UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ		QUARTER REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-14953

 

HEALTHMARKETS, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		75-2044750 (I.R.S. Employer Identification Number)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     On October 30, 2009 the registrant had 26,772,436 outstanding shares of Class A-1 Common Stock, $.01 Par Value, and 2,570,460 outstanding shares of Class A-2 Common Stock, $.01 Par Value.

 

 

HEALTHMARKETS, INC.
and Subsidiaries

Third Quarter 2009 Form 10-Q

TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			40
Item 4. Controls and Procedures			40
PART II OTHER INFORMATION
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3. Defaults Upon Senior Securities			42
Item 4. Submission of Matters to a Vote of Security Holders			42
Item 5. Other Information			43
Item 6. Exhibits			44
SIGNATURES
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-10.8
EX-10.9
EX-10.10
EX-10.11
EX-10.12
EX-10.13
EX-31.1
EX-31.2
EX-32

HEALTHMARKETS, INC.
and Subsidiaries

				Page
PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Consolidated Condensed Balance Sheets as of September 30, 2009 and December 31, 2008			2
		Consolidated Condensed Statements of Income (Loss) for the Three and Nine Months Ended September 30, 2009 and 2008			3
		Consolidated Condensed Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2009 and 2008			4
		Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008			5
		Notes to Consolidated Condensed Financial Statements			6

HEALTHMARKETS, INC.
and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share data)

		September 30,				December 31,
		2009				2008
		(Unaudited)
ASSETS
Investments:
Securities available for sale —
Fixed maturities, at fair value (cost: September 30, 2009 — $792,378; December 31, 2008 — $855,137)		$	809,360			$	805,026
Equity securities, at fair value (cost: September 30, 2009 — $214; December 31, 2008 — $178)			246				210
Trading securities, at fair value			13,956				11,937
Short-term and other investments			338,029				210,433
Total investments			1,161,591				1,027,606
Cash and cash equivalents			8,572				100,339
Student loan receivables			71,984				78,837
Restricted cash			7,410				7,881
Investment income due and accrued			12,294				13,304
Reinsurance recoverable — ceded policy liabilities			376,499				384,801
Agent and other receivables			26,409				37,954
Deferred acquisition costs			68,796				72,151
Property and equipment, net			47,129				63,198
Goodwill and other intangible assets			86,356				87,555
Recoverable federal income taxes			1,818				10,177
Other assets			25,990				32,910
		$	1,894,848			$	1,916,713
LIABILITIES AND STOCKHOLDERS’ EQUITY
Policy liabilities:
Future policy and contract benefits		$	468,761			$	486,174
Claims			349,013				415,748
Unearned premiums			51,027				61,491
Other policy liabilities			9,549				9,633
Accounts payable and accrued expenses			48,892				58,571
Other liabilities			84,503				94,346
Deferred federal income taxes			48,216				23,495
Debt			481,070				481,070
Student loan credit facility			78,850				86,050
Net liabilities of discontinued operations			2,007				2,210
			1,621,888				1,718,788
Commitments and Contingencies (Note 8)
Stockholders’ Equity:
Preferred stock, par value $0.01 per share — authorized 10,000,000 shares, none issued			—				—
Common Stock, Class A-1, par value $0.01 per share — authorized 90,000,000 shares, 27,000,062 issued and 26,772,436 outstanding at September 30, 2009; 27,000,062 issued and 26,887,281 outstanding at December 31, 2008. Class A-2, par value $0.01 per share — authorized 20,000,000 shares, 4,026,104 issued and 2,626,801 outstanding at September 30, 2009; 4,026,104 issued and 2,741,240 outstanding at December 31, 2008			310				310
Additional paid-in capital			46,682				54,004
Accumulated other comprehensive income (loss)			4,185				(41,970	)
Retained earnings			257,420				227,686
Treasury stock, at cost (227,626 Class A-1 common shares and 1,399,303 Class A-2 common shares at September 30, 2009; 112,781 Class A-1 common shares and 1,284,864 Class A-2 common shares at December 31, 2008)			(35,637	)			(42,105	)
			272,960				197,925
		$	1,894,848			$	1,916,713

HEALTHMARKETS, INC.
and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share data)
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
REVENUE
Health premiums		$	239,560			$	315,765			$	753,203			$	959,068
Life premiums and other considerations			487				673				1,829				37,189
			240,047				316,438				755,032				996,257
Investment income			10,873				16,244				32,224				55,607
Other income			15,064				19,710				47,841				62,440
Total other-than-temporary impairment losses			—				(16,785	)			(4,078	)			(22,366	)
Portion of loss recognized in other comprehensive income (before taxes)			—				—				—				—
Net impairment losses recognized in earnings			—				(16,785	)			(4,078	)			(22,366	)
Realized gains, net			795				1,463				2,350				3,805
			266,779				337,070				833,369				1,095,743
BENEFITS AND EXPENSES
Benefits, claims, and settlement expenses			126,042				211,500				435,721				661,795
Underwriting, acquisition, and insurance expenses			84,191				113,862				263,467				381,846
Other expenses			21,948				26,498				63,862				87,288
Interest expense			7,559				13,325				25,252				34,920
			239,740				365,185				788,302				1,165,849
Income (loss) from continuing operations before income taxes			27,039				(28,115	)			45,067				(70,106	)
Federal income tax expense (benefit)			9,644				(9,319	)			16,456				(25,721	)
Income (loss) from continuing operations			17,395				(18,796	)			28,611				(44,385	)
Income from discontinued operations, net			55				82				106				149
Net income (loss)		$	17,450			$	(18,714	)		$	28,717			$	(44,236	)
Basic earnings per share:
Income (loss) from continuing operations		$	0.59			$	(0.63	)		$	0.97			$	(1.46	)
Income (loss) from discontinued operations			0.00				0.00				0.00				0.00
Net income (loss) per share, basic		$	0.59			$	(0.63	)		$	0.97			$	(1.46	)
Diluted earnings per share:
Income (loss) from continuing operations		$	0.58			$	(0.63	)		$	0.95			$	(1.46	)
Income (loss) from discontinued operations			0.00				0.00				0.00				0.00
Net income (loss) per share, diluted		$	0.58			$	(0.63	)		$	0.95			$	(1.46	)

HEALTHMARKETS, INC.
and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net income (loss)		$	17,450			$	(18,714	)		$	28,717			$	(44,236	)
Implementation effect upon adoption of SFAS FSP No. 115-2, which was codified into FASB ASC Topic 320, Investments — Debt and Equity Securities			—				—				1,017				—
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale arising during the period			38,360				(27,956	)			65,131				(45,954	)
Reclassification for investment (gains) losses included in net income (loss)			(809	)			(756	)			2,221				(1,170	)
Other-than-temporary impairment losses recognized in OCI			—				—				(1,565	)			—
Effect on other comprehensive income (loss) from investment securities			37,551				(28,712	)			65,787				(47,124	)
Unrealized gains (losses) on derivatives used in cash flow hedging during the period			(1,137	)			(901	)			(2,036	)			(2,881	)
Reclassification adjustments included in net income (loss)			2,380				1,891				7,260				4,188
Effect on other comprehensive income from hedging activities			1,243				990				5,224				1,307
Other comprehensive income (loss) before tax			38,794				(27,722	)			71,011				(45,817	)
Income tax expense (benefit) related to items of other comprehensive income (loss)			13,579				(9,691	)			24,856				(16,010	)
Other comprehensive income (loss) net of tax			25,215				(18,031	)			46,155				(29,807	)
Comprehensive income (loss)		$	42,665			$	(36,745	)		$	75,889			$	(74,043	)

HEALTHMARKETS, INC.
and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

		Nine Months Ended
		September 30,
		2009				2008
Operating Activities:
Net income (loss)		$	28,717			$	(44,236	)
Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities:
Income from discontinued operations			(106	)			(149	)
Realized gains, net			2,217				14,043
Change in deferred income taxes			(681	)			(38,220	)
Depreciation and amortization			22,962				22,275
Amortization of prepaid monitoring fees			9,375				9,375
Equity based compensation expense			5,250				3,477
Other items, net			9,732				575
Changes in assets and liabilities:
Investment income due and accrued			1,010				3,681
Due premiums			1,845				797
Reinsurance recoverable — ceded policy liabilities			8,869				(328,793	)
Agent and other receivables			7,476				45,200
Deferred acquisition costs			3,355				121,975
Prepaid monitoring fees			(12,500	)			(12,500	)
Current income tax recoverable			8,359				10,323
Policy liabilities			(90,286	)			11,412
Other liabilities and accrued expenses			(6,514	)			(31,457	)
Cash used in continuing operations			(920	)			(212,222	)
Cash used in discontinued operations			(97	)			(52	)
Net cash used in operating activities			(1,017	)			(212,274	)
Investing Activities:
Student loan receivables			4,763				5,492
Securities available for sale			59,069				247,395
Short-term and other investments, net			(127,140	)			175
Purchases of property and equipment			(2,170	)			(13,698	)
Proceeds from subsidiaries sold, net of cash disposed of $437			(440	)			—
Net proceeds from sale of businesses and assets			—				4,665
Change in restricted cash			471				767
Decrease (increase) in agent receivables			(276	)			2,923
Cash (used in) provided by continuing operations			(65,723	)			247,719
Cash (used in) provided by discontinued operations			—				—
Net cash (used in) provided by investing activities			(65,723	)			247,719
Financing Activities:
Repayment of student loan credit facility			(7,200	)			(9,400	)
Decrease in investment products			(4,410	)			(1,322	)
Increase in cash overdraft			—				2,931
Proceeds from shares issued to agent plans and other			6,340				9,923
Purchases of treasury stock			(18,279	)			(51,566	)
Excess tax reduction from equity based compensation			(1,478	)			(320	)
Cash used in continuing operations			(25,027	)			(49,754	)
Cash (used in) provided by discontinued operations			—				—
Net cash used in financing activities			(25,027	)			(49,754	)
Net change in cash and cash equivalents			(91,767	)			(14,309	)
Cash and cash equivalents at beginning of period			100,339				14,309
Cash and cash equivalents at end of period in continuing operations		$	8,572			$	—
Supplemental disclosures:
Income taxes paid		$	10,314			$	2,588
Interest paid		$	29,142			$	35,966

HEALTHMARKETS, INC.
and Subsidiaries

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

     The accompanying consolidated condensed financial statements for HealthMarkets, Inc. (the “Company” or “HealthMarkets”) and its subsidiaries have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, such financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these financial statements include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair presentation of the consolidated condensed balance sheets, statements of income (loss), statements of comprehensive income (loss) and statements of cash flows for the periods presented. The accompanying December 31, 2008 consolidated condensed balance sheet was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP for annual financial statement purposes. Preparing financial statements requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and the accompanying disclosures. Although these estimates are based on management’s knowledge of current events and actions that HealthMarkets may undertake in the future, actual results may differ materially from the estimates. Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2009. Certain amounts in the prior period financial statements have been reclassified to conform to the 2009 financial statement presentation. We have evaluated subsequent events for recognition or disclosure through November 6, 2009, which was the date we filed this Form 10-Q with the Securities and Exchange Commission (the “SEC”). For further information, refer to the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Concentrations

     Through the Self-Employed Agency Division (“SEA”), the Company’s insurance company subsidiaries provide health insurance products in 41 states and the District of Columbia. As is the case with many of HealthMarkets’ competitors in this market, a substantial portion of the Company’s insurance company subsidiaries products are issued to members of various independent membership associations that act as the master policyholder for such products. The three principal membership associations in the self-employed market that make available to their members our health insurance products are the Alliance for Affordable Services (“AAS”), the National Association for the Self-Employed (“NASE”) and Americans for Financial Security (“AFS”). During the nine months ended September 30, 2009, the Company issued approximately 49% of our new policies through AAS, approximately 12% of our new policies through NASE and approximately 22% of our new policies through AFS.

     Additionally, during the nine months ended September 30, 2009, the Company generated approximately 56% of its health premium revenue from the following 10 states:

		Percentage
California			13	%
Texas			8	%
Florida			7	%
Massachusetts			6	%
Illinois			5	%
Washington			4	%
North Carolina			4	%
Maine			3	%
Pennsylvania			3	%
Wisconsin			3	%
			56	%

     As previously reported, on August 26, 2009, The MEGA Life and Health Insurance Company (“MEGA”), Mid-West National Life Insurance Company of Tennessee (“Mid-West’) and The Chesapeake Life Insurance Company (“Chesapeake”) entered into a regulatory settlement agreement with the Massachusetts Division of Insurance to resolve all outstanding matters stemming from a 2006 regulatory settlement agreement and to resolve all issues identified in subsequent reviews and/or re-examinations conducted through February 2009. As previously reported, on August 31, 2009, the Company, MEGA and Mid-West entered into a consent with the Commonwealth of Massachusetts settling the matter entitled Commonwealth of Massachusetts v. The MEGA Life and Health Insurance Company, pending in the Superior Court of Suffolk County, Massachusetts, Case

Number 06-4411-F. As a result of these settlements, the Company’s insurance subsidiaries are prohibited from offering any new health benefit plans in Massachusetts on or after October 1, 2009. See Note 8 of Notes to Consolidated Condensed Financial Statements for additional information.

Deferred Acquisition Costs (“DAC”) — 2009 Change in Estimates

     Prior to January 1, 2009, the basis for the amortization period on deferred lead costs and the portion of DAC associated with excess commissions over ultimate paid to agents was the estimated weighted average life of the insurance policy, which approximated 24 months. The monthly amortization factor was calculated to correspond with the historical persistency of policies (i.e. the monthly amortization is variable and is higher in the early months). Beginning January 1, 2009, on newly issued policies, the Company refined its estimated life of the policy to approximate the premium paying period of the policy based on the expected persistency over this period. As such, these costs are now amortized over sixty months, and the monthly amortization factor is calculated to correspond with the expected persistency experience for the newly issued policies. However, the amounts amortized will continue to be substantially higher in the early months of the policy as both are based on the persistency of the Company’s insurance policies. Policies issued before January 1, 2009 will continue to be amortized using the existing assumptions in place at the time of the issuance of the policy.

     Additionally, prior to January 1, 2009, certain other underwriting and policy issuance costs, which the Company determined to be more fixed than variable, were expensed as incurred. Effective January 1, 2009, HealthMarkets determined that, due to changes in both the Company’s products and underwriting procedures performed, certain of these costs have become more variable than fixed in nature. As such, the Company began deferring such costs over the expected premium paying period of the policy, which approximates five years.

     These changes resulted in a decrease in “Underwriting, acquisition and insurance expenses” of $3.0 million and $10.3 million, respectively, for the three and nine months ended September 30, 2009.

Recent Accounting Pronouncements

     In June 2009, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”), which has not yet been codified in the FASB Accounting Standards Codification (“ASC”). SFAS No. 167 modifies financial reporting for variable interest entities (“VIEs”). Under this guidance, companies are required to perform a periodic analysis to determine whether their variable interest must be consolidated by the Company. Additionally, Companies must disclose significant judgments and assumptions made when determining whether it must consolidate a VIE. Any changes in consolidated entities resulting from a Company’s analysis must be applied retrospectively to prior period financial statements. SFAS No. 167 is effective for annual and interim periods beginning after November 15, 2009. The Company has not yet determined the impact that the adoption of this guidance will have on its financial position and results of operations.

     In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets—an amendment of SFAS No. 140 (“SFAS No. 166”), which has not yet been codified in the ASC. SFAS No. 166 provides greater transparency about transfers of financial assets and requires companies to determine whether the transferor or companies included in the transferor’s financial statements have surrendered control over transferred financial assets. SFAS No. 166 modifies the financial-components approach used in SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which was codified into FASB ASC Topic 860, Transfers and Servicing, and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized. Additionally, this FSP removes the concept of a qualifying special-purpose entity (“QSPE”) and removes the exception from applying FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, to QSPEs. SFAS No. 166 is effective for annual and interim periods beginning after November 15, 2009. The Company has not yet determined the impact that the adoption of this guidance will have on its financial position and results of operations.

     In September 2009, the FASB issued ASC Updated 2009-12, Fair Value Measurements and Disclosures (Topic 820) — Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent), which provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures — Overall, for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). This Update is effective for annual and interim periods beginning after December 15, 2009. The Company has not yet determined the impact that the adoption of this guidance will have on its financial position and results of operations.

     In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162, which was codified into FASB ASC Topic 105, Generally Accepted Accounting Standards. This standard recognizes the ASC as the source of

authoritative U.S. GAAP recognized by the FASB. Additionally, rules and interpretive releases of the SEC under authority of federal securities laws will also continue to be sources of authoritative GAAP for SEC registrants. The Company adopted such guidance in September 2009. Beginning in the third quarter of 2009, this guidance impacted the Company’s financial statements and related disclosures as all references to authoritative accounting literature reflect the newly adopted codification.

     In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”), which was codified into FASB ASC Topic 855, Subsequent Events. Under this guidance, an entity is required to disclose the date through which it has evaluated subsequent events and the basis for that date. Additionally, this guidance clarifies the circumstances under which an entity should recognize in the financial statements, the effects of events or transactions occurring after the balance sheet date, and required disclosures for such events and transactions. The Company adopted this guidance in the third quarter of 2009. Such adoption did not have a material impact on the Company’s financial position and results of operations.

     In August 2009, the FASB issued ASC Update No. 2009-05, Fair Value Measurements and Disclosures (Topic 820 — Measuring Liabilities at Fair Value), which provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures — Overall, for the fair value measurement of liabilities. This Update provides clarification for measuring fair value in circumstances where a quoted price in an active market for the identical liability is not available. The Company adopted this guidance in the third quarter of 2009. Such adoption did not have a material impact on the Company’s financial position and results of operations.

     In April 2009, the FASB issued FASB Staff Position (“FSP”) SFAS No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which was codified into FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). This standard provides guidance for estimating fair value when the market activity for the asset or liability has significantly decreased and guidance for identifying transactions that are not orderly. Furthermore, this guidance requires disclosure in interim and annual periods for the inputs and valuation techniques used to measure fair value. Additionally, it requires an entity to disclose a change in valuation technique, and to quantify such effects. The Company adopted this guidance in the second quarter of 2009. Such adoption did not have a material impact on the Company’s financial position and results of operations.

     In February 2008, the FASB issued FSP SFAS No. 157-2, Effective Date of FASB Statement No. 157, which was codified into FASB ASC Topic 820. This guidance delays the effective date of SFAS No. 157, Fair Value Measurements, for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). These nonfinancial items would include, for example, reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. The Company adopted this guidance in the first quarter of 2009. Such adoption of these remaining provisions did not have a material impact on the Company’s financial position and results of operations.

     In April 2009, the FASB issued FSP SFAS No. 107-1 and APB 28-1, Disclosures about Fair Value of Financial Instruments, which was codified into FASB ASC Topic 825, Financial Instruments. This guidance requires companies to provide disclosures about fair value of financial instruments in both interim and annual financial statements. Additionally, under this guidance, companies are required to disclose the methods and significant assumptions used to estimate the fair value of financial instruments in both interim and annual financial statements. The Company adopted this guidance in the second quarter of 2009. Such adoption did not have a material impact on the Company’s financial position and results of operations.

     In April 2009, FASB issued FSP SFAS No. 115-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP SFAS No. 115-2”), which was codified into FASB ASC Topic 320, Investments — Debt and Equity Securities (“ASC Topic 320”). This guidance improves the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. Under this guidance, when the fair value is less than the amortized cost basis at the measurement date, a company would be required to assess the impaired security to determine whether the impairment is other-than-temporary. Such assessment may result in the recognition of an other-than-temporary impairment related to a credit loss in the statement of income and the recognition of an other-than-temporary impairment related to a non-credit loss in accumulated other comprehensive income on the balance sheet. To avoid recognizing the entire other-than-temporary impairment in the statement of income, a company would be required to assert (a) it does not have the intent to sell the security and (b) it is more likely than not that it will not have to sell the security before recovery of its cost basis. Additionally, at adoption, a company is permitted to make a one-time cumulative-effect adjustment for securities held at adoption for which an other-than-temporary impairment related to a non-credit loss had been previously recognized. The Company adopted this guidance in the second quarter of 2009. Upon adoption, the Company recognized such tax-effected cumulative effect as an increase to the opening balance of retained earnings for $1.0 million with a

corresponding decrease to accumulated other comprehensive income, with no overall change to shareholders’ equity. See Note 4 of Notes to Consolidated Condensed Financial Statements.

     On January 1, 2009, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133, which was codified into FASB ASC Topic 815, Derivative Instruments (“ASC Topic 815”). This standard requires companies with derivative instruments to disclose information that enables financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows. The Company adopted this guidance in the first quarter of 2009. See Note 6 of Notes to Consolidated Condensed Financial Statements for information on the Company’s derivative instrument, including these additional required disclosures.

     In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS No. 160”), which was codified into FASB ASC Topic 810, Consolidation. The objective of SFAS No. 160 is to improve the relevance, comparability, and transparency of financial information related to minority interest in consolidated financial statements. The Company adopted this guidance in the first quarter of 2009. Such adoption did not have a material impact on the Company’s financial position and results of operations.

2. DISPOSITIONS

Exit from Life Insurance Division Business

     On September 30, 2008 (the “Closing Date”), HealthMarkets, LLC completed the transactions contemplated by the Agreement for Reinsurance and Purchase and Sale of Assets dated June 12, 2008 (the “Master Agreement”). Pursuant to the Master Agreement, Wilton Reassurance Company or its affiliates (“Wilton”) acquired substantially all of the business of the Company’s Life Insurance Division, which operated through MEGA, Mid-West and The Chesapeake Life Insurance Company (“Chesapeake”) (collectively the “Ceding Companies”), and all of the Company’s 79% equity interest in each of U.S. Managers Life Insurance Company, Ltd. and Financial Services Reinsurance, Ltd. As part of the transaction, under the terms of the Coinsurance Agreements (the “Coinsurance Agreements”) entered into with each of the Ceding Companies on the Closing Date, Wilton agreed, effective July 1, 2008 (the “Coinsurance Effective Date”), to reinsure on a 100% coinsurance basis substantially all of the insurance policies associated with the Company’s Life Insurance Division (the “Coinsured Policies”). The reinsurance transaction resulted in a pre-tax loss of $17.6 million for the nine months ended September 30, 2008, of which $13.0 million was recorded as an impairment to the Life Insurance Division’s deferred acquisition costs and $4.6 million was recorded in “Realized gains, net” in the Company’s consolidated condensed statement of income (loss).

     In connection with these transactions, the Company incurred $6.3 million in investment banker fees and legal fees recorded as “Other expenses” on the Company’s consolidated condensed statement of income (loss), of which $5.0 million was incurred during the three months ended September 30, 2008. The Company also incurred $6.4 million of employee and lease termination costs and other costs recorded in “Underwriting, acquisition and insurance expenses,” of which $3.2 million was incurred during the three months ended September 30, 2008 (see Note 11 of Notes to Consolidated Condensed Financial Statements). In addition, the Company incurred interest expense of $3.0 million during the third quarter of 2008 associated with the use of the cash transferred to Wilton during the period from the Coinsurance Effective Date to the Closing Date. Lastly, the Ceding Companies wrote-off deferred acquisition costs of $101.1 million, representing all of the deferred acquisition costs associated with the Coinsured Policies subject to the transaction, which is included in the realized loss on the transaction. This write-off of deferred acquisition costs correspondingly reduced the related deferred tax assets by $36.7 million at September 30, 2008.

Student Loans

     In connection with the execution of the Master Agreement, HealthMarkets, LLC entered into a definitive Stock Purchase Agreement (as amended, the “Stock Purchase Agreement”) pursuant to which Wilton agreed to purchase the Company’s student loan funding vehicles, CFLD-I, Inc. (“CFLD-I”) and UICI Funding Corp. 2 (“UFC2”), and the related student association. Prior to June 30, 2009, the Company had presented the assets and liabilities of CFLD-I and UFC2 as held for sale on its consolidated condensed balance sheet and included the results of operations of CFLD-I and UFC2 in discontinued operations on its consolidated condensed statement of income (loss). As the closing of the Stock Purchase Agreement did not occur, the Company reclassified the assets and liabilities of CFLD-I and UFC2 out of held for sale and reclassified the results of operations from discontinued operations to continuing operations for all periods presented. Such reclassification in the condensed consolidated statement of income (loss) resulted in an increase in “Loss from continuing operations” of $12,000 and $5.3 million for the three and nine months ended September 30, 2008, respectively.

     In accordance with the terms of the Coinsurance Agreements, Wilton will fund student loans; provided, however, that Wilton will not be required to fund any student loan that would cause the aggregate par value of all such loans funded by Wilton, following the Coinsurance Effective Date, to exceed $10.0 million. As of September 30, 2009, approximately $1.4 million of student loans have been funded under this agreement.

Sale of ZON-Re

     The Company’s Other Insurance Division consisted of ZON-Re USA, LLC (“ZON-Re”), an 82.5%-owned subsidiary, which underwrote, administered and issued accidental death, accidental death and dismemberment (“AD&D”), accident medical, and accident disability insurance products, both on a primary and on a reinsurance basis. The Company distributed these products through professional reinsurance intermediaries and a network of independent commercial insurance agents, brokers and third party administrators.

     On June 5, 2009, HealthMarkets, LLC, entered into an Acquisition Agreement for the sale of its 82.5% membership interest in ZON-Re to Venue Re, LLC (“Venue Re”). The transaction contemplated by the Acquisition Agreement closed effective June 30, 2009. The sale of the Company’s membership interest in ZON-Re resulted in a total pre-tax loss of $489,000 for the nine months ended September 30, 2009. The Company will continue to reflect the existing insurance business in its financial statements to final termination of all liabilities.

Exit from the Medicare Market

     In late 2007, the Company expanded into the Medicare market by offering a new portfolio of Medicare Advantage Private-Fee-for-Service Plans — called HealthMarkets Care Assured Plans^SM — in selected markets in 29 states with calendar year coverage effective for January 1, 2008. In July 2008, the Company determined it would not continue to participate in the Medicare business after the 2008 plan year. In connection with its exit from the Medicare market, the Company incurred employee termination costs of $371,000 and asset impairment charges of $1.1 million associated with technology assets unique to its Medicare business in the third quarter of 2008. Additionally, during the nine months ended September 30, 2008, the Company recognized a $4.9 million expense, recorded in “Underwriting, acquisition and insurance expenses,” associated with a minimum volume guarantee fee related to the Company’s contract with a third party administrator. This minimum volume guarantee fee was based on a minimum number of member months for the three year term of the contract covering calendar years 2008 through 2010. During 2009, the Company continued to fulfill its remaining obligations under the 2008 calendar year Medicare contracts.

3. FAIR VALUE MEASUREMENTS

     In accordance with ASC Topic 820, the Company categorizes its investments and certain other assets and liabilities recorded at fair value into a three-level fair value hierarchy as follows:

•

Level 1 — Unadjusted quoted market prices for identical assets or liabilities in active markets which are accessible by the Company.

•

Level 2 — Observable prices in active markets for similar assets or liabilities. Prices for identical or similar assets or liabilities in markets that are not active. Directly observable market inputs for substantially the full term of the asset or liability, such as interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, default rates, and credit spreads. Market inputs that are not directly observable but are derived from or corroborated by observable market data.

•

Level 3 — Unobservable inputs based on the Company’s own judgment as to assumptions a market participant would use, including inputs derived from extrapolation and interpolation that are not corroborated by observable market data.

     The Company evaluates the various types of securities in its investment portfolio to determine the appropriate level in the fair value hierarchy based upon trading activity and the observability of market inputs. The Company employs control processes to validate the reasonableness of the fair value estimates of its assets and liabilities, including those estimates based on prices and quotes obtained from independent third party sources. The Company’s procedures generally include, but are not limited to, initial and ongoing evaluation of methodologies used by independent third parties and monthly analytical reviews of the prices against current pricing trends and statistics.

     Where possible, the Company utilizes quoted market prices to measure fair value. For investments that have quoted market prices in active markets, the Company uses the quoted market price as fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy. When quoted market prices in active markets are unavailable, the Company determines fair values using various valuation techniques and models based on a range of observable market inputs including pricing models, quoted market price of publicly traded securities with similar duration and yield, time value, yield curve, prepayment speeds, default rates and discounted cash flow. In most cases, these estimates are determined based on independent third party valuation information, and the amounts are disclosed in Level 2 of the fair value hierarchy. Generally, the Company obtains a single price or quote per instrument from independent third parties to assist in establishing the fair value of these investments.

     If quoted market prices and independent third party valuation information are unavailable, the Company produces an estimate of fair value based on internally developed valuation techniques, which, depending on the level of observable market inputs, will render the fair value estimate as Level 2 or Level 3. On occasions when pricing service data is unavailable, the Company may rely on bid/ask spreads from dealers in determining the fair value. When dealer quotations are used to assist in establishing the fair value, the Company generally obtains one quote per instrument. The quotes obtained from dealers or brokers are generally non-binding. When dealer quotations are used, the Company uses the mid-mark as fair value. When broker or dealer quotations are used for valuation or price verification, greater priority is given to executable quotes. As part of the price verification process, valuations based on quotes are corroborated by comparison both to other quotes and to recent trading activity in the same or similar instruments.

     To the extent the Company determines that a price or quote is inconsistent with actual trading activity observed in that investment or similar investments, or if the Company does not think the quote is reflective of the market value for the investment, the Company will internally develop a fair value using this observable market information and disclose the occurrence of this circumstance.

     In accordance with ASC Topic 820, the Company has categorized its available for sale securities into a three level fair value hierarchy based on the priority of inputs to the valuation techniques. The fair values of investments disclosed in Level 1 of the fair value hierarchy include money market funds and certain U.S. government securities, while the investments disclosed in Level 2 include the majority of the Company’s fixed income investments. In cases where there is limited activity or less transparency around inputs to the valuation, the Company classifies the fair value estimates within Level 3 of the fair value hierarchy.

     As of September 30, 2009, all of the Company’s investments classified within Level 2 and Level 3 of the fair value hierarchy are valued based on quotes or prices obtained from independent third parties, except for $106.3 million of “Corporate debt and other” classified as Level 2, $2.2 million of “Collateralized debt obligations” classified as Level 3 and $1.4 million of “Commercial-backed” investments classified as Level 3. The $106.3 million of “Corporate debt and other” investments classified as Level 2 noted above includes $93.9 million of an investment grade corporate bond issued by UnitedHealth Group that was received as consideration for the sale of the Company’s former Student Insurance Division in December 2006.

Fair Value Hierarchy on a Recurring Basis

     Assets and liabilities measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations.

		Assets at Fair Value as of September 30, 2009
		Level 1				Level 2				Level 3				Total
						(In thousands)
U.S. and U.S. Government agencies		$	5,085			$	43,114			$	—			$	48,199
Corporate debt and other			—				351,705				—				351,705
Collateralized debt obligations			—				—				3,096				3,096
Residential-backed issued by agencies			—				111,585				—				111,585
Commercial-backed issued by agencies			—				8,787				—				8,787
Residential-backed			—				4,189				—				4,189
Commercial-backed			—				75,361				1,388				76,749
Asset-backed			—				20,367				445				20,812
Municipals			—				176,968				7,270				184,238
Corporate equities			33				—				—				33
Trading securities			—				—				13,956				13,956
Put options (1)			—				—				794				794
Short-term and other investments (2)			312,805				6,234				440				319,479
		$	317,923			$	798,310			$	27,389			$	1,143,622

		Liabilities at Fair Value as of September 30, 2009
		Level 1				Level 2				Level 3				Total
						(In thousands)
Interest rate swaps		$	—			$	10,714			$	—			$	10,714
Agent and employee plans			—				—				14,982				14,982
		$	—			$	10,714			$	14,982			$	25,696

     The following is a description of the valuation methodologies used for certain assets and liabilities of the Company measured at fair value on a recurring basis, including the general classification of such assets pursuant to the valuation hierarchy.

Fixed Income Investments

   Available for sale investments

     The Company’s fixed income investments include investments in U.S. treasury securities, U.S. government agencies bonds, corporate bonds, mortgage-backed and asset-backed securities, and municipal auction rate securities and bonds.

     The Company estimates the fair value of its U.S. treasury securities using unadjusted quoted market prices, and accordingly, discloses these investments in Level 1 of the fair value hierarchy. The fair values of the majority of non-U.S. treasury securities held by the Company are determined based on observable market inputs provided by independent third party valuation information. The market inputs utilized in the pricing evaluation include but are not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The Company classifies the fair value estimates based on these observable market inputs within Level 2 of the fair value hierarchy. Investments classified within Level 2 consist of U.S. government agencies bonds, corporate bonds, mortgage-backed and asset-backed securities, and municipal bonds.

     The Company also holds a small number of fixed income investments, including certain mortgage-backed and asset- backed securities, and collateralized debt obligations, for which it estimates the fair value using internal pricing matrices with some unobservable inputs that are significant to the valuation. The Company estimates the fair value of its entire portfolio of municipal auction rate securities based on non-binding quotes received from independent third parties due to limited activity and market data for auction rate securities, resulting from liquidity issues in the global credit and capital markets. Consequently, the lack of transparency in the inputs and the availability of independent third party pricing information for these investments resulted in their fair values being classified within the Level 3 of the hierarchy. As of September 30, 2009, the fair values of certain municipal auction rate securities, collateralized debt obligations and mortgage-backed and asset-backed securities which represent approximately 1.5% of the Company’s total fixed income investments are reflected within the Level 3 of the fair value hierarchy.

     Beginning in 2008, the Company determined that the non-binding quoted price received from an independent third party broker for a particular collateralized debt obligation investment did not reflect a value based on an active market. During discussions with the independent third party broker, the Company learned that the price quote was established by applying a discount to the most recent price that the broker had offered the investment. However, there were no responding bids to purchase the investment at that price. As this price was not set based on an active market, the Company developed a fair value for this particular collateralized debt obligation. The Company continues to fair value this collateralized debt obligation as such during 2009.

     The Company established a fair value for such collateralized debt obligation based on information about the underlying pool of assets supplied by the investment’s asset manager. The Company developed a discounted cash flow valuation for the investment by applying assumptions for a variety of factors including among other things, default rates, recovery rates and a discount rate. The Company believes the assumptions for these factors were developed in a manner consistent with those that a market participant would use in valuation and were based on the information provided regarding the underlying pool of assets, various current market benchmarks, industry data for similar assets types, and particular market observations about similar assets.

Trading securities

     The Company’s fixed income trading securities consist of auction rate securities, for which the fair value is determined based on unobservable inputs. Accordingly, the fair value of this asset is reflected within Level 3 of the fair value hierarchy.

Equities

     The Company maintains one investment in equity securities for which the Company uses a quoted market price based on observable market transactions. The Company includes the fair value estimate for this stock in Level 1 of the hierarchy. The remaining amount in equity securities represents one security accounted for using the equity method of accounting and, therefore, does not require fair value disclosure under the provisions of ASC Topic 820.

Short-term and other investments

     The Company’s short-term and other investments primarily consist of highly liquid money market funds, which are reflected within Level 1 and Level 2 of the fair value hierarchy. Additionally, the fair value of one of the Company’s investment assets included in short-term and other investments is determined based on unobservable inputs. Accordingly, the fair value of this asset is reflected within Level 3 of the fair value hierarchy.

Put Options

     The put options that the Company owns are directly related to agreements the Company entered into with UBS during 2008 to facilitate the repurchase of certain auction rate municipal securities. The options are carried at fair value which is related to the fair value of the auction rate securities (see Trading securities above) and are recorded in “Other assets” on the consolidated condensed balance sheets. The Company accounts for such put options in accordance with ASC Topic 320, which provides a fair value option election that permits an entity to elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities on an instrument by instrument basis. Changes in fair value of assets and liabilities, for which the election is made, will be recognized in earnings as they occur.

Derivatives

     The Company’s derivative instruments are valued utilizing valuation models that primarily use market observable inputs and are traded in the markets where quoted market prices are not readily available, and accordingly, these instruments are reflected within the Level 2 of the fair value hierarchy.

Agent and Employee Stock Plans

     The Company accounts for its agent and employee stock plan liabilities based on the Company’s share price at the end of each reporting period. The Company’s share price at the end of each reporting period is based on the prevailing fair value as determined by the Company’s Board of Directors. The Company largely uses unobservable inputs in deriving the fair value of its share price and the value is, therefore, reflected in Level 3 of the hierarchy.

Changes in Level 3 Assets and Liabilities

     The tables below summarize the change in balance sheet carrying values associated with Level 3 financial instruments and agent and employee stock plans for the three and nine months ended September 30, 2009.

Changes in Level 3 Assets and Liabilities Measured at Fair Value For the Three Months Ended September 30, 2009
										Purchases,
										Sales,
						Unrealized				Payments								Transfer
		Beginning				Gains or				and				Realized				in/(out) of				Ending
		Balance				(Losses)				Issuances, Net				Losses(1)				Level 3, Net				Balance
		In Thousands
Assets
Collateralized debt obligations		$	2,563			$	533			$	—			$	—			$	—			$	3,096
Commercial-backed			1,424				52				(88	)			—				—				1,388
Asset-backed			360				85				—				—				—				445
Municipals			7,301				(31	)			—				—				—				7,270
Trading securities			14,259				(53	)			(250	)			—				—				13,956
Put options			741				53				—				—				—				794
Other invested assets			141				365				(66	)			—				—				440
		$	26,789			$	1,004			$	(404	)		$	—			$	—			$	27,389
Liabilities
Agent and employee stock plans		$	13,184			$	—			$	1,798			$	—			$	—			$	14,982

Changes in Level 3 Assets and Liabilities Measured at Fair Value For the Nine Months Ended September 30, 2009
										Purchases,
										Sales,
						Unrealized				Payments								Transfer
		Beginning				Gains or				and				Realized				in/(out) of				Ending
		Balance				(Losses)				Issuances, Net				Losses(1)				Level 3, Net				Balance
		In Thousands
Assets
Collateralized debt obligations		$	2,585			$	1,906			$	—			$	(1,395	)		$	—			$	3,096
Commercial-backed			1,494				149				(255	)			—				—				1,388
Asset-backed			252				193				—				—				—				445
Municipals			6,539				731				—				—				—				7,270
Trading securities			11,937				2,369				(350	)			—				—				13,956
Put options			3,163				(2,369	)			—				—				—				794
Other invested assets			476				258				(294	)			—				—				440
		$	26,446			$	3,237			$	(899	)		$	(1,395	)		$	—			$	27,389
Liabilities
Agent and employee stock plans		$	18,158			$	—			$	(3,176	)		$	—			$	—			$	14,982

Investments not reported at fair value

     Other investments primarily consists of investments in equity investees, which are accounted for under the equity method of accounting on the Company’s consolidated condensed balance sheet at cost.

4. INVESTMENTS

     The Company’s investments consist of the following at September 30, 2009 and December 31, 2008:

		September 30,				December 31,
		2009				2008
		(In thousands)
Securities available for sale
Fixed maturities		$	809,360			$	805,026
Equity securities			246				210
Trading securities			13,956				11,937
Short-term and other investments			338,029				210,433
Total investments		$	1,161,591			$	1,027,606

     Available for sale fixed maturities are reported at fair value which was derived as follows:

		September 30, 2009
						Gross				Gross				Non-credit Loss
		Amortized				Unrealized				Unrealized				Recognized
		Cost				Gains				Losses				in OCI				Fair Value
		(In thousands)
U.S. and U.S. Government agencies		$	46,717			$	1,482			$	—			$	—			$	48,199
Collateralized debt obligations			2,352				929				(185	)			—				3,096
Residential-backed issued by agencies			107,388				4,347				(150	)			—				111,585
Commercial-backed issued by agencies			8,366				421				—				—				8,787
Residential-backed			4,288				6				(105	)			—				4,189
Commercial-backed			75,984				1,177				(412	)			—				76,749
Asset-backed			21,474				316				(978	)			—				20,812
Corporate bonds and municipals			519,709				19,163				(8,352	)			—				530,520
Other			6,100				—				(677	)			—				5,423
Total fixed maturities		$	792,378			$	27,841			$	(10,859	)		$	—			$	809,360

		December 31, 2008
						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
		(In thousands)
U.S. and U.S. Government agencies		$	36,014			$	1,794			$	—			$	37,808
Collateralized debt obligations			3,700				—				(1,115	)			2,585
Residential-backed issued by agencies			72,468				1,910				(6	)			74,372
Commercial-backed issued by agencies			37,406				781				(53	)			38,134
Residential-backed			6,340				—				(878	)			5,462
Commercial-backed			76,959				—				(8,427	)			68,532
Asset-backed			25,011				70				(6,148	)			18,933
Corporate bonds and municipals			590,996				4,229				(41,985	)			553,240
Other			6,243				—				(283	)			5,960
Total fixed maturities		$	855,137			$	8,784			$	(58,895	)		$	805,026

     The amortized cost and fair value of available for sale fixed maturities at September 30, 2009, by contractual maturity, are set forth in the table below. Fixed maturities subject to early or unscheduled prepayments have been included based upon their contractual maturity dates. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

		September 30, 2009
		Amortized
		Cost				Fair Value
		(In thousands)
Maturity:
One year or less		$	18,787			$	18,989
Over 1 year through 5 years			179,801				184,639
Over 5 years through 10 years			258,195				262,277
Over 10 years			118,095				121,333
			574,878				587,238
Mortgage and asset-backed securities			217,500				222,122
Total fixed maturities		$	792,378			$	809,360

     See Note 3 of Notes to Consolidated Condensed Financial Statements for additional disclosures on fair value measurements.

     A summary of net investment income sources is set forth below:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In thousands)
Fixed maturities		$	9,290			$	13,361			$	28,980			$	42,524
Equity securities			19				—				36				(9	)
Short-term and other investments			273				942				(937	)			6,335
Agent receivables			613				731				1,959				2,382
Student loan interest income			1,149				1,656				3,625				5,817
			11,344				16,690				33,663				57,049
Less investment expenses			471				446				1,439				1,442
		$	10,873			$	16,244			$	32,224			$	55,607

Realized Gains and Losses

     Realized gains and losses on sales of investments are recognized in net income (loss) on the specific identification basis and include write downs on those investments deemed to have other than temporary declines in fair values. Gains and losses on trading securities are reported in “Realized gains, net” on the consolidated condensed statements of income (loss).

     Fixed maturities

     Proceeds from the sale and call of investments in fixed maturities were $38.2 million and $52.6 million for the three and nine months ended September 30, 2009, respectively, and $99.8 million and $224.2 million for the three and nine months ended September 30, 2008, respectively. Gross gains of $809,000 and $1.9 million were realized on the sale and call of fixed maturity investments for the three and nine months ended September 30, 2009, respectively. Gross gains of $961,000 and $1.9 million and gross losses of $206,000 and $766,000 were realized on the sale and call of fixed maturity investments for the three and nine months ended September 30, 2008, respectively.

     Equity securities

     The Company realized no gains or losses on equity securities during the three and nine months ended September 30, 2009 and 2008.

     Trading securities and Put options

     The Company accounts for certain municipal auction rate securities as trading securities. In 2008, the Company entered into an agreement with UBS to facilitate the repurchase of certain auction rate municipal securities. At such time, the Company received put options. Any gain or loss recognized on the trading securities is offset by the same gain or loss on the put options.

Unrealized Gains (Losses)

     Unrealized investment gains and losses on available for sale securities, net of applicable deferred income tax, are reported in “Accumulated other comprehensive income (loss)” as a separate component of stockholders’ equity and accordingly have no effect on net income (loss).

     Set forth below is a summary of gross unrealized losses in its fixed maturities as of September 30, 2009 and December 31, 2008:

		September 30, 2009
		Unrealized Loss								Unrealized Loss
		Less Than 12 Months								12 Months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
Description of Securities		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
Collateralized debt obligations		$	921			$	185			$	—			$	—			$	921			$	185
Residential-backed issued by agencies			23,099				150				—				—				23,099				150
Residential-backed			—				—				3,740				105				3,740				105
Commercial-backed			—				—				19,199				412				19,199				412
Asset-backed			—				—				16,945				978				16,945				978
Corporate bonds and municipals			300				—				187,951				8,352				188,251				8,352
Other			—				—				5,423				677				5,423				677
Total		$	24,320			$	335			$	233,258			$	10,524			$	257,578			$	10,859

		December 31, 2008
		Unrealized Loss								Unrealized Loss
		Less Than 12 Months								12 Months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
Description of Securities		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
Collateralized debt obligations		$	—			$	—			$	2,310			$	1,115			$	2,310			$	1,115
Residential-backed issued by agencies			49				—				2,361				59				2,410				59
Residential-backed			—				—				5,461				878				5,461				878
Commercial-backed			28,432				2,960				40,100				5,467				68,532				8,427
Asset-backed			—				—				13,072				6,148				13,072				6,148
Corporate bonds and municipals			117,143				6,877				289,731				35,108				406,874				41,985
Other			—				—				5,960				283				5,960				283
Total		$	145,624			$	9,837			$	358,995			$	49,058			$	504,619			$	58,895

     Of the $335,000 in unrealized losses that had existed for less than twelve months at September 30, 2009, one “Collateralized debt obligation” had an unrealized loss in excess of 10% of the security’s cost. The amount of unrealized loss with respect to this security is $114,000 at September 30, 2009.

     Of the $10.5 million in unrealized losses that have existed for twelve months or longer at September 30, 2009, eleven securities had unrealized losses in excess of 10% of the security’s cost, of which five were classified as “Asset-backed securities,” one was classified as “Other” and five were classified as “Corporate bonds and municipals” in the table above. The amount of unrealized loss with respect to those securities was $5.8 million at September 30, 2009, of which $581,000 relates to “Asset-backed” securities, $676,000 relates to “Other” and $4.6 million relates to “Corporate bonds and municipals.”

     As a Company that holds investments in the financial services industry, HealthMarkets has been affected by conditions in U.S. financial markets and economic conditions throughout the world. The financial environment in the U.S. was volatile during 2008; however, the Company has seen improved market conditions during 2009, which are reflected in the decrease in unrealized losses, as well as a decrease in the number of securities with unrealized losses. The Company continually monitors investments with unrealized losses that have existed for twelve months or longer and considers such factors as the current financial condition of the issuer, the performance of underlying collateral and effective yields. Additionally, HealthMarkets’ considers whether it has the intent to sell the security and whether it is more likely than not that the Company will be required to sell the debt security before the fair value reverts to our cost basis, which may be at maturity of the security. Based on such review, the Company believes that, as of September 30, 2009, the unrealized loss in these investments is temporary.

     It is at least reasonably probable the Company’s assessment of whether the unrealized losses are other than temporary may change over time, given, among other things, the dynamic nature of markets or changes in the Company’s assessment of its ability or intent to hold impaired investment securities, which could result in the Company recognizing other-than-temporary impairment charges or realized losses on the sale of such investments in the future.

     Equity securities

     Gross unrealized investment gains (losses) on equity securities were $4,000 and $1,000 for the three and nine months ended September 30, 2009, respectively, and $4,000 and $(3,000) for the three and nine months ended September 30, 2008, respectively.

     Other-than-temporary impairments

     Investments are reviewed at least quarterly, using both quantitative and qualitative factors, to determine if they have experienced an impairment of value that is considered other-than-temporary. In its review, management considers the following indicators of impairment: fair value significantly below cost; decline in fair value attributable to specific adverse conditions affecting a particular investment; decline in fair value attributable to specific conditions, such as conditions in an industry or in a geographic area; decline in fair value for an extended period of time; downgrades by rating agencies from investment grade to non-investment grade; financial condition deterioration of the issuer and situations where dividends have been reduced or eliminated or scheduled interest payments have not been made. Additionally, the Company assesses whether the amortized cost basis will be recovered by comparing the present value of cash flows expected to be collected with the amortized cost basis of the investment. When the determination is made that an other-than-temporary impairment (“OTTI”) exists but the Company does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before the recovery of its remaining amortized cost basis, the Company will determine the amount of the impairment related to a credit loss and the amount related to other factors. OTTI losses attributed to a credit loss are recorded in “Net impairment losses recognized in earnings” on the statement of income (loss). OTTI losses attributed to other factors are reported in “Accumulated other comprehensive income (loss)” as a separate component of stockholders’ equity and accordingly have no effect on net income (loss).

     The Company recognized no OTTI losses during the three months ended September 30, 2009 and $4.1 million during the nine months ended September 30, 2009. These impairments, which the Company deemed to be other-than-temporary reductions, were attributable to credit losses and, as such, these impairments were recorded in the consolidated condensed statement of income (loss). The Company recognized realized losses from OTTIs of $16.8 million and $22.4 million for the three and nine months ended September 30, 2008, respectively. These OTTIs, which the Company deemed were other-than-temporary reductions, were due to a decline in the fair values of the investments below the Company’s cost basis resulting partially from liquidity issues experienced in the global credit and capital markets. The significant OTTI charges recognized during the three months ended September 30, 2008 resulted from certain corporate debt and collateralized debt obligation securities.

     Upon adoption of FSP SFAS No. 115-2, which was codified into ASC Topic 320, the Company recorded a cumulative-effect adjustment for debt securities held at adoption for which an OTTI had been previously recognized. The Company recognized such tax-effected cumulative effect of initially applying this guidance as an adjustment to “Retained earnings” for $1.0 million, net of tax, with a corresponding adjustment to “Accumulated other comprehensive income.”

Reductions for

Credit losses on

Additions for OTTI

increases in cash

debt securities for

Cumulative OTTI credit

Additions to OTTI

securities where

flows expected to

which a portion of

losses recognized for

securities where no

credit losses have

Reductions for

be collected that

an OTTI was

securities still

credit losses were

been recognized

securities sold

are recognized over

recognized

held at

recognized prior to

prior to

during the period

the remaining life

in OCI at

April 1, 2009

April 1, 2009

April 1, 2009

(realized)

of the security

September 30, 2009

(In thousands)

$28,012

$

2,683

$

—

$

(4,203

)

$

(307

)

$

26,185

5. DEBT

     On April 5, 2006, HealthMarkets, LLC entered into a credit agreement, providing for a $500.0 million term loan facility and a $75.0 million revolving credit facility, which includes a $35.0 million letter of credit sub-facility. The full amount of the term loan was drawn at closing. At September 30, 2009, the Company had an aggregate of $362.5 million of indebtedness outstanding under the term loan facility, which indebtedness bore interest at the London inter-bank offered rate (“LIBOR”) plus a borrowing margin of 1.00%. The Company has not drawn on the $75.0 million revolving credit facility.

     In addition, on April 5, 2006, HealthMarkets Capital Trust I and HealthMarkets Capital Trust II (two newly formed Delaware statutory business trusts, collectively the “Trusts”) issued $100.0 million of floating rate trust preferred securities (the “Trust Securities”) and $3.1 million of floating rate common securities. The Trusts invested the proceeds from the sale of the Trust Securities, together with the proceeds from the issuance to HealthMarkets, LLC by the Trusts of the common securities, in $100.0 million principal amount of HealthMarkets, LLC’s Floating Rate Junior Subordinated Notes due June 15, 2036 (the “Notes”), of which $50.0 million principal amount accrue interest at a floating rate equal to three-month LIBOR plus 3.05% and $50.0 million principal amount accrue interest at a fixed rate of 8.367%.

     On April 29, 2004, UICI Capital Trust I (a Delaware statutory business trust, the “2004 Trust”) completed the private placement of $15.0 million aggregate issuance amount of floating rate trust preferred securities with an aggregate liquidation value of $15.0 million (the “2004 Trust Preferred Securities”). The 2004 Trust invested the $15.0 million proceeds from the sale of the 2004 Trust Preferred Securities, together with the proceeds from the issuance to the Company by the 2004 Trust of its floating rate common securities in the amount of $470,000 (the “Common Securities” and, collectively with the 2004 Trust Preferred Securities, the “2004 Trust Securities”), in an equivalent face amount of the Company’s Floating Rate Junior Subordinated Notes due 2034 (the “2004 Notes”). The 2004 Notes will mature on April 29, 2034. The 2004 Notes accrue interest at a floating rate equal to three-month LIBOR plus 3.50%, payable quarterly.

     The following table sets forth detail of the Company’s debt and interest expense:

						Interest Expense
		Principal Amount at				Three Months Ended								Nine Months Ended
		September 30,				September 30,								September 30,
		2009				2009				2008				2009				2008
		(In thousands)
2006 credit agreement:
Term loan		$	362,500			$	3,737			$	5,203			$	12,757			$	15,796
$75 Million revolver (non-use fee)			—				92				33				235				105
Trust preferred securities:
UICI Capital Trust I			15,470				165				247				544				788
HealthMarkets Capital Trust I			51,550				478				768				1,668				2,534
HealthMarkets Capital Trust II			51,550				1,102				1,102				3,271				3,283
Other:
Other interest			—				790				4,115				2,357				6,211
Amortization of financing fees			—				1,195				1,139				3,554				3,361
Total		$	481,070			$	7,559			$	12,607			$	24,386			$	32,078
Student Loan Credit Facility			78,850				—				718				866				2,842
Total		$	559,920			$	7,559			$	13,325			$	25,252			$	34,920