nonregistered warrants                             2,016
Registered warrants                                  658
Incentive stock options                              229
Director stock option                                  7
Treasury stock purchased from
   proceeds of exercise of
   options and warrants                           (1,241)

Diluted EPS
Net income applicable to
   common shareholders plus
   assumed conversions           $   2,608        13,156       $   0.20  

l. Other Comprehensive Income: The components of other comprehensive income, and the related tax effects for each component, for the years ended December 31, 2000, 1999 and 1998 are as follows:

                                    Before Tax       Tax Expense      Net of Tax
                                      Amount          (Benefit)         Amount  
                                                    (In thousands)
Year ended
December 31, 2000
   Net unrealized gain
   arising during the year
   (net of deferred
   acquisition costs)               $  20,531        $     7,498     $   13,033
Reclassification
   adjustment for
   gains included
   in net income                         (146)               (51)           (95)
Net unrealized gains                   20,385              7,447         12,938
Foreign currency
   translation adjustment              (1,434)              (258)        (1,176)
Other comprehensive
   income                           $  18,951        $     7,189     $   11,762 



                                    Before Tax       Tax Expense      Net of Tax
                                      Amount          (Benefit)         Amount  
                                                    (In thousands)
Year ended
December 31, 1999
Net unrealized loss
   arising during the year
   (net of deferred
   acquisition costs)               $ (15,293)       $    (6,202)    $   (9,091)
Reclassification
   adjustment for losses
   included in net income                  87                 35             52 
Net unrealized gains                  (15,206)            (6,167)        (9,039)
Foreign currency
   translation adjustment               2,177                883          1,294 
Other comprehensive                                               
   income (loss)                    $ (13,029)          $ (5,284)    $   (7,745)



                                    Before Tax       Tax Expense      Net of Tax
                                      Amount          (Benefit)         Amount  
                                                    (In thousands)
Year ended
December 31, 1998
Net unrealized gain
   arising during the year
   (net of deferred
   acquisition costs)               $     171        $     55        $      116
Reclassification
   adjustment for gains
   included in net income                (147)            (47)             (100)
Net unrealized gains                       24               8                16
Foreign currency
   translation adjustment                   -               -                 - 
Other comprehensive
   income                           $      24        $      8        $       16 

m. Cash Flow Information: Included in cash and cash equivalents are cash on deposit, money market funds, and short-term investments, which had an original maturity of three months or less from the time of purchase.

n. FASB Statement No. 133: In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Its amendments Statements 137, Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133 and 138, Accounting for Derivative Instruments and Certain Hedging Activities, were issued in June 1999 and June 2000, respectively. Collectively, these are referred to as Statement 133. Statement 133 establishes accounting and reporting standards for derivative instruments and is effective for fiscal years beginning after June 15, 2000. Because of the minimal use of derivatives, Management does not anticipate that the adoption will have a significant effect on earnings or the financial position of the Company.

o. Goodwill/Negative Goodwill: Business combinations accounted for as a purchase result in the allocation of the purchase consideration to the fair values of the assets and liabilities acquired, including the present value of future profits, establishing such fair values as the new accounting bases. Purchase consideration in excess of the fair value of net assets acquired, for a specific acquisition, is allocated to goodwill. Should the fair value of the net assets acquired exceed the purchase consideration, such excess is utilized to reduce certain intangible assets, primarily present value of future profits related to the specific acquisition, and any remaining excess is allocated to negative goodwill. Allocation of purchase price is performed in the period in which the purchase is consummated. Adjustments, if any, in subsequent periods relate to resolution of pre-acquisition contingencies and refinements made to estimates of fair value in connection with the preliminary allocation. In connection with the acquisition of First National in 1996, the Company recorded $3.5 million of goodwill, which is being amortized on a straight line basis over 30 years. In connection with the acquisition of American Exchange in 1997, the Company recorded $1.3 million of goodwill, which is also being amortized on a straight line basis over 30 years. In connection with the acquisition of CHCS in August 2000, the Company recorded $2.7 million of goodwill, which is being amortized on a straight line basis over 20 years.

Negative Goodwill relates to the 1999 Acquisition and is being amortized over 10 years on a straight-line basis (see Note 3).

p. Reclassifications: Certain reclassifications have been made to prior years' financial statements to conform to current period classifications.