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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

Edgar Online, Inc.

CONDITION AND RESULTS OF OPERATIONS



The following discussion of the financial condition and results of operations of
Independence Holding Company ("IHC") and its subsidiaries (collectively, the
"Company") should be read in conjunction with, and is qualified in its entirety
by reference to, the Consolidated Financial Statements of the Company and the
related Notes thereto appearing in our annual report on Form 10-K for the fiscal
year ended December 31, 2011, as filed with the Securities and Exchange
Commission, and our unaudited Condensed Consolidated Financial Statements and
related Notes thereto appearing elsewhere in this quarterly report.


                                    Overview


Independence Holding Company, a Delaware corporation ("IHC"), is a holding
company principally engaged in the life and health insurance business through:
(i) its insurance companies, Standard Security Life Insurance Company of New
York ("Standard Security Life"),  Madison National Life Insurance Company, Inc.
("Madison National Life"), and Independence American Insurance Company
("Independence American"); and (ii) its marketing and administrative companies,
including IHC Risk Solutions, LLC ("Risk Solutions"), IHC Health Solutions, Inc.
("Health Solutions"), and Actuarial Management Corporation ("AMC").  These
companies are sometimes collectively referred to as the "Insurance Group", and
IHC and its subsidiaries (including the Insurance Group) are sometimes
collectively referred to as the "Company." IHC also owns a significant equity
interest in a managing general underwriter ("MGU") that writes medical stop-loss
for Standard Security Life. At September 30, 2012, the Company also owned a
78.6% interest in American Independence Corp. ("AMIC").


While management considers a wide range of factors in its strategic planning and
decision-making, underwriting profit is consistently emphasized as the primary
goal in all decisions as to whether or not to increase our retention in a core
line, expand into new products, acquire an entity or a block of business, or
otherwise change our business model.  Management's assessment of trends in
healthcare and morbidity, with respect to medical stop-loss, fully insured
medical, disability and New York State short-term statutory disability benefit
product ("DBL"); mortality rates with respect to life insurance; and changes in
market conditions in general play a significant role in determining the rates
charged, deductibles and attachment points quoted, and the percentage of
business retained. IHC also seeks transactions that permit it to leverage its
vertically integrated organizational structure by generating fee income from
production and administrative operating companies as well as risk income for its
carriers and profit commissions.  Management has always focused on managing the
costs of its operations and providing its insureds with the best cost
containment tools available.




                                       28

The following is a summary of key performance information and events:

The results of operations for the three months and nine months ended September 30, 2012 and 2011 are summarized as follows (in thousands):

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                                             Three Months Ended        Nine Months Ended
                                                September 30,            September 30,
                                              2012         2011        2012         2011

Revenues                                  $  111,502   $ 103,659   $  315,101   $  313,503
Expenses                                     104,921      97,972      296,428      301,061

Income from operations  before income          6,581       5,687       18,673       12,442
taxes
Income taxes (benefits)                        2,191       1,676        6,123        1,167

Net income                                     4,390       4,011       12,550       11,275

Less: Income from noncontrolling                (472)       (457)      (1,179)      (1,497)
interests in subsidiaries

Net income attributable to IHC $ 3,918$ 3,554$ 11,371$ 9,778




o
Net income of $.22 per share, diluted, for the three months ended September 30,
2012 compared to $.20 per share, diluted, for the same period in 2011. Net
income of $.63 per share, diluted, for the nine months ended September 30, 2012,
compared to $.56 per share, diluted, for the nine months ended September 30,
2011.


o

Consolidated investment yields (on an annualized basis) of 4.6% and 4.2% for the
three months and nine months ended September 30, 2012 compared to 4.0% and 4.2%
for the comparable periods in 2011;


o

Declared a special 10% stock dividend to IHC shareholders of record on February
17, 2012 with a distribution date of March 5, 2012. As a result, IHC issued 1.6
million shares of its common stock, net of treasury shares, with a fair value of
$15.8 million and paid cash in-lieu of fractional shares;


o

Announced an increase IHC's annual dividend from $.05 to $.07 per share; and



o

Book value of $15.59 per common share, an increase of $1.13 per common share from $14.46 at December 31, 2011.

The following is a summary of key performance information by segment:



o

The Medical Stop-Loss segment reported income before taxes of $2.9 million for
the third quarter of 2012 compared to $2.7 million in the same quarter in 2011,
and reported income before taxes of $12.8 million for the first nine months of
2012 compared to $4.6 million for the first nine months of 2011. The increase is
primarily due to increased volume and improved loss ratios in 2012;


o

Premiums earned increased $6.1 million and $17.4 million for the three months
and nine months ended September 30, 2012, respectively, when compared to the
same periods in 2011. The increase in premiums earned is primarily due to
increased volume and retention on business underwritten by Risk Solutions.


o

Underwriting experience for the Medical Stop-Loss segment, as indicated by its
GAAP Combined Ratios, are as follows for the periods indicated (in thousands):




                                       29




                                          Three Months Ended      Nine Months Ended
                                            September 30,           September 30,
                                          2012         2011        2012        2011

Premiums Earned                       $    36,465  $    30,342 $   103,100  $ 85,658
Insurance Benefits, Claims & Reserves      24,590       19,562      65,585 
  58,689
Expenses                                   10,718        9,228      29,193    25,830

Loss Ratio(A)                               67.4%        64.5%       63.6%     68.5%
Expense Ratio (B)                           29.4%        30.4%       28.3%     30.2%
Combined Ratio (C)                          96.8%        94.9%       91.9%     98.7%




o

Loss ratios for the nine months ended September 30, 2012 decreased due to improved underwriting results in business produced by both Risk Solutions and by independent MGUs.

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o

The expense ratio decreased for the nine months ended September 30, 2012 primarily due to a decrease in profit commission expense as a result of poor performance on certain business written through one program at AMIC.

(A)

Loss ratio represents insurance benefits, claims and reserves divided by premiums earned.

(B)

Expense ratio represents commissions, administrative fees, premium taxes and other underwriting expenses divided by premiums earned.

(C)

The combined ratio is equal to the sum of the loss ratio, profit commission expense ratio and the expense ratio.

·

The Fully Insured Health segment reported $1.5 million of income before taxes
for the three months ended September 30, 2012 as compared to $2.4 million for
the comparable period in 2011, and reported $4.6 million of income before taxes
for the nine months ended September 30, 2012 compared to $7.3 million for the
same period in 2011.


o
Premiums earned increased $1.5 million for the three months ended September 30,
2012 and decreased $6.7 million for the nine months ended September 30, 2012
over the comparable 2011 periods. The increased premiums during the quarter
resulted primarily from the new pet insurance line of business at AMIC. The
decrease in premiums earned for the nine months were primarily due to decreased
volume and retentions in certain other lines of the business.


o

Underwriting experience, as indicated by its GAAP Combined Ratios, for the Fully Insured segment are as follows for the periods indicated (in thousands):




                                       30




                                          Three Months Ended      Nine Months Ended
                                            September 30,           September 30,
                                          2012         2011        2012       2011

Premiums Earned                       $    37,137  $    35,619 $  102,204  $ 108,866
Insurance Benefits, Claims & Reserves      25,154       21,616     67,536  
  68,048
Expenses                                   11,265       11,563     30,369     33,782

Loss Ratio                                  67.7%        60.7%      66.1%      62.5%
Expense Ratio                               30.3%        32.5%      29.7%      31.0%
Combined Ratio                              98.0%        93.2%      95.8%      93.5%




o

The increase in the loss ratio for the three and nine-month period was primarily
attributable to an increase in the claims experience on major medical business
for groups and individuals and dental.


o

The underwriting expense ratio decreased for the nine months ended September 30, 2012, primarily as a result of a decrease in general expenses.

·


Income before taxes from the Group disability, life, annuities and DBL segment
increased $.3 million for the three months ended September 30, 2012 and
decreased $.6 million for the nine months ended September 30, 2012 compared to
the three months and nine months ended September 30, 2011. The increase in
quarterly income was principally due to lower claims in the group life and
LTD
business;


·

Income before taxes from the Individual life, annuities and other segment
increased $.5 million and $.4 million for the three months and nine months ended
September 30, 2012 compared to the same periods in 2011 primarily due to new
business written;


·

Income before taxes from the Corporate segment increased $.6 million for the
three months ended September 30, 2012 and decreased $.2 million for the nine
months ended September 30, 2012. The increase in the comparable quarter is
primarily due to losses in a partnership investment in 2011;


·

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Net realized investment gains were $1.0 million and $4.0 million for the three
months and nine months ended September 30, 2012 compared to net realized
investment gains of $.9 million and $2.6 million for the three months and nine
months ended September 30, 2011. Other-than-temporary impairment losses
recognized in earnings for the nine months ended September 30, 2012 were $.7
million, and were $.1 million and $.6 million for the three months and nine
months ended September 30, 2011, respectively; and


·

Premiums by principal product for the three months and nine months ended September 30, 2012 and 2011 are as follows (in thousands):



                                       31



                                               Three Months Ended     Nine Months Ended
                                                 September 30,          September 30,

Gross Direct and Assumed
     Earned Premiums:                           2012        2011       2012       2011

Medical Stop-Loss                           $    42,992  $  38,472 $  123,425  $ 109,301
Fully Insured Health                             58,518     53,276    163,967    157,052
Group disability, life, annuities and DBL        22,371     23,098     68,013     71,169
Individual, life, annuities and other             7,488      7,921     23,257     25,140

                                            $   131,369  $ 122,767 $  378,662  $ 362,662




                                       Three Months Ended        Nine Months Ended
                                         September 30,             September 30,

    Net Direct and Assumed
         Earned Premiums:              2012         2011         2012         2011

    Medical Stop-Loss              $    36,465  $    30,342  $   103,100  $    85,658
    Fully Insured Health                37,137       35,619      102,204      108,866
    Group disability, life,             12,423       12,416       36,776       38,078
    annuities and DBL
    Individual, life, annuities          6,211        6,853       19,399       22,502
    and other

                                   $    92,236  $    85,230  $   261,479  $   255,104





                          CRITICAL ACCOUNTING POLICIES


The accounting and reporting policies of the Company conform to U.S. generally
accepted accounting principles ("GAAP"). The preparation of the Condensed
Consolidated Financial Statements in conformity with GAAP requires the Company's
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates. A summary of the Company's significant accounting policies
and practices is provided in Note 1 of the Notes to the Consolidated Financial
Statements included in Item 8 of the Annual Report on Form 10-K for the fiscal
year ended December 31, 2011. Management has identified the accounting policies
related to Insurance Premium Revenue Recognition and Policy Charges, Insurance
Reserves, Deferred Acquisition Costs, Investments, Goodwill and Other Intangible
Assets, and Deferred Income Taxes as those that, due to the judgments, estimates
and assumptions inherent in those policies, are critical to an understanding of
the Company's Consolidated Financial Statements and this Management's Discussion
and Analysis. A full discussion of these policies is included under the heading,
"Critical Accounting Policies" in Item 7 of the Annual Report on Form 10-K for
the fiscal year ended December 31, 2011.  During the nine months ended September
30, 2012, there were no additions to or changes in the critical accounting
policies disclosed in the 2011 Form 10-K except for the recently adopted
accounting standards discussed in Note 1(C) of the Notes to Condensed
Consolidated Financial Statements.



                                       32

Results of Operations for the Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011



Information by business segment for the three months ended September 30, 2012
and 2011 is as follows:


                                                    Benefits,   Amortization      Selling,
                                Net       Fee and     Claims    of  Deferred      General
                 Premiums    Investment    Other       and       Acquisition        And
September 30,     Earned       Income     Income     Reserves       Costs      Administrative     Total
2012
(In thousands)

Medical          $ 36,465          1,733        88       24,590             -           10,843 $    2,853

Stop-Loss

Fully Insured      37,137            477     7,743       25,154             6           18,736      1,461
Health
Group
disability,
   life,
   annuities
   and DBL         12,423            713        24        5,772             -            3,798      3,590
Individual
life,
   annuities        6,211          6,401     1,054        7,518         1,581            3,715        852
   and other
Corporate               -             22         -                          -            2,699     (2,677)
Sub total        $ 92,236       $  9,346  $  8,909   $   63,034  $      1,587    $      39,791      6,079

Net realized investment gains                                                                       1,011
Other-than-temporary impairment losses                                                                  -
Interest expense on debt                                                                             (509)
Income from operations before income taxes                                                          6,581
Income taxes                                                                                        2,191
Net income                                                                                     $    4,390




                                                    Benefits,   Amortization      Selling,
                                Net       Fee and     Claims    of  Deferred      General
                 Premiums    Investment    Other       and       Acquisition        And
September 30,     Earned       Income     Income     Reserves       Costs      Administrative     Total
2011
(In thousands)

Medical          $ 30,342          1,487       839       19,562             -           10,415 $    2,691
Stop-Loss
Fully Insured      35,619            367     6,402       21,616             8           18,409      2,355
Health
Group
disability,
   life,
   annuities
   and DBL         12,416          2,528        42        7,520           133            4,048      3,285
Individual
life,
   annuities        6,853          5,977     1,094        7,956         1,703            3,957        308
   and other
Corporate               -        (1,124)         -            -             -            2,129     (3,253)
Sub total        $ 85,230       $  9,235  $  8,377   $   56,654  $      1,844    $      38,958      5,386


Net realized investment losses                                                                        924
Other-than-temporary impairment losses                                                               (107)
Interest expense on debt                                                                             (516)
Income from operations before income taxes                                                          5,687
Income tax benefits                                                        
                        1,676
Net income                                                                                     $    4,011













                                       33


 Premiums Earned


In the third quarter of 2012, premiums earned increased $7.0 million over the
comparable period of 2011. The increase is primarily due to: (i) a $6.1 million
increase in the Medical Stop-Loss segment due to increased volume and retention
of business in 2012; (ii) a $1.5 million increase in the Fully Insured Health
segment which had increased premiums of $3.0 million, from the new 2012 pet and
international lines of business; $.5 million in increased premiums in ancillary
medical and other minor lines; offset by $2.0 million in decreased premiums as a
result of lower retentions and volume in the short term medical business, major
medical business for groups and individuals, limited medical and dental lines of
business; and (iii) a decrease of $.6 million of earned premiums in the
Individual life, annuities and other segment primarily as a result of the
transfer of certain annuity contracts in the fourth quarter of 2011. The Group
disability, life, annuities and DBL segment stayed constant.


Net Investment Income

Total net investment income increased $.1 million.  The overall annualized
investment yields were 4.6% and 4.0% (approximately 4.8% and 4.1%, on a tax
advantaged basis) in the third quarter of 2012 and 2011, respectively. The
slight increase was primarily a result of higher returns on a partnership
investment. The annualized investment yields on bonds, equities and short-term
investments were 4.3% in both the third quarter of 2012 and 2011. IHC has
approximately $185.1 million in highly rated shorter duration securities earning
on average 1.8%. A portfolio that is shorter in duration enables us, if we deem
prudent, the flexibility to reinvest in much higher yielding longer-term
securities, which would significantly increase investment income.


Net Realized Investment Gains and Other-Than-Temporary Impairment Losses, Net



The Company had net realized investment gains of $1.0 million and $.9 million in
the third quarter of 2012 and 2011, respectively. These amounts include gains
and losses from sales of fixed maturities and equity securities
available-for-sale and other investments. Decisions to sell securities are based
on management's ongoing evaluation of investment opportunities and economic and
market conditions, thus creating fluctuations in gains and losses from period to
period.


No other-than-temporary impairment losses were recorded for the three months
ended September 2012. For the three months ended September 30, 2011, the Company
recorded $.1 million of other-than-temporary impairment losses, pre-tax.
Other-than-temporary impairment losses in 2011 consist of credit losses
resulting from expected cash flows of debt securities that are less than their
amortized cost basis.


Fee Income and Other Income


Fee income increased $.6 million for the three months ended September 30, 2012
compared to the three months ended September 30, 2011 primarily as a result of
higher agency referral fees and medical management fees.


Total other income decreased $.1 million in the three months ended September 30,
2012 to $1.2 million from $1.3 million in the three months ended September 30,
2011.


Insurance Benefits, Claims and Reserves



In the third quarter of 2012, insurance, benefits, claims and reserves increased
$6.3 million over the comparable period in 2011. The increase is primarily
attributable to: (i) an increase of $5.0 million in the Medical Stop-Loss
segment as a result of an increase in premium volume by Risk Solutions partially
offset by improved loss ratios; (ii) an increase of $3.5 million in the Fully
Insured Health segment, principally due to increased claims on the major medical
business for groups and individuals and short term medical lines of business,
increased premium volume associated with the new pet line of business; partially
offset due to



                                       34


decreased dental premiums; (ii) a $1.8 million decrease in the Group disability,
life, annuities and DBL segment primarily as a result of the transfer of certain
annuity contracts in the fourth quarter of 2011 and reduced production; and
(iii) a $.4 million decrease in the Individual life, annuity and other segment
primarily resulting from the transfer of certain group annuity contracts in the
fourth quarter of 2011 and decreased premium volume from other lines in run-off.


Amortization of Deferred Acquisition Costs

Amortization of deferred acquisition costs decreased $.2 million primarily as a result of the write-off, in the fourth quarter of 2011, of certain deferred acquisition costs in connection with a coinsurance agreement.

Selling, General and Administrative Expenses



Selling, general and administrative expenses increased $.8 million. The increase
is primarily due to: (i) a $.4 million increase in expenses due to volume as a
result of increased production, in the Medical Stop-Loss segment; (ii) a $.3
million increase in the Fully Insured Health segment largely due to employee
costs related to an increased sales and marketing force; and (iii) an increase
of $.6 million in corporate employee benefit related expenses; partially offset
by (iv) a decrease of $.3 million in Group, life, annuities and other lines of
business primarily as a result of the transfer of certain annuity contracts in
the fourth quarter of 2011; and (v) a decrease of $.2 million principally due to
Individual annuities, and other run off lines.


Income Taxes



The effective tax rate for the three months ended September 30, 2012 was 33.3%
compared to 29.8% in 2011.  The lower effective tax rate in 2011 was due to a
higher benefit from tax advantaged securities as a percentage of income due
to
lower income in 2011.



                                       35

Results of Operations for the Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011



Information by business segment for the nine months ended September 30, 2012 and
2011 is as follows:


                                                    Benefits,  Amortization      Selling,
                                 Net      Fee and    Claims    of  Deferred      General
                  Premiums   Investment    Other       and      Acquisition        And
September 30,      Earned      Income     Income    Reserves       Costs      Administrative    Total
2012
(In thousands)

Medical          $ 103,100         4,119       625      65,585             -           29,472 $ 12.787
Stop-Loss
Fully Insured      102,204         1,123    20,706      67,536            18           51,860    4.619
Health
Group
disability,
   life,
   annuities
   and DBL          36,776         2,035        90      22,876             -           11,733    4.292
Individual
life,
   annuities        19,399        17,917     3,201      24,437         4,794           10,236    1.050
   and other
Corporate                -           512         -           -             -            6,293   (5,781)
Sub total        $ 261,479      $ 25,706  $ 24,622   $ 180,434  $      4,812  $       109,594   16.967

Net realized investment gains                                                                    3,998
Other-than-temporary impairment losses                                                            (704)
Interest expense on debt                                                                        (1,588)
Income from operations before income taxes                                 
                    18,673
Income taxes                                                                                     6,123
Net income                                                                                    $ 12,550




                                                    Benefits,  Amortization      Selling,
                                 Net      Fee and    Claims    of  Deferred      General
                  Premiums   Investment    Other       and      Acquisition        And
September 30,      Earned      Income     Income    Reserves       Costs      Administrative    Total
2011
(In thousands)

Medical          $  85,658         3,679     4,111      58,689             -           30,161  $  4,598

Stop-Loss

Fully Insured      108,866         1,117    19,723      68,048            23           54,338     7,297
Health
Group
disability,
   life,
   annuities

and DBL 38,078 7,231 120 28,654 397

           11,505     4,873
Individual
life,
   annuities        22,502        17,951     3,431      27,669         4,873           10,690       652
   and other
Corporate                -         (994)         -           -             -            4,581    (5,575)
Sub total        $ 255,104      $ 28,984  $ 27,385   $ 183,060  $      5,293  $       111,275    11,845

Net realized investment losses                                                                    2,605
Other-than-temporary impairment losses                                                             (575)
Interest expense on debt                                                                         (1,433)
Income from operations before income taxes                                                       12,442
Income tax benefits                                                        
                      1,167
Net income                                                                                     $ 11,275













                                       36


 Premiums Earned


In the first nine months of 2012, premiums earned increased $6.4 million over
the comparable period of 2011. The increase is primarily due to: (i) an $17.4
million increase in the Medical Stop-Loss segment due to increased volume and
retention of business in 2012; partially offset by (ii) the Fully Insured Health
segment which had a $6.6 million decrease in premiums primarily as a result of
decreased retentions and volume in the short term medical business, major
medical business for groups and individuals, limited medical and dental lines of
business, partially offset by the new 2012 pet and international lines of
business; (iii) a decrease of $3.1 million of earned premiums in the Individual
life, annuities and other segment primarily as a result of the transfer of
certain annuity contracts in the fourth quarter of 2011and decreased premium
volume from other lines in run-off; and (iv) a $1.3 million decrease in the
Group disability, life, annuities and DBL segment primarily due to decreased
premiums from the group term life and LTD lines due in part to reduced
production sources, partially offset by premiums generated by a new line of
international LTD and life business.


Net Investment Income

Total net investment income decreased $3.3 million.  The overall annualized
investment yields were 4.2% (approximately 4.3%, on a tax advantaged basis) in
the first nine months of both 2012 and 2011. The overall decrease was primarily
a result of a decrease in investment income on bonds, equities and short-term
investments due the transfer of $143.5 million of assets related to the
coinsurance treaty in the fourth quarter of 2011.  The annualized investment
yields on bonds, equities and short-term investments were 3.9% and 4.2% in the
first nine months of 2012 and 2011, respectively. IHC has approximately $185.1
million in highly rated shorter duration securities earning on average 1.8%. A
portfolio that is shorter in duration enables us, if we deem prudent, the
flexibility to reinvest in much higher yielding longer-term securities, which
would significantly increase investment income.


Net Realized Investment Gains and Other-Than-Temporary Impairment Losses, Net



The Company had net realized investment gains of $4.0 million in 2012 compared
to $2.6 million in 2011. These amounts include gains and losses from sales of
fixed maturities and equity securities available-for-sale and other investments.
Decisions to sell securities are based on management's ongoing evaluation of
investment opportunities and economic and market conditions, thus creating
fluctuations in gains and losses from period to period.


For the nine months ended September 30, 2012 and 2011, the Company recorded $.7
million and $.6 million, respectively, of other-than-temporary impairment
losses, pre-tax. Other-than-temporary impairment losses in both 2012 and 2011
consist of credit losses resulting from expected cash flows of debt securities
that are less than their amortized cost.


Fee Income and Other Income



Fee income decreased $1.7 million for the nine months ended September 30, 2012
compared to the nine months ended September 30, 2011 primarily as a result of
increased retentions and therefore an increase in the elimination of
intercompany fee income.


Total other income decreased $1.0 million in the nine months ended September 30,
2012 to $3.6 million from $4.6 million in the nine months ended September 30,
2011.


Insurance Benefits, Claims and Reserves

In the first nine months of 2012, insurance, benefits, claims and reserves
decreased $2.6 million over the comparable period in 2011. The decrease is
primarily attributable to: (i) a $5.8 million decrease in the Group disability,
life, annuities and DBL segment as a result of lower production coupled with
lower



                                       37


loss ratios in the LTD line and the transfer of certain annuity contracts in the
fourth quarter of 2011; (ii) a $3.2 million decrease in the Individual life,
annuity and other segment primarily resulting from the transfer of certain group
annuity contracts in the fourth quarter of 2011 and decreased premium volume
from other lines in run-off; and (iii) a decrease of $.5 million in the Fully
Insured Health segment, principally due to the decrease in premiums on the short
term medical, major medical business for groups and individuals, limited medical
and dental lines of business, slightly offset by increases due to premium volume
on the new pet line of business; and (iv) partially offset by an increase of
$6.9 million in the Medical Stop-Loss segment as a result of improved loss
ratios offset by an increase in premium volume by Risk Solutions.


Amortization of Deferred Acquisition Costs

Amortization of deferred acquisition costs decreased $.5 million primarily as a result of the write-off, in the fourth quarter of 2011, of certain deferred acquisition costs in connection with a coinsurance agreement.

Selling, General and Administrative Expenses



Selling, general and administrative expenses decreased $1.7 million. The
decrease is primarily due to: (i) a $.7 million decrease in commissions and
other general expenses in the Medical Stop-Loss segment due to increased
retentions partially offset by increases in expenses due to volume as a result
of increased production; and (ii) a $2.5 million decrease in the Fully Insured
Health segment largely due to decreased volume of business in the short term
medical,  major medical business for groups and individuals, limited medical and
dental lines of business in 2012; partially offset by (iii) an increase of $1.7
million in corporate overhead expenses due to employee, option, SAR and benefit
related expenses.


Income Taxes


The effective tax rate for the nine months ended September 30, 2012 was 32.6%.
In 2011, IHC eliminated $2.3 million of previously recorded deferred income
taxes due to management's intention to adopt tax planning strategies to recover
its investment in AMIC in a tax-free manner.  Excluding this transaction, the
effective tax rate for the nine months ended September 30, 2011 was 28.2%. The
lower effective tax rate in 2011 was due to a higher benefit from tax advantaged
securities as a percentage of income in 2011.


 LIQUIDITY


Insurance Group
The Insurance Group normally provides cash flow from: (i) operations; (ii) the
receipt of scheduled principal payments on its portfolio of fixed maturities;
and (iii) earnings on investments. Such cash flow is partially used to fund
liabilities for insurance policy benefits. These liabilities represent long-term
and short-term obligations.


Corporate


Corporate derives its funds principally from: (i) dividends from the Insurance
Group; (ii) management fees from its subsidiaries; and (iii) investment income
from Corporate liquidity. Regulatory constraints historically have not affected
the Company's consolidated liquidity, although state insurance laws have
provisions relating to the ability of the parent company to use cash generated
by the Insurance Group. The insurance group declared and paid $6.5 million and
$2.0 million of cash dividends to Corporate in the first nine months of 2012 and
2011, respectively.




                                       38


Cash Flows

The Company had $14.6 million and $18.2 million of cash and cash equivalents as of September 30, 2012 and December 31, 2011, respectively.

In February 2012, Standard Security Life transferred $143.5 million cash to an
unaffiliated reinsurer in connection with a coinsurance agreement, representing
a significant portion of the $130.4 million decrease in cash from operating
activities. Cash provided by investing activities of $128.6 million consists
primarily of proceeds from the net sales of investments in preparation for such
transfer of funds.


The Company has $456.7 million of insurance reserves that it expects to
ultimately pay out of current assets and cash flows from future business. If
necessary, the Company could utilize the cash received from maturities and
repayments of its fixed maturity investments if the timing of claim payments
associated with the Company's insurance resources does not coincide with future
cash flows. For the nine months ended September 30, 2012, cash received from the
maturities and other repayments of fixed maturities was $53.0 million.


The Company believes it has sufficient cash to meet its currently anticipated business requirements over the next twelve months including working capital requirements and capital investments.


BALANCE SHEET



The Company had net receivables from reinsurers of $124.8 million at September
30, 2012 compared to $119.7 million at December 31, 2011. All of such
reinsurance receivables are highly rated companies or are adequately secured. No
allowance for doubtful accounts was necessary at September 30, 2012.


The Company's health reserves by segment are as follows (in thousands):

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