Summary of Results

The Company reported Net Income of $98.4 million ($1.58 per unrestricted common share) and $62.1 million ($1.00 per unrestricted common share) for the nine and three months ended September 30, 2009, respectively, compared to Net Loss of $19.0 million ($0.30 per unrestricted common share) and $45.2 million ($0.72 per unrestricted common share) for the same periods in 2008. The Company reported Income from Continuing Operations of $96.1 million ($1.54 per unrestricted common share) and $61.0 million ($0.98 per unrestricted common share) for the nine and three months ended September 30, 2009, compared to Loss from Continuing Operations of $11.9 million ($0.19 per unrestricted common share) and $49.6 million ($0.79 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 increased by $108.0 million for the nine months ended September 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 Grumman Corporation ("Northrop"). Income from Continuing Operations increased by $110.6 million for the three months ended September 30, 2009, compared to the same period in 2008, due primarily to higher Segment Net Income, lower Net Impairment Losses Recognized in Earnings, partially offset by lower Net Realized Gains on Sales of Investments. Segment Net Income increased by $117.3 million and $86.9 million for the nine and three months ended September 30, 2009, respectively, compared to the same periods in 2008, due to improved results in all segments, most notably the Kemper and Life and Health Insurance segments. Income from Continuing Operations for the nine and three months ended September 30, 2009 included restructuring charges of $19.3 million before tax and $3.1 million before tax, respectively. Loss from Continuing Operations for the nine months ended September 30, 2008 included restructuring charges of $5.0 million before tax. Restructuring charges included in Loss from Continuing Operations for the three months ended September 30, 2008 were insignificant. 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 nine months ended September 30, 2009 also included an income tax provision of $6.3 million to increase the valuation allowance for deferred state income taxes, net of federal benefit, related to the Fireside Bank segment. Loss from Continuing Operations for the nine months and three months ended September 30, 2008 also included an income tax provision of $4.4 million to establish a valuation allowance for deferred state income taxes, net of federal benefit, related to the Fireside Bank segment. Catastrophe losses from continuing operations were $49.9 million before tax and $13.9 million before tax for the nine and three months ended September 30, 2009, respectively, compared to $146.4 million before tax and $83.1 million before tax for same periods in 2008. See Note 17, "Catastrophe Reinsurance" to the Condensed Consolidated Financial Statements, "Catastrophes" in the MD&A and the individual segment MD&A for more information regarding catastrophe losses. The Company reported Income from Discontinued Operations of $2.3 million and $1.1 million for the nine and three months ended September 30, 2009, respectively, compared to Loss from Discontinued Operations of $7.1 million and Income from Discontinued Operations of $4.4 million for the same periods in 2008. There were no catastrophe losses from discontinued operations for either the nine or three months ended September 30, 2009. Catastrophe losses from discontinued operations were $7.8 million before tax for the nine months ended September 30, 2008.

Total Revenues were $2,202.5 million and $2,117.5 million for the nine months ended September 30, 2009 and 2008, respectively, an increase of $85.0 million. Total Revenues increased for the nine months ended September 30, 2009 due primarily to higher Earned Premiums, lower Net Impairment Losses Recognized in Earnings and higher Net Investment Income, partially offset by lower Net Realized Gains on Sales of Investments and lower Automobile Finance Revenues. Total Revenues were $750.6 million and $679.9 million for the three months ended September 30, 2009 and 2008, respectively, an increase of $70.7 million. Total Revenues increased for the three months ended September 30, 2009 due primarily to lower Net Impairment Losses Recognized in Earnings, higher Net Investment Income and higher Earned Premiums, partially offset by lower Automobile Finance Revenues and lower Net Realized Gains on Sales of Investments.

Earned Premiums were $1,855.0 million and $1,771.7 million for the nine months ended September 30, 2009 and 2008, respectively, an increase of $83.3 million. Earned premiums increased for the nine months ended September 30, 2009 in the Unitrin Direct, Unitrin Specialty and Kemper segments, partially offset by lower earned premiums in the Life and Health Insurance segment. Earned Premiums were $616.2 million and $599.5 million for the three months ended September 30, 2009 and 2008, respectively, an increase of $16.7 million. Earned premiums increased for the three months ended September 30, 2009 in the Unitrin Direct and Unitrin Specialty segments, partially offset by lower earned premiums in the Life and Health Insurance and Kemper segments.

Summary of Results (continued)

Automobile Finance Revenues decreased by $43.2 million and $18.0 million for the nine and three months ended September 30, 2009, respectively, compared to the same periods in 2008, due to the Company's decision to exit the automobile finance business.

Net Investment Income increased by $43.7 million and $29.6 million for the nine and three months ended September 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 $17.6 million and $12.4 million for the nine and three months ended September 30, 2009, respectively, compared to $65.5 million and $27.5 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 $3.8 million for both the nine and three months ended September 30, 2009, compared to $47.5 million and $35.4 million for the same periods in 2008. Net Impairment Losses Recognized in Earnings were $49.2 million and $14.5 million for the nine and three months ended September 30, 2009, respectively, compared to $98.9 million and $72.1 million in the same periods in 2008, resulting from other than temporary declines in the fair values of investments. The Company cannot anticipate when or if similar net investment gains or 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.

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 accurately be 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.

Catastrophes (continued)

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 17, "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, 2009 and 2008 by the following:

                                                  Nine Months Ended             Three Months Ended
                                              Sept. 30,      Sept. 30,      Sept. 30,       Sept. 30,
(Dollars in Millions)                            2009           2008           2009           2008
Kemper                                        $     16.8     $     14.6     $      5.6     $       5.0
Unitrin Specialty                                    0.2            0.4            0.1             0.1
Unitrin Direct                                       0.5            0.1            0.2              -
Life and Health Insurance                            3.4            8.6            1.2             5.5

Total Catastrophe Reinsurance Premiums        $     20.9     $     23.7     $      7.1     $      10.6

The Life and Health Insurance segment amounts presented above for both the nine and three months ended September 30, 2008 include reinsurance reinstatement premiums of $4.1 million to reinstate coverage following Hurricanes Dolly, Gustav and Ike.

Total catastrophe losses and LAE (including development), net of reinsurance recoveries, by business segment for the nine and three months ended September 30, 2009 and 2008 are presented below:

                                                      Nine Months Ended             Three Months Ended
                                                  Sept. 30,       Sept. 30,      Sept. 30,      Sept. 30,
(Dollars in Millions)                                2009           2008            2009           2008
Kemper                                            $     29.3     $     101.2     $      6.5     $     49.9
Unitrin Specialty                                        3.6             3.0            2.0            1.7
Unitrin Direct                                           2.9             2.7            0.8            1.1
Career Agency Property Program                          14.1            39.5            4.6           30.4

Total Catastrophes from Continuing Operations           49.9           146.4           13.9           83.1

Catastrophe loss reserves developed favorably by $9.4 million and $1.7 million for the nine and three months ended September 30, 2009, respectively. Catastrophe loss reserves developed adversely by $3.5 million and $6.3 million for the nine and three months ended September 30, 2008, respectively. No major hurricanes that significantly impacted the Company made landfall in the United States during the first nine months of 2009, whereas three major hurricanes that significantly impacted the Company (Dolly, Gustav and Ike) made landfall in the United States in the third quarter of 2008. A summary of 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. Insurance Expenses for the nine and three months ended September 30, 2009 includes a reduction of expense of $2.8 million due to a decrease in the Company's estimate of its share of assessments from TWIA.

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)                         2009              2008              2009              2008
Earned Premiums:
Automobile                                $      441.1       $     440.7       $    147.0        $     149.1
Homeowners                                       219.9             215.0             74.2               72.9
Other Personal                                    39.9              38.5             13.5               13.2

Total Earned Premiums                            700.9             694.2            234.7              235.2
Net Investment Income                             28.7              22.4             13.9                6.7
Other Income                                       0.3               0.4              0.1                0.2

Total Revenues                                   729.9             717.0            248.7              242.1

Incurred Losses and LAE                          470.5             529.8            158.8              195.4
Insurance Expenses                               198.3             199.8             63.5               70.3

Operating Profit (Loss)                           61.1             (12.6 )           26.4              (23.6 )
Income Tax Benefit (Expense)                     (15.4 )            10.8             (7.2 )             10.3

Net Income (Loss)                         $       45.7       $      (1.8 )     $     19.2        $     (13.3 )

                        Ratios Based On Earned Premiums



                                                Nine Months Ended                 Three Months Ended
                                            Sept. 30,        Sept. 30,        Sept. 30,        Sept. 30,
                                              2009             2008             2009             2008
Incurred Loss and LAE Ratio (excluding
Catastrophes)                                    62.9 %           61.7 %           64.9 %           61.9 %
Incurred Catastrophe Loss and LAE Ratio           4.2 %           14.6 %            2.8 %           21.2 %

Total Incurred Loss and LAE Ratio                67.1 %           76.3 %           67.7 %           83.1 %
Incurred Expense Ratio                           28.3 %           28.8 %           27.1 %           29.9 %

Combined Ratio                                   95.4 %          105.1 %           94.8 %          113.0 %

                               Insurance Reserves



                                              Sept. 30,     Dec. 31,
                 (Dollars in Millions)          2009          2008
                 Insurance Reserves:
                 Personal Automobile         $     309.7   $    336.3
                 Homeowners                         94.4        103.0
                 Other Personal                     37.2         36.8

                 Insurance Reserves          $     441.3   $    476.1


                 Insurance Reserves:
                 Loss Reserves:
                 Case                        $     271.0   $    273.3
                 Incurred but Not Reported          93.3        125.9

                 Total Loss Reserves               364.3        399.2
                 LAE Reserves                       77.0         76.9

                 Insurance Reserves          $     441.3   $    476.1

Kemper (continued)



                                                Nine Months Ended                     Three Months Ended
                                          Sept. 30,           Sept. 30,         Sept. 30,           Sept. 30,
(Dollars in Millions)                        2009               2008               2009               2008
Favorable Loss and LAE Reserve
Development, Net (excluding
Catastrophes)                             $     37.3         $      43.7        $     11.0         $      10.0
Favorable Catastrophe Loss and LAE
Reserve Development, Net                        17.5                 5.3               5.9                 0.4

Total Favorable Loss and LAE Reserve
Development, Net                          $     54.8         $      49.0        $     16.9         $      10.4


Loss and LAE Reserve Development as a
Percentage of Insurance Reserves at
Beginning of Year                               11.5 %               9.8 %             3.5 %               2.1 %

Earned Premiums in the Kemper segment increased by $6.7 million for the nine months ended September 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 decreased by $0.5 million for the three months ended September 30, 2009, compared to the same period in 2008, due primarily to an increase in the cost of reinsurance. Earned premiums on homeowners insurance increased by $4.9 million for the nine months ended September 30, 2009, compared to the same period in 2008, 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 $1.3 million for the three months ended September 30, 2009, compared to the same period in 2008, due primarily to higher average premium rates, partially offset by an increase in the cost of reinsurance. Earned premiums on automobile insurance increased by $0.4 million for the nine months ended September 30, 2009, compared to the same period in 2008, due primarily to higher volume, partially offset by lower average premium rates. Earned premiums on automobile insurance decreased by $2.1 million for the three months ended September 30, 2009, compared to the same period in 2008, due primarily to lower average premium rates and lower volume. Earned premiums on other personal insurance increased by $1.4 million and $0.3 million for the nine and three months ended September 30, 2009, respectively, compared to the same periods in 2008, due primarily to higher volume.

Net Investment Income increased by $6.3 million for the nine months ended September 30, 2009, compared to the same period in 2008, due primarily to higher 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, partially offset by a lower level of investments. Net Investment Income increased by $7.2 million for the three months ended September 30, 2009, compared to the same period in 2008, due primarily to higher net investment income from certain investments in limited liability investment companies and limited partnerships. The Kemper segment reported net investment income of $2.9 million and $5.2 million from these investments for the nine and three months ended September 30, 2009, respectively, compared to net investment losses of $5.7 million and $2.2 million, respectively, for the same periods in 2008.

Operating Profit in the Kemper segment increased by $73.7 million for the nine months ended September 30, 2009, compared to the same period in 2008, due primarily to lower incurred catastrophe losses and LAE (excluding loss and LAE reserve development) and, to a lesser extent, higher net investment income and higher favorable loss and LAE reserve development (which recognizes changes in estimates of prior year loss and LAE reserves in the current period). Operating Profit in the Kemper segment increased by $50.0 million for the three months ended September 30, 2009, compared to the same period in 2008, due primarily to lower incurred catastrophe losses and LAE (excluding loss and LAE reserve development) and, to a lesser extent, higher net investment income, higher favorable loss and LAE reserve development and lower insurance expenses.

Homeowners insurance incurred losses and LAE were $151.2 million for the nine months ended September 30, 2009, compared to $213.1 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 loss and LAE reserve development) on homeowners insurance were $37.8 million for the nine months ended September 30, 2009, compared to $93.0 million for the same period in 2008. Catastrophe loss and LAE reserve development on homeowners insurance had a favorable effect of $16.7 million for the nine months ended September 30, 2009, compared to a favorable effect of $4.7 million for the same period in 2008. Catastrophe loss and LAE reserve development for the nine months ended September 30, 2009 included favorable development of $8.1 million on Hurricanes Ike and Gustav, both of which occurred in 2008, and $2.8 million of higher subrogation recoveries from certain California wildfires, which occurred in 2007 (the "2007 Wildfires").

Kemper (continued)

Homeowners insurance incurred losses and LAE were $51.2 million for the three months ended September 30, 2009, compared to $91.4 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 loss and LAE reserve development) on homeowners insurance were $10.0 million for the three months ended September 30, 2009, compared to $46.8 million for the same period in 2008. Catastrophe loss and LAE reserve development on homeowners insurance had a favorable effect of $5.7 million for the three months ended September 30, 2009, compared to a favorable effect of $0.3 million for the same period in 2008. Catastrophe loss and LAE reserve development for the three months ended September 30, 2009 included $2.8 million of higher subrogation recoveries from the 2007 Wildfires and favorable development of $0.7 million on Hurricanes Ike and Gustav.

Automobile insurance incurred losses and LAE were $297.9 million for the nine months ended September 30, 2009, compared to $291.5 million for the same period in 2008. Automobile insurance incurred losses and LAE increased due primarily to lower favorable loss and LAE reserve development, partially offset by lower catastrophe losses and LAE (excluding loss and LAE reserve development). Loss and LAE reserve development on automobile insurance had a favorable effect of $28.3 million for the nine months ended September 30, 2009, compared to a favorable effect of $37.9 million for the same period in 2008. Catastrophe losses and LAE (excluding loss and LAE reserve development) on automobile insurance were $6.9 million for the nine months ended September 30, 2009, compared to $9.3 million for the same period in 2008.

Automobile insurance incurred losses and LAE were $101.1 million for the three months ended September 30, 2009, compared to $94.5 million for the same period in 2008. Automobile insurance incurred losses and LAE increased due primarily to higher non-catastrophe loss and LAE (excluding loss and LAE reserve development) and, to a lesser extent, higher catastrophe losses and LAE (excluding loss and LAE reserve development) and lower favorable loss and LAE reserve development. Non-catastrophe loss and LAE (excluding loss and LAE reserve development) increased by $4.6 million due primarily to higher frequency of losses and, to a lesser extent, higher average, estimated severity of losses. Catastrophe losses and LAE (excluding loss and LAE reserve development) on automobile insurance were $1.8 million for the three months ended September 30, 2009, compared to $0.7 million for the same period in 2008. Loss and LAE reserve development on automobile insurance had a favorable effect of $7.7 million for the three months ended September 30, 2009, compared to a favorable effect of $8.6 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 . . .