Summary of Results

Net Loss was $19.7 million ($0.31 per common share) for the nine months ended September 30, 2008, compared to Net Income of $198.9 million ($3.02 per common share) for the same period in 2007. The Company reported a Net Loss of $39.3 million ($0.63 per common share) for the three months ended September 30, 2008, compared to Net Income of $64.3 million ($0.99 per common share) for the same period in 2007. Loss from Continuing Operations was $12.0 million ($0.19 per common share) and $43.7 million ($0.70 per common share) for the nine and three months ended September 30, 2008, respectively, compared to Income from Continuing Operations of $183.7 million ($2.79 per common share) and $57.6 million ($0.89 per common share) for the same periods in 2007. As discussed throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), results from continuing operations decreased for the nine and three months ended September 30, 2008, due primarily to lower operating results in the aggregate, including higher catastrophe losses, lower Net Investment Income and higher losses arising from other than temporary declines in fair value of investments and realized investment losses from sales of stocks of financial institutions. Catastrophe losses from continuing operations were $146.4 million and $83.1 million before tax for the nine and three months ended September 30, 2008, respectively, compared to $27.8 million and $7.3 million for the same periods in 2007. The Company reported a Loss from Discontinued Operations of $7.7 million and Income from Discontinued Operations of $4.4 million for the nine and three months ended September 30, 2008, respectively, compared to Income from Discontinued Operations of $15.2 million and $6.7 million for the same periods in 2007. Catastrophe losses from discontinued operations were $7.8 million before tax for the nine months ended September 30, 2008, compared to $4.0 million for the same period in 2007.

Total Revenues were $2,117.3 million and $2,196.5 million for the nine months ended September 30, 2008 and 2007, respectively, a decrease of $79.2 million. Total Revenues decreased due primarily to net realized investment losses and lower Net Investment Income, partially offset by an increase in Earned Premiums. Total Revenues were $688.9 million and $735.4 million for the three months ended September 30, 2008 and 2007, respectively, a decrease of $46.5 million. Total Revenues decreased due primarily to net realized investment losses, partially offset by an increase in Earned Premiums.

Earned Premiums were $1,771.7 million and $1,712.6 million for the nine months ended September 30, 2008 and 2007, respectively, an increase of $59.1 million. Earned premiums increased due primarily to increases in the Unitrin Direct and Unitrin Specialty segments. Earned Premiums were $599.5 million and $579.9 million for the three months ended September 30, 2008 and 2007, respectively, an increase of $19.6 million. Earned premiums increased in all four insurance segments.

Automobile Finance Revenues decreased by $8.8 million and $6.4 million for the nine and three months ended September 30, 2008, respectively, compared to the same periods in 2007, due primarily to lower yields on loans outstanding and lower average levels of loans outstanding.

Net Investment Income decreased by $44.0 million and $3.3 million for the nine and three months ended September 30, 2008, respectively, compared to the same periods in 2007, due primarily to lower net investment income from certain investments in limited liability investment companies and limited partnerships, which the Company accounts for under the equity method of accounting and lower short-term investment income, partially offset by higher investment income related to the acquisitions of businesses. The Company reported net investment losses of $29.8 million and $0.9 million from its investments in limited liability investment companies and limited partnerships for the nine and three months ended September 30, 2008, respectively, compared to net investment income of $18.8 million and $6.4 million for the same periods in 2007. Each of the Company's insurance segments reported lower net investment income as a result of these investments.

Net Realized Investment Gains (Losses) were losses of $33.4 million and $44.6 million for the nine and three months ended September 30, 2008, respectively, compared to gains of $52.0 million and $12.5 million for the same periods in 2007. Realized investment gains from the sales of a portion of the Company's investment in Northrop common stock were $47.5 million and $35.4 million for the nine and three months ended September 30, 2008, respectively, compared to $35.3 million and $8.7 million for the same periods in 2007. Net Realized Investment Gains (Losses) includes pretax losses of $98.9 million and $72.1 million for the nine and three months ended September 30, 2008, respectively, resulting from other than temporary declines in the fair values of investments, compared to pretax losses of $8.0 million and $7.0 million for the same periods in 2007. The Company cannot anticipate when or if similar net investment gains and losses may occur in the future.

Critical Accounting Estimates

Unitrin's subsidiaries conduct their businesses in three industries: property and casualty insurance, life and health insurance and automobile finance. Accordingly, the Company is subject to several industry-specific accounting principles under GAAP. The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The process of estimation is inherently uncertain. Accordingly, actual results could ultimately differ materially from the estimated amounts reported in a company's financial statements. Different assumptions are likely to result in different estimates of reported amounts.

The Company's critical accounting policies most sensitive to estimates include the valuation of investments, the valuation of reserves for property and casualty insurance incurred losses and LAE, the valuation of the reserve for loan losses, the assessment of recoverability of goodwill, and the valuation of postretirement benefit obligations. The Company's critical accounting policies with respect to the valuation of investments, the valuation of reserves for property and casualty insurance incurred losses and LAE, the valuation of the reserve for loan losses, the assessment of recoverability of goodwill, and the valuation of postretirement benefit obligations are described in the MD&A presented in the 2007 Annual Report. Except for additional disclosures required by SFAS No. 157 and presented in Note 16, "Fair Value Measurements," to the Condensed Consolidated Financial Statements, there has been no material change, subsequent to December 31, 2007, to information previously disclosed with respect to the Company's critical accounting policies.

Catastrophes

Catastrophes and storms are inherent risks of the property and casualty insurance business. These catastrophic events and natural disasters include hurricanes, tornadoes, earthquakes, hailstorms, wildfires, high winds and winter storms. Such events result in insured losses that are, and will continue to be, a material factor in the results of operations and financial position of the Company's property and casualty insurance companies. Further, because the level of these insured losses occurring in any one year cannot be accurately predicted, these losses may contribute to material year-to-year fluctuations in the results of the operations and financial position of these companies. Specific types of catastrophic events are more likely to occur at certain times within the year than others. This factor adds an element of seasonality to property and casualty insurance claims. The Company has adopted the industry-wide catastrophe classifications of storms and other events promulgated by ISO to track and report losses related to catastrophes. ISO classifies a disaster as a catastrophe when the event causes $25.0 million or more in direct losses to property and affects a significant number of policyholders and insurers. ISO-classified catastrophes are assigned a unique serial number recognized throughout the insurance industry. The discussions that follow utilize ISO's definition of catastrophes.

The Company manages its exposure to catastrophes and other natural disasters through a combination of geographical diversification and reinsurance. To limit its exposures to catastrophic events, the Company maintains various catastrophe reinsurance programs for its property and casualty insurance businesses. Coverage for each catastrophe reinsurance program is provided in various layers (See Note 15, "Catastrophe Reinsurance," to the Condensed Consolidated Financial Statements for further discussion of these programs).

Catastrophe reinsurance premiums for the Company's catastrophe reinsurance programs and the FHCF reduced earned premiums for the nine and three months ended September 30, 2008 and 2007, by the following:

                                                    Nine Months Ended          Three Months Ended
                                                 Sept. 30,     Sept. 30,     Sept. 30,     Sept. 30,
(Dollars in Millions)                               2008          2007         2008           2007
Kemper                                           $     14.6    $     14.6   $       5.0    $      5.1
Unitrin Specialty                                       0.4           0.2           0.1            -
Unitrin Direct                                          0.1           0.4            -            0.3
Life and Health Insurance                               8.6           6.4           5.5           1.8

Total Catastrophe Reinsurance Premiums           $     23.7    $     21.6   $      10.6    $      7.2

Catastrophes (continued)

Catastrophe reinsurance premiums increased due primarily to reinstatement premium related to the Life and Health Insurance segment's catastrophe reinsurance programs. The Life and Health Insurance segment reported reinsurance reinstatement premiums of $4.1 million for both the nine and three months ended September 30, 2008 to reinstate coverage following Hurricanes Dolly, Gustav and Ike.

Total catastrophe losses and LAE (including development), net of reinsurance recoveries, reported in continuing operations were $146.4 million and $83.1 million for the nine and three months ended September 30, 2008, respectively, compared to $27.8 million and $7.3 million for the same periods in 2007. The Company recognized catastrophe losses, totaling $70.5 million, net of reinsurance recoveries, from three major hurricanes (Dolly, Gustav and Ike) in the third quarter of 2008. While there were no major hurricane catastrophe losses and LAE for the same period in 2007, the Company recognized adverse development of $3.4 million and $3.5 million for the nine and three months ended September 30, 2007 related to Hurricanes Katrina and Rita. Catastrophe losses for the nine months ended September 30, 2008 also increased due to higher frequency and severity of wind and hail storms in the first half of 2008, compared to the same period in 2007. The Company's estimated losses and LAE, net of reinsurance recoveries of $40.2 million, from Hurricanes Dolly, Gustav and Ike reported in the Company's Condensed Consolidated Statements of Operations for both the nine and three months ended September 30, 2008 by business segment were:

        (Dollars in Millions)                    Dolly    Gustav     Ike     Total
        Kemper                                   $  0.7   $  12.1   $ 32.9   $ 45.7
        Unitrin Specialty                            -        0.5      1.1      1.6
        Unitrin Direct                               -        0.1      0.4      0.5
        Life and Health Insurance                   6.9       6.8      9.0     22.7

        Total Loss and LAE, Net of Reinsurance   $  7.6   $  19.5   $ 43.4   $ 70.5

The estimated losses presented above by the Life and Health Insurance segment are net of reinsurance recoveries of $3.3 million, $3.3 million and $33.6 million related to Hurricanes Dolly, Gustav and Ike, respectively. In addition to the losses presented above, Insurance Expenses for both the nine and three months ended September 30, 2008 includes an expense of $3.9 million related to the Kemper segment's estimate of its share of assessments from TWIA. The Company's estimates for Hurricanes Dolly, Gustav and Ike include estimates for both direct losses and LAE and indirect losses from residual market assessments, such as TWIA.

The process of estimating and establishing reserves for catastrophe losses is inherently uncertain and the actual ultimate cost of a claim, net of actual reinsurance recoveries, may vary materially from the estimated amount reserved. The Company's estimates of direct catastrophe losses are generally based on inspections by claims adjusters and historical loss development experience for areas that have not been inspected or for claims that have not yet been reported and are based on the coverages provided by its insurance policies. The Company's homeowners and dwellings insurance policies do not provide coverage for losses caused by floods, but generally provide coverage for physical damage caused by wind or wind driven rain. Accordingly, the Company's estimates of direct losses for homeowners and dwellings insurance do not include losses caused by flood. Depending on the policy, automobile insurance may provide coverage for losses caused by flood. Estimates of the number of and severity of claims ultimately reported are influenced by many variables including, but not limited to, repair or reconstruction costs and determination of cause of loss that are difficult to quantify and will influence the final amount of claim settlements. All these factors, coupled with the impact of the availability of labor and material on costs, require significant judgment in the reserve setting process. A change in any one or more of these factors is likely to result in an ultimate net claim cost different from the estimated reserve. The Company's estimates of indirect losses from residual market assessments are based on a variety of factors including, but not limited to, actual or estimated assessments provided by or received from the assessing entity, insurance industry estimates of losses, and estimates of the Company's market share in the assessable states. Actual assessments may differ materially from these estimated amounts.

Kemper

Selected financial information for the Kemper segment follows:



                                     Nine Months Ended              Three Months Ended
                                 Sept. 30,       Sept. 30,      Sept. 30,        Sept. 30,
  (Dollars in Millions)             2008           2007            2008            2007
  Earned Premiums:
  Automobile                     $    440.7     $     446.2     $    149.1      $     149.3
  Homeowners                          215.0           212.0           72.9             71.3
  Other Personal                       38.5            35.7           13.2             12.2

  Total Earned Premiums               694.2           693.9          235.2            232.8
  Net Investment Income                22.2            35.4            8.8             12.1
  Other Income                          0.4             0.4            0.2              0.2

  Total Revenues                      716.8           729.7          244.2            245.1

  Incurred Losses and LAE             529.8           460.3          195.4            143.3
  Insurance Expenses                  199.8           198.0           70.3             66.8

  Operating Profit (Loss)             (12.8 )          71.4          (21.5 )           35.0
  Income Tax Benefit (Expense)         10.9           (18.6 )          9.6            (10.1 )

  Net Income (Loss)              $     (1.9 )   $      52.8     $    (11.9 )    $      24.9

                        RATIOS BASED ON EARNED PREMIUMS



                                                 Nine Months Ended              Three Months Ended
                                             Sept. 30,       Sept. 30,       Sept. 30,       Sept. 30,
                                               2008            2007            2008            2007
Incurred Loss and LAE Ratio (excluding
Catastrophes)                                     61.7 %          63.6 %          61.9 %          60.5 %
Incurred Catastrophe Loss and LAE Ratio           14.6 %           2.7 %          21.2 %           1.1 %

Total Incurred Loss and LAE Ratio                 76.3 %          66.3 %          83.1 %          61.6 %
Incurred Expense Ratio                            28.8 %          28.5 %          29.9 %          28.7 %

Combined Ratio                                   105.1 %          94.8 %         113.0 %          90.3 %

                               INSURANCE RESERVES



                                              Sept. 30,     Dec. 31,
                 (Dollars in Millions)          2008          2007
                 Insurance Reserves:
                 Personal Automobile         $     342.6   $    378.8
                 Homeowners                        127.1         91.1
                 Other Personal                     35.4         32.5

                 Insurance Reserves          $     505.1   $    502.4

                 Insurance Reserves:
                 Loss Reserves:
                 Case                        $     290.1   $    274.1
                 Incurred but Not Reported         134.3        145.3

                 Total Loss Reserves               424.4        419.4
                 LAE Reserves                       80.7         83.0

                 Insurance Reserves          $     505.1   $    502.4

Kemper (continued)



                                                 Nine Months Ended                  Three Months Ended
                                           Sept. 30,          Sept. 30,        Sept. 30,         Sept. 30,
(Dollars in Millions)                         2008              2007              2008              2007
Favorable Loss and LAE Reserve
Development, Net (excluding
Catastrophes)                              $     43.7        $      36.3       $     10.0        $     11.1
Favorable Catastrophe Loss and LAE
Reserve Development, Net                          5.3                9.3              0.4               2.9

Total Favorable Loss and LAE Reserve
Development, Net                           $     49.0        $      45.6       $     10.4        $     14.0

Loss and LAE Reserve Development as a
Percentage of
Insurance Reserves at Beginning of
Year                                              9.8 %              8.5 %            2.1 %             2.6 %

Earned Premiums in the Kemper segment increased by $0.3 million and $2.4 million for the nine and three months ended September 30, 2008, respectively, compared to the same periods in 2007, due primarily to higher earned premiums on homeowners insurance and other personal lines, partially offset by lower earned premiums on automobile insurance. Earned premiums on homeowners insurance increased by $3.0 million for the nine months ended September 30, 2008, compared to the same period in 2007, due primarily to higher average premium rates. Earned premiums on homeowners insurance increased by $1.6 million for the three months ended September 30, 2008, compared to the same period in 2007, due to higher average premium rates and higher volume. Other personal insurance earned premiums increased by $2.8 million and $1.0 million for the nine and three months ended September 30, 2008, respectively, compared to the same periods in 2007, due primarily to higher volume. Earned premiums on automobile insurance decreased by $5.5 million for the nine months ended September 30, 2008, compared to the same period in 2007, due primarily to lower volume. Earned premiums on automobile insurance decreased by $0.2 million for the three months ended September 30, 2008, compared to the same period in 2007, due primarily to lower average premium rates, partially offset by higher volume.

Net Investment Income decreased by $13.2 million and $3.3 million for the nine and three months ended September 30, 2008, respectively, compared to the same periods in 2007, due primarily to lower net investment income from certain investments in limited liability investment companies and limited partnerships which the Company accounts for under the equity method of accounting. The Kemper segment reported net investment losses of $5.9 million and $0.1 million from these investments for the nine and three months ended September 30, 2008, respectively, compared to net investment income of $4.8 million and $1.9 million, respectively, for the same periods in 2007.

Kemper reported an Operating Loss of $12.8 million for the nine months ended September 30, 2008, compared to Operating Profit of $71.4 million for the same period in 2007. Operating results for the nine months ended September 30, 2008 decreased due primarily to higher incurred losses and LAE and to a lesser extent the lower Net Investment Income. Kemper reported an Operating Loss of $21.5 million for the three months ended September 30, 2008, compared to an Operating Profit of $35.0 million for the same period in 2007. Operating results for the three months ended September 30, 2008 decreased due primarily to higher incurred losses and LAE.

Incurred Losses and LAE increased for the nine months ended September 30, 2008, compared to the same period in 2007, due primarily to higher catastrophe losses and LAE, partially offset by lower non-catastrophe losses and LAE and higher favorable loss and LAE reserve development (which recognizes changes in estimates of prior year loss and LAE reserves in the current period). Incurred Losses and LAE increased for the three months ended September 30, 2008, compared to the same period in 2007, due primarily to higher catastrophe losses and LAE. Catastrophe losses and LAE (including development) were $101.2 million and $49.9 million for the nine and three months ended September 30, 2008, respectively, compared to $18.6 million and $2.6 million, respectively, for the same periods in 2007. The Kemper segment recognized catastrophe losses, totaling $45.7 million, from Hurricanes Dolly, Gustav and Ike in the third quarter of 2008. See the above discussion under "Catastrophes" for additional information on Hurricanes Dolly, Gustav and Ike and the Company's catastrophe reinsurance programs. There were no major hurricane catastrophe losses and LAE for the same period in 2007. Catastrophe losses for the nine months ended September 30, 2008 also increased due to higher frequency and severity of wind and hail storms in the first half of 2008, compared to the same period in 2007. Loss and LAE reserve development had favorable effects of $49.0 million (including favorable development of $5.3 million for catastrophes) and $10.4 million (including favorable development of $0.4 million for catastrophes) for the nine and three months ended September 30, 2008, respectively, compared to favorable effects of $45.6 million (including favorable development of $9.3 million for catastrophes) and $14.0 million (including favorable development of $2.9 million for catastrophes), respectively, for the same periods in 2007.

Kemper (continued)

Automobile insurance incurred losses and LAE decreased by $22.7 million and $4.4 million for the nine and three months ended September 30, 2008, respectively, compared to the same periods in 2007, due primarily to the impact of higher favorable loss and LAE reserve development and lower non-catastrophe losses and LAE, partially offset by higher catastrophe losses and LAE. Loss and LAE reserve development on automobile insurance had favorable effects of $37.9 million and $8.6 million for the nine and three months ended September 30, 2008, respectively, compared to favorable effects of $23.5 million and $7.3 million, respectively, for the same periods in 2007. Non-catastrophe losses on automobile insurance decreased for the nine and three months ended September 30, 2008, compared to the same periods in 2007, due primarily to lower severity. Catastrophe losses and LAE (including development) on automobile insurance were $8.9 million and $0.7 million for the nine and three months ended September 30, 2008, respectively, compared to $2.5 million and $0.3 million, respectively, for the same periods in 2007.

Homeowners insurance incurred losses and LAE increased by $81.7 million for the nine months ended September 30, 2008, compared to the same period in 2007, due primarily to higher catastrophe losses and LAE and, to a lesser extent, the impact of lower favorable loss and LAE reserve development. Catastrophe losses and LAE (excluding development) on homeowners insurance were $93.0 million for the nine months ended September 30, 2008, compared to $24.0 million for the same period in 2007. Catastrophe losses and LAE increased for the nine months ended September 30, 2008 due primarily to the aforementioned hurricanes and increased frequency and severity of wind and hail storms. Loss and LAE reserve development on homeowners insurance had a favorable effect of $10.8 million (including favorable development of $4.7 million for catastrophes) for the nine months ended September 30, 2008, compared to a favorable effect of $19.1 million (including favorable development of $8.5 million for catastrophes) in 2007.

Homeowners insurance incurred losses and LAE increased by $50.0 million for the three months ended September 30, 2008, compared to the same period in 2007, due primarily to higher catastrophe losses and LAE and, to a lesser extent, higher non-catastrophe losses and LAE and lower favorable loss and LAE reserve development. Catastrophe losses and LAE (excluding development) on homeowners insurance were $46.8 million for the three months ended September 30, 2008, compared to $4.7 million for the same period in 2007. Catastrophe losses and LAE increased for the third quarter of 2008 due primarily to the aforementioned hurricanes. Loss and LAE reserve development on homeowners insurance had a favorable effect of $1.1 million (including favorable development of $0.3 million for catastrophes) for the three months ended September 30, 2008, compared to a favorable effect of $4.2 million (including favorable development of $2.7 million for catastrophes) in 2007.

Other insurance incurred losses and LAE increased by $10.5 million and $6.5 million for the nine and three months ended September 30, 2008, respectively, compared to the same periods in 2007, due primarily to higher catastrophe losses and LAE and to a lesser extent lower favorable loss and LAE reserve development. Catastrophe losses and LAE (including development) on other insurance were $4.0 million and $2.7 million for the nine and three months ended September 30, 2008, respectively, compared to $0.6 million and $0.3 million, respectively, for the . . .