Summary of Results

The Company reported Net Income of $36.3 million ($0.58 per unrestricted common share) and $41.9 million ($0.67 per unrestricted common share) for the six and three months ended June 30, 2009, respectively, compared to Net Income of $26.2 million ($0.41 per unrestricted common share) and $11.0 million ($0.18 per unrestricted common share) for the same periods in 2008. The Company reported Income from Continuing Operations of $35.1 million ($0.56 per unrestricted common share) and $41.4 million ($0.66 per unrestricted common share) for the six and three months ended June 30, 2009, compared to Income from Continuing Operations of $37.7 million ($0.59 per unrestricted common share) and $17.0 million ($0.27 per unrestricted common share) for the same periods in 2008. As discussed throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), Income from Continuing Operations decreased by $2.6 million for the six months ended June 30, 2009, compared to the same period in 2008, due primarily to lower Net Realized Gains on Sales of Investments, higher Net Impairment Losses Recognized in Earnings, and lower unallocated dividend income due to lower levels of investments in Northrop Grumman Corporation ("Northrop") common stock, partially offset by higher Segment Net Income. Income from Continuing Operations increased by $24.4 million for the three months ended June 30, 2009, compared to the same period in 2008, due primarily to higher Segment Net Income and lower Net Impairment Losses Recognized in Earnings, partially offset by lower Net Realized Gains on Sales of Investments and lower unallocated dividend income due to lower levels of investments in Northrop common stock. Segment Net Income increased by $30.4 million and $36.0 million for the six and three months ended June 30, 2009, respectively, compared to the same periods in 2008, due to improved results in all segments, most notably the Kemper, Life and Health Insurance and Fireside Bank segments. Income from Continuing Operations for the six and three months ended June 30, 2009 and 2008 included restructuring charges of $16.2 million before tax and $8.1 million before tax, respectively, compared to $5.0 million before tax and $2.7 million before tax in the same periods of 2008. See Note 12, "Restructuring Expenses," to the Condensed Consolidated Financial Statements and the individual segment MD&A for more information regarding restructuring charges. Income from Continuing Operations for the six months ended June 30, 2009 also included an income tax provision of $6.8 million to increase the valuation allowance for deferred state income taxes, net of federal benefit, related to the Fireside Bank segment. Catastrophe losses from continuing operations were $36.0 million before tax and $21.7 million before tax for the six and three months ended June 30, 2009, compared to $63.3 million before tax and $49.4 million before tax for same periods in 2008. The Company reported Income from Discontinued Operations of $1.2 million and $0.5 million for the six and three months ended June 30, 2009 respectively, compared to Loss from Discontinued Operations of $11.5 million and $6.0 million for the same periods in 2008. There were no catastrophe losses from discontinued operations for either the six and three months ended June 30, 2009, compared to catastrophe losses of $9.5 million before tax and $7.3 million before tax for the six and three months ended June 30, 2008, respectively.

Total Revenues were $1,451.9 million and $1,437.6 million for the six months ended June 30, 2009 and 2008, respectively, an increase of $14.3 million. Total Revenues increased for the six months ended June 30, 2009 due primarily to higher Earned Premiums and Net Investment Income, partially offset by lower Net Realized Gains on Sales of Investments, lower Automobile Finance Revenues and higher Net Impairment Losses Recognized in Earnings. Total Revenues were $763.3 million and $745.7 million for the three months ended June 30, 2009 and 2008, respectively, an increase of $17.6 million. Total Revenues increased for the three months ended June 30, 2009 due primarily to higher Earned Premiums and Net Investment Income and lower Net Impairment Losses Recognized in Earnings, partially offset by lower Net Realized Gains on Sales of Investments and lower Automobile Finance Revenues.

Earned Premiums were $1,238.8 million and $1,172.2 million for the six months ended June 30, 2009 and 2008, respectively, an increase of $66.6 million. Earned Premiums were $626.3 million and $596.3 million for the three months ended June 30, 2009 and 2008, respectively, an increase of $30.0 million. Earned premiums increased, for both the six and three months ended June 30, 2009, in the Unitrin Specialty, Unitrin Direct and Kemper segments, partially offset by lower earned premiums in the Life and Health Insurance segment.

Summary of Results (continued)

Automobile Finance Revenues decreased by $25.2 and $14.7 million for the six and three months ended June 30, 2009, respectively, compared to the same periods in 2008, due primarily to the Company's decision to exit the automobile finance business.

Net Investment Income increased by $14.1 million and $13.0 million for the six and three months ended June 30, 2009, respectively, compared to the same periods in 2008. See "Investment Results" of the MD&A for a discussion of Net Investment Income.

Net Realized Gains on Sales of Investments were $5.2 million and $4.4 million for the six and three months ended June 30, 2009, respectively, compared to $38.0 million and $23.3 million for the same periods in 2008. Realized investment gains from sales of a portion of the Company's investment in Northrop common stock were $12.1 million and $1.8 million for the six and three months ended June 30, 2008, respectively. There were no such sales of Northrop common stock for the six and three months ended June 30, 2009. Net Impairment Losses Recognized in Earnings were $34.7 million and $9.7 million for the six and three months ended June 30, 2009, respectively, compared to $26.8 million and $18.3 million in the same periods of 2008 resulting from other than temporary declines in the fair values of investments. 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 pension 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 pension benefit obligations are described in the MD&A included in the 2008 Annual Report. There has been no material change, subsequent to December 31, 2008, to information previously disclosed in the 2008 Annual Report with respect to the Company's critical accounting policies.

Kemper

Selected financial information for the Kemper segment follows:



                                                   Six Months Ended                Three Months Ended
                                               June 30,         June 30,       June 30,         June 30,
(Dollars in Millions)                            2009             2008           2009             2008
Earned Premiums:
Automobile                                    $     294.1      $    291.6      $   148.0       $    145.4
Homeowners                                          145.7           142.1           74.1             71.3
Other Personal                                       26.4            25.3           13.2             12.7

Total Earned Premiums                               466.2           459.0          235.3            229.4
Net Investment Income                                14.8            15.7           12.5             10.9
Other Income                                          0.2             0.2            0.1              0.1

Total Revenues                                      481.2           474.9          247.9            240.4

Incurred Losses and LAE                             311.7           334.4          160.6            173.6
Insurance Expenses                                  134.8           129.5           65.6             64.5

Operating Profit                                     34.7            11.0           21.7              2.3
Income Tax Benefit (Expense)                         (8.2 )           0.5           (5.6 )            1.4

Net Income                                    $      26.5      $     11.5      $    16.1       $      3.7


                                     Ratios Based On Earned Premiums

                                                   Six Months Ended                Three Months Ended
                                               June 30,         June 30,       June 30,         June 30,
                                                 2009             2008           2009             2008
Incurred Loss and LAE Ratio (excluding
Catastrophes)                                        62.0 %          61.7 %         61.5 %           58.8 %
Incurred Catastrophe Loss and LAE Ratio               4.9 %          11.2 %          6.8 %           16.9 %

Total Incurred Loss and LAE Ratio                    66.9 %          72.9 %         68.3 %           75.7 %
Incurred Expense Ratio                               28.9 %          28.2 %         27.9 %           28.1 %

Combined Ratio                                       95.8 %         101.1 %         96.2 %          103.8 %

                               Insurance Reserves



                                              June 30,     Dec. 31,
                 (Dollars in Millions)          2009         2008
                 Insurance Reserves:
                 Personal Automobile         $    312.5   $    336.3
                 Homeowners                        99.4        103.0
                 Other Personal                    37.1         36.8

                 Insurance Reserves          $    449.0   $    476.1


                 Insurance Reserves:
                 Loss Reserves:
                 Case                        $    268.1   $    273.3
                 Incurred but Not Reported        103.3        125.9

                 Total Loss Reserves              371.4        399.2
                 LAE Reserves                      77.6         76.9

                 Insurance Reserves          $    449.0   $    476.1

Kemper (Continued)



                                                  Six Months Ended                 Three Months Ended
                                             June 30,          June 30,        June 30,          June 30,
(Dollars in Millions)                          2009              2008            2009              2008
Favorable Loss and LAE Reserve
Development, Net (excluding Catastrophes)    $    26.3        $     33.7       $    15.4        $     18.9
Favorable Catastrophe Loss and LAE
Reserve Development, Net                          11.6               4.9             4.3               2.7

Total Favorable Loss and LAE Reserve
Development, Net                             $    37.9        $     38.6       $    19.7        $     21.6


Loss and LAE Reserve Development as a
Percentage of Insurance Reserves at
Beginning of Year                                  8.0 %             7.7 %           4.1 %             4.3 %

Earned Premiums in the Kemper segment increased by $7.2 million for the six months ended June 30, 2009, compared to the same period in 2008, due primarily to higher volume, partially offset by an increase in the cost of reinsurance. Earned Premiums in the Kemper segment increased by $5.9 million for the three months ended June 30, 2009, compared to the same period in 2008, due primarily to higher volume. Earned premiums on homeowners insurance increased by $3.6 million for the six months ended June 30, 2009, due primarily to higher average premium rates and higher volume, partially offset by an increase in the cost of reinsurance. Earned premiums on homeowners insurance increased by $2.8 million for the three months ended June 30, 2009, due primarily to higher average premium rates and higher volume. Earned premiums on automobile insurance increased by $2.5 million and $2.6 million for the six and three months ended June 30, 2009, respectively, due primarily to higher volume, partially offset by lower average premium rates. Earned premiums on other personal insurance increased by $1.1 million and $0.5 million for the six and three months ended June 30, 2009, respectively, due primarily to higher volume.

Net Investment Income decreased by $0.9 million for the six months ended June 30, 2009, compared to the same period in 2008, due primarily to lower levels of investments, partially offset by higher yields on investments. Net Investment Income increased by $1.6 million for the three months ended June 30, 2009, compared to the same period in 2008, due primarily to higher yields on investments, partially offset by lower levels of investments. The increase in investment yield was due primarily to higher investment income from certain investments in limited liability investment companies and limited partnerships which the Company accounts for under the equity method of accounting.

Operating Profit in the Kemper segment increased by $23.7 million for the six months ended June 30, 2009, compared to the same period in 2008, due primarily to lower incurred catastrophe losses and LAE, partially offset by higher insurance expenses. Operating Profit in the Kemper segment increased by $19.4 million for the three months ended June 30, 2009, compared to the same period in 2008, due primarily to lower incurred catastrophe losses and LAE.

Homeowners insurance incurred losses and LAE were $100.0 million for the six months ended June 30, 2009, compared to $121.7 million for the same period in 2008. Homeowners insurance incurred losses and LAE decreased due primarily to lower catastrophe losses and LAE. Catastrophe losses and LAE (excluding development) on homeowners insurance were $27.8 million for the six months ended June 30, 2009, compared to $46.2 million for the same period in 2008. Catastrophe loss and LAE reserve development on homeowners insurance had a favorable effect of $11.0 million for the six months ended June 30, 2009, compared to a favorable effect of $4.4 million for the same period in 2008. Catastrophe loss and LAE reserve development for the six months ended June 30, 2009 included favorable development of $7.4 million on Hurricanes Ike and Gustav, both of which occurred in the third quarter of 2008.

Homeowners insurance incurred losses and LAE were $55.0 million for the three months ended June 30, 2009, compared to $70.7 million for the same period in 2008. Homeowners insurance incurred losses and LAE decreased due primarily to lower catastrophe losses and LAE. Catastrophe losses and LAE (excluding development) on homeowners insurance were $16.9 million for the three months ended June 30, 2009, compared to $33.7 million for the same period in 2008. Catastrophe loss and LAE reserve development on homeowners insurance had a favorable effect of $3.9 million for the three months ended June 30, 2009, compared to a favorable effect of $2.5 million for the same period in 2008. Catastrophe loss and LAE reserve development for the three months ended June 30, 2009 included favorable development of $2.5 million on Hurricanes Ike and Gustav, both of which occurred in the third quarter of 2008.

Kemper (Continued)

Automobile insurance incurred losses and LAE were $196.8 million for the six months ended June 30, 2009, compared to $197.0 million for the same period in 2008. Automobile insurance incurred losses and LAE decreased slightly as lower non-catastrophe loss and LAE (excluding development) and lower catastrophe losses and LAE (excluding development) were mostly offset by lower favorable loss and LAE reserve development. Non-catastrophe loss and LAE (excluding development) decreased by $5.4 million due primarily to lower average, estimated severity of losses, partially offset by higher frequency of losses. Catastrophe losses and LAE (excluding development) on automobile insurance were $5.1 million for the six months ended June 30, 2009, compared to $8.6 million for the same period in 2008. Loss and LAE reserve development on automobile insurance had a favorable effect of $20.6 million for the six months ended June 30, 2009, compared to a favorable effect of $29.3 million for the same period in 2008.

Automobile insurance incurred losses and LAE were $96.2 million for the three months ended June 30, 2009, compared to $93.9 million for the same period in 2008. Automobile insurance incurred losses and LAE increased due primarily to lower favorable loss and LAE reserve development and higher non-catastrophe loss and LAE (excluding development), partially offset by lower catastrophe losses and LAE (excluding development). Loss and LAE reserve development on automobile insurance had a favorable effect of $11.9 million for the three months ended June 30, 2009, compared to a favorable effect of $15.4 million for the same period in 2008. Non-catastrophe loss and LAE (excluding development) increased by $3.1 million due primarily to higher frequency of losses, partially offset by lower average, estimated severity of losses. Catastrophe losses and LAE on automobile insurance were $2.2 million for the three months ended June 30, 2009, compared to $6.5 million for the same period in 2008.

See MD&A, "Critical Accounting Estimates," in the 2008 Annual Report for additional information pertaining to the Company's process of estimating property and casualty insurance reserves for losses and LAE, development of property and casualty insurance losses and LAE, estimated variability of property and casualty insurance reserves for losses and LAE, and a discussion of some of the variables that may impact development of property and casualty insurance losses and LAE and the estimated variability of property and casualty insurance reserves for losses and LAE.

Insurance Expenses increased by $5.3 million for the six months ended June 30, 2009, compared to the same period in 2008, due primarily to higher commission expenses, higher premium-based state assessments and certain employee termination costs. Commission expenses increased due primarily to the higher amount of Earned Premiums. Insurance Expenses increased by $1.1 million for the three months ended June 30, 2009, compared to the same period in 2008, due primarily to higher premium-based state assessments.

Net Income in the Kemper segment increased by $15.0 million and $12.4 million for the six and three months ended June 30, 2009, respectively, compared to the same periods in 2008, due primarily to the changes in Operating Profit. The Kemper segment's effective income tax rate differs from the federal statutory income tax rate due primarily to tax-exempt investment income and dividends received deductions. Tax-exempt investment income and dividends received deductions were $11.7 million and $5.9 million for the six and three months ended June 30, 2009, compared to $12.9 million and $6.5 million for the same periods in 2008.

Unitrin Specialty

Selected financial information for the Unitrin Specialty segment follows:



                                                  Six Months Ended               Three Months Ended
                                              June 30,        June 30,       June 30,         June 30,
(Dollars in Millions)                           2009            2008           2009             2008
Earned Premiums:
Personal Automobile                           $   237.4      $    193.9      $   120.3       $    101.7
Commercial Automobile                              29.9            43.3           14.4             20.7

Total Earned Premiums                             267.3           237.2          134.7            122.4
Net Investment Income                               7.4             7.0            6.3              4.8
Other Income                                        0.1             0.1            0.1              0.1

Total Revenues                                    274.8           244.3          141.1            127.3

Incurred Losses and LAE                           214.7           187.7          106.1             96.2
Insurance Expenses                                 49.3            46.4           24.2             23.9

Operating Profit                                   10.8            10.2           10.8              7.2
Income Tax Benefit (Expense)                       (1.8 )          (1.6 )         (2.8 )           (1.5 )

Net Income                                    $     9.0      $      8.6      $     8.0       $      5.7


                                    Ratios Based On Earned Premiums

                                                  Six Months Ended               Three Months Ended
                                              June 30,        June 30,       June 30,         June 30,
                                                2009            2008           2009             2008
Incurred Loss and LAE Ratio (excluding
Catastrophes)                                      79.7 %          78.6 %         78.3 %           77.7 %
Incurred Catastrophe Loss and LAE Ratio             0.6 %           0.5 %          0.5 %            0.9 %

Total Incurred Loss and LAE Ratio                  80.3 %          79.1 %         78.8 %           78.6 %
Incurred Expense Ratio                             18.4 %          19.6 %         18.0 %           19.5 %

Combined Ratio                                     98.7 %          98.7 %         96.8 %           98.1 %

                               Insurance Reserves



                                              June 30,     Dec. 31,
                 (Dollars in Millions)          2009         2008
                 Insurance Reserves:
                 Personal Automobile         $    182.5   $    175.7
                 Commercial Automobile             95.4        107.2
                 Other                              8.5         10.2

                 Insurance Reserves          $    286.4   $    293.1


                 Insurance Reserves:
                 Loss Reserves:
                 Case                        $    175.3   $    179.6
                 Incurred but Not Reported         74.5         76.3

                 Total Loss Reserves              249.8        255.9
                 LAE Reserves                      36.6         37.2

                 Insurance Reserves          $    286.4   $    293.1

Unitrin Specialty (continued)



                                                  Six Months Ended                 Three Months Ended
                                             June 30,         June 30,        June 30,           June 30,
(Dollars in Millions)                          2009             2008            2009               2008
Favorable Loss and LAE Reserve
Development, Net (excluding Catastrophes)    $     2.9        $     3.6       $     2.7         $      2.9
Adverse Catastrophe Loss and LAE Reserve
Development, Net                                  (0.1 )             -               -                  -

Total Favorable Loss and LAE Reserve
Development, Net                             $     2.8        $     3.6       $     2.7         $      2.9


Loss and LAE Reserve Development as a
Percentage of Insurance Reserves at
Beginning of Year                                  1.0 %            1.3 %           1.0 %              1.0 %

Earned Premiums in the Unitrin Specialty segment increased by $30.1 million and $12.3 million for the six and three months ended June 30, 2009, respectively, compared to the same periods in 2008, due to higher earned premiums on personal automobile insurance, partially offset by lower earned premiums on commercial automobile insurance. Personal automobile insurance earned premiums increased by $43.5 million and $18.6 million for the six and three months ended June 30, 2009, respectively, compared to the same periods in 2008, due to higher volume, partially offset by lower average earned premium rates. Personal automobile insurance volume increased due primarily to a higher level of renewal policies resulting from significant growth in 2008 in California. Unitrin Specialty expects that its rate of growth in personal automobile insurance volume will begin to slow due to recently implemented rate increases, its decision to focus on states where it is more profitable, its withdrawal from three states which were unprofitable for Unitrin Specialty and its decision to terminate its relationship with two multi-state agencies that had been acquired by a competing insurer. Unitrin Specialty has recently implemented personal automobile insurance rate increases in various states, including its two largest markets, California and Texas, which account for approximately 58.5% of Unitrin Specialty's personal automobile insurance earned premiums. Commercial automobile insurance earned premiums decreased by $13.4 million and $6.3 million for the six and three months ended June 30, 2009, respectively, compared to the same periods in 2008, due primarily to lower volume. In the fourth quarter of 2008, Unitrin Specialty implemented in certain key states several initiatives targeted to stabilize commercial automobile premium volume, including the introduction of a new commercial insurance product for light commercial vehicles, a reduction in down payment requirements for certain commercial automobile insurance risks and the introduction of improved internet-enabled commercial lines rating technology. While these initiatives appear to have stabilized new business production in these states, commercial automobile insurance premium volume decreased for the six and three months ended June 30, 2009, compared to the same . . .