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		75-2044750
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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 þ   No o

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 1 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.

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 25, 2010, the registrant had 28,418,821 outstanding shares of Class A-1 Common Stock, $.01 Par Value, and 2,738,252 outstanding shares of Class A-2 Common Stock, $.01 Par Value.

 

 

HEALTHMARKETS, INC.
and Subsidiaries

Third Quarter 2010 Form 10-Q

TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)			1
Consolidated Condensed Balance Sheets as of September 30, 2010 and December 31, 2009			2
Consolidated Condensed Statements of Income for the Three and Nine Months Ended September 30, 2010 and 2009			3
Consolidated Condensed Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2010 and 2009			4
Consolidated Condensed Statements of Cash Flows for Nine Months Ended September 30, 2010 and 2009			5
Notes to Consolidated Condensed Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			38
PART II OTHER INFORMATION
Item 1. Legal Proceedings			39
Item 1A. Risk Factors			39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			40
Item 3. Defaults Upon Senior Securities			40
Item 5. Other Information			40
Item 6. Exhibits			41
SIGNATURES			42
Exhibit 31.1
Exhibit 31.2
Exhibit 32

HEALTHMARKETS, INC.
and Subsidiaries

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

		September 30,				December 31,
		2010				2009
		(Unaudited)
ASSETS
Investments:
Securities available for sale —
Fixed maturities, at fair value (cost: 2010 — $706,319; 2009 — $742,630)		$	758,595			$	756,180
Equity securities, at fair value (cost: 2009 — $234)			—				234
Trading securities, at fair value			—				9,893
Short-term and other investments, at fair value (cost: 2010 — $315,303; 2009 — $370,676)			316,921				371,534
Total investments			1,075,516				1,137,841
Cash and cash equivalents			10,066				17,406
Student loan receivables			61,916				69,911
Restricted cash			10,091				8,647
Investment income due and accrued			11,661				10,464
Reinsurance recoverable — ceded policy liabilities			361,726				361,305
Agent and other receivables			25,863				26,390
Deferred acquisition costs			39,393				64,339
Property and equipment, net of accumulated depreciation of $145,103 and $134,155 at September 30, 2010 and December 31, 2009, respectively)			46,149				48,690
Goodwill and other intangible assets			83,655				85,973
Recoverable federal income taxes			—				17,879
Other assets			21,747				22,653
		$	1,747,783			$	1,871,498
LIABILITIES AND STOCKHOLDERS’ EQUITY
Policy liabilities:
Future policy and contract benefits		$	456,011			$	462,217
Claims			230,329				339,755
Unearned premiums			37,332				46,309
Other policy liabilities			7,711				8,247
Accounts payable and accrued expenses			44,807				65,692
Other liabilities			53,522				74,929
Current and deferred federal income taxes			65,050				51,978
Debt			553,420				481,070
Student loan credit facility			70,400				77,350
Net liabilities of discontinued operations			1,725				1,752
			1,520,307				1,609,299
Commitments and Contingencies (Note 10)
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, 28,418,821 issued and 28,418,821 outstanding at September 30, 2010; 27,608,371 issued and 27,608,371 outstanding at December 31, 2009. Class A-2, par value $0.01 per share — authorized 20,000,000 shares, 4,026,104 issued and 2,759,289 outstanding at September 30, 2010; 4,026,104 issued and 2,565,874 outstanding at December 31, 2009			324				316
Additional paid-in capital			54,228				42,342
Accumulated other comprehensive income			32,334				3,739
Retained earnings			161,571				246,427
Treasury stock, at cost (-0- Class A-1 common shares and 1,266,815 Class A-2 common shares at September 30, 2010; -0- Class A-1 common shares and 1,460,230 Class A-2 common shares at December 31, 2009)			(20,981	)			(30,625	)
			227,476				262,199
		$	1,747,783			$	1,871,498

See Notes to Consolidated Condensed Financial Statements.

HEALTHMARKETS, INC.
and Subsidiaries

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
REVENUE
Health premiums		$	176,736			$	239,560			$	571,423			$	753,203
Life premiums and other considerations			380				487				1,529				1,829
			177,116				240,047				572,952				755,032
Investment income			9,729				10,873				31,840				32,224
Commissions and other income			18,838				15,064				49,377				47,841
Total other-than-temporary impairment losses			(765	)			—				(765	)			(4,078	)
Portion of loss recognized in other comprehensive income (before taxes)			—				—				—				—
Net impairment losses recognized in earnings			(765	)			—				(765	)			(4,078	)
Realized gains, net			1,225				795				3,866				2,350
			206,143				266,779				657,270				833,369
BENEFITS AND EXPENSES
Benefits, claims, and settlement expenses			57,605				126,042				279,353				435,721
Underwriting, acquisition, and insurance expenses			39,765				80,867				138,432				260,143
Other expenses			67,204				25,272				161,947				67,186
Interest expense			7,375				7,559				22,835				25,252
			171,949				239,740				602,567				788,302
Income from continuing operations before income taxes			34,194				27,039				54,703				45,067
Federal income tax expense			11,951				9,644				21,288				16,456
Income from continuing operations			22,243				17,395				33,415				28,611
Income from discontinued operations, (net of income tax expense of $6 and $21 for the three and nine months ended September 30, 2010, respectively, and $30 and $57 for the three and nine months ended September 30, 2009, respectively)			12				55				39				106
Net income		$	22,255			$	17,450			$	33,454			$	28,717
Basic earnings per share:
Income from continuing operations		$	0.75			$	0.59			$	1.13			$	0.97
Income from discontinued operations			0.00				0.00				0.00				0.00
Net income per share, basic		$	0.75			$	0.59			$	1.13			$	0.97
Diluted earnings per share:
Income from continuing operations		$	0.73			$	0.58			$	1.09			$	0.95
Income from discontinued operations			0.00				0.00				0.00				0.00
Net income per share, diluted		$	0.73			$	0.58			$	1.09			$	0.95

See Notes to Consolidated Condensed Financial Statements.

HEALTHMARKETS, INC.
and Subsidiaries

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net income		$	22,255			$	17,450			$	33,454			$	28,717
Implementation effect upon adoption of ASC 320-10			—				—				—				1,017
Other comprehensive income:
Unrealized gains on securities available for sale arising during the period			14,483				38,360				43,352				65,131
Reclassification for investment (gains) losses included in net income			(1,225	)			(809	)			(3,866	)			2,221
Other-than-temporary impairment losses recognized in OCI			—				—				—				(1,565	)
Effect on other comprehensive income from investment securities			13,258				37,551				39,486				65,787
Unrealized gains (losses) on derivatives used in cash flow hedging during the period			(217	)			(1,137	)			(683	)			(2,036	)
Reclassification adjustments included in net income			1,217				2,380				5,190				7,260
Effect on other comprehensive income from hedging activities			1,000				1,243				4,507				5,224
Other comprehensive income before tax			14,258				38,794				43,993				71,011
Income tax expense related to items of other comprehensive income			4,990				13,579				15,398				24,856
Other comprehensive income net of tax			9,268				25,215				28,595				46,155
Comprehensive income		$	31,523			$	42,665			$	62,049			$	75,889

See Notes to Consolidated Condensed Financial Statements.

HEALTHMARKETS, INC.
and Subsidiaries

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

		Nine Months Ended
		September 30,
		2010				2009
Operating Activities:
Net income		$	33,454			$	28,717
Adjustments to reconcile net income to cash (used in) provided by operating activities:
Income from discontinued operations			(39	)			(106	)
Realized (gains) losses, net			(3,101	)			2,217
Change in deferred income taxes			(7,087	)			(681	)
Depreciation and amortization			17,096				22,962
Amortization of prepaid monitoring fees			11,250				9,375
Equity based compensation expense			10,642				5,250
Other items, net			9,891				9,732
Changes in assets and liabilities:
Investment income due and accrued			(2,212	)			1,010
Due premiums			928				1,845
Reinsurance recoverable — ceded policy liabilities			(421	)			8,869
Agent and other receivables			1,553				7,476
Deferred acquisition costs			24,946				3,355
Prepaid monitoring fees			(15,000	)			(12,500	)
Current income tax recoverable			22,642				8,359
Policy liabilities			(121,001	)			(90,286	)
Other liabilities and accrued expenses			(18,327	)			(6,514	)
Cash used in continuing operations			(34,786	)			(920	)
Cash (used in) provided by discontinued operations			12				(97	)
Net cash used in operating activities			(34,774	)			(1,017	)
Investing Activities:
Student loan receivables			6,565				4,763
Securities available for sale			120,863				59,069
Short-term and other investments, net			54,715				(127,140	)
Purchases of property and equipment			(8,459	)			(2,170	)
Proceeds from subsidiaries sold, net of cash disposed of $437 in 2009			—				(440	)
Intangible assets acquired			(297	)			—
Acquisitions net of cash acquired			252				—
Change in restricted cash			1,742				471
Increase in agent receivables			(6,421	)			(276	)
Cash (used in) provided by continuing operations			168,960				(65,723	)
Cash (used in) provided by discontinued operations			—				—
Net cash (used in) provided by investing activities			168,960				(65,723	)
Financing Activities:
Repayment of student loan credit facility			(6,950	)			(7,200	)
Decrease in investment products			(4,144	)			(4,410	)
Change in cash overdraft			(7,055	)			—
Proceeds from shares issued to agent plans and other			6,099				6,340
Purchases of treasury stock			(8,675	)			(18,279	)
Dividends paid			(119,514	)			—
Excess tax reduction from equity based compensation			(1,287	)			(1,478	)
Cash used in continuing operations			(141,526	)			(25,027	)
Cash (used in) provided by discontinued operations			—				—
Net cash used in financing activities			(141,526	)			(25,027	)
Net change in cash and cash equivalents			(7,340	)			(91,767	)
Cash and cash equivalents at beginning of period			17,406				100,339
Cash and cash equivalents at end of period in continuing operations		$	10,066			$	8,572
Supplemental disclosures:
Income taxes paid		$	9,168			$	13,505
Interest paid		$	20,823			$	29,142

See Notes to Consolidated Condensed Financial Statements.

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, statements of comprehensive income and statements of cash flows for the periods presented. The accompanying December 31, 2009 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, 2010 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2010. We have evaluated subsequent events for recognition or disclosure through 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, 2009.

Concentrations

Through its Commercial Health Division (formerly the Self-Employed Agency Division), the Company’s insurance 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 subsidiaries products are issued to members of various independent membership associations that act as the master policyholder for such products. In 2010, the two principal membership associations in the self-employed market through which the Company’s health insurance products were made available were the Alliance for Affordable Services (“AAS”) and Americans for Financial Security (“AFS”). While the Company believes that its insurance subsidiaries are providing association group coverage in full compliance with applicable law, changes in the relationship with the membership associations and/or changes in the laws and regulations governing association group insurance could have a material adverse impact on the Company’s financial condition and results of operations. During the nine months ended September 30, 2010, the Company issued approximately 39% and 12%, of its new policies through AAS and AFS, respectively. The remaining 49% were individual policies not issued through a membership association. In the third quarter the Company discontinued marketing its health insurance products in all but a limited number of states in which Insphere, a subsidiary, does not currently have access to third-party health insurance products. The Company will continue to focus its efforts on selling products underwritten by third-party carriers as well as marketing its own supplemental insurance products.

Additionally, during the nine months ended September 30, 2010, the Company generated approximately 56% of its health premium revenue from new and existing business from the following 10 states:

		Percentage
California			14	%
Texas			7	%
Florida			6	%
Massachusetts			6	%
Illinois			5	%
Maine			5	%
Washington			4	%
North Carolina			3	%
Pennsylvania			3	%
Georgia			3	%
			56	%

2010 Change in Estimate — Amortization of Intangible Assets

On January 1, 2010, the Company re-evaluated the amortization period related to an intangible asset recorded in the Commercial Health Division. See Note 6 of Notes to Consolidated Condensed Financial Statements.

Reclassification

Certain amounts in the 2009 financial statements have been reclassified to conform to the 2010 financial statement presentation.

Recent Accounting Pronouncements

In October 2010, the Financial Account Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-26, Financial Services—Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (a consensus of the FASB Emerging Issues Task Force) providing guidance modifying the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. The guidance specifies that incremental direct costs of contract acquisition attributable to successful efforts should be included as deferred acquisition costs. The guidance also specifies that deferred acquisition costs include advertising costs only when the direct-response advertising accounting criteria are met. The new guidance is effective for reporting periods beginning after December 15, 2011 and should be applied prospectively, with retrospective application permitted. If application of the guidance would result in the capitalization of acquisition costs that had not previously been capitalized prior to adoption, the entity may elect not to capitalize those additional costs. The Company is in process of evaluating the impact of adoption on the Company’s results of operations and financial position.

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU 2010-20”). ASU 2010-20 provides enhanced disclosures related to the credit quality of financing receivables and the allowance for credit losses, and provides that new and existing disclosures should be disaggregated based on how an entity develops its allowance for credit losses and how it manages credit exposures. Under the provisions of ASU 2010-20, additional disclosures required for financing receivables include information regarding the aging of past due receivables, credit quality indicators, and modifications of financing receivables. The provisions of ASU 2010-20 are effective for periods ending after December 15, 2010, with the exception of the amendments to the rollforward of the allowance for credit losses and the disclosures about modifications which are effective for periods beginning after December 15, 2010. Comparative disclosures are required only for periods ending subsequent to initial adoption. The Company is currently assessing the effects of adopting the provisions of ASU 2010-20.

In April 2010, the FASB issued ASU No. 2010-15, How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments, (“ASU 2010-15”). ASU 2010-15 clarifies that insurance companies should not consider separate account interests held for the benefit of policy holders in an investment to be the insurer’s interests and that the Company should not combine those interests with its general account interest in the same investment when assessing the investment for consolidation, unless the separate account interests are held for the benefit of a related party policy holder. Additionally, ASU provides guidance on how an insurer should consolidate an investment fund in situations in which the insurer concludes that consolidation is required. ASU 2010-15 is effective for interim and annual periods beginning after December 15, 2010. The Company does not anticipate that the adoption of ASU 2010-15 will have a material impact on the Company’s financial position or results of operations.

During the third quarter of 2010, the Company adopted ASU No. 2010-11, Derivatives and Hedging (Topic 815) — Scope Exception Related to Embedded Credit Derivatives, (“ASU 2010-11”). ASU 2010-11 clarifies the scope exception for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another. This standard also addresses how to determine which embedded credit derivative features, including those in collateralized debt obligations and synthetic collateralized debt obligations, are considered to be embedded derivatives that should not be analyzed for potential bifurcation and separate accounting. Implementation of this standard did not have a material impact on the Company’s financial position or results of operations.

On January 1, 2010, the Company adopted ASU No. 2009-17, Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”), which provides amendments to FASB Accounting Standards Codification (“ASC”) Topic 810, Consolidation. ASU 2009-17 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. Upon adoption, the Company determined that Grapevine Finance, LLC (“Grapevine”) is a VIE and, as such, the Company began consolidating the activities of Grapevine on January 1, 2010. See Note 5 of Notes to Consolidated Condensed Financial Statements.

On January 1, 2010, the Company adopted ASU No. 2009-16, Accounting for Transfers of Financial Assets and Servicing Assets and Liabilities (“ASU 2009-16”), which provides amendments to FASB ASC Topic 860, Transfers and Servicing (“ASC 860”). ASU 2009-16 incorporates the amendments to SFAS No. 140 made by SFAS No. 166, Accounting for Transfers of Financial Assets—an amendment of SFAS No. 140, into the FASB ASC. ASU 2009-16 provides greater transparency about transfers of financial assets and requires that all servicing assets and servicing liabilities be initially measured at fair value. Additionally, ASU 2009-16 eliminates the concept of a non-consolidated 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. Upon adoption, the Company was no longer permitted to account for Grapevine as a QSPE, and instead was required to evaluate its activities under ASU 2009-17. See Note 5 of Notes to Consolidated Condensed Financial Statements.

During the first quarter of 2010, the Company adopted ASC Update 2009-12, Fair Value Measurements and Disclosures — Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent) (“ASC 2009-12”), which provides amendments to Subtopic 820, Fair Value Measurements and Disclosures (“ASC 820”), for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). See Note 2 of Notes to Consolidated Condensed Financial Statements for additional disclosures required under ASC 2009-12.

During the first quarter of 2010, the Company adopted ASC Update 2010-06, Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends ASC Subtopic 820-10 to require new disclosures around the transfers in and out of Level 1 and Level 2 and around activity in Level 3 fair value measurements. Such guidance also provides amendments to ASC 820 which clarifies existing disclosures on the level of disaggregation, inputs and valuation techniques. See Note 2 of Notes to Consolidated Condensed Financial Statements for additional fair value measurement disclosures.

In January 2010, the FASB issued ASC Update 2010-09, Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements (“ASU 2010-09”), which amends ASC Topic 855, Subsequent Events. Such guidance requires an entity to evaluate subsequent events through the date that the financial statements are issued. ASU 2010-09 is effective for interim and annual periods ending after June 15, 2010. The Company had previously evaluated subsequent events through the date the financial statements are issued and will continue to do so under this guidance.

Impact on Medical Loss Ratio from Update of Completion Factors

The majority of the Company’s claim liabilities are estimated using the developmental method, which involves the use of completion factors for most incurral months, supplemented with additional estimation techniques, such as loss ratio estimates, in the most recent incurral months. This method applies completion factors to claim payments in order to estimate the ultimate amount of the claim. These completion factors are derived from historical experience and are dependent on the incurred dates of the claim, as well as the dates a payment is made against the claim.

The loss ratio for the quarter reflects an update to the completion factors used at the end of the third quarter of 2010 to reflect more recent patterns of claim payments. Through September 2010, the Company has seen an ongoing decrease in the time period from incurral to payment of a claim, resulting in higher completion factors and lower reserves. In response to these trends, in the third quarter, the Company used more recent experience to develop the completion factors, resulting in a decrease in claim liabilities of $30.6 million recognized during the three months ended September 30, 2010. The Company will continue to evaluate and update completion factors on an ongoing basis, as appropriate, and will evaluate the impact, if any, that Health Care Reform Legislation may have on the completion factors.

The decrease in loss ratio for the quarter also reflects the Company’s refinement of a previously estimated claim liability, established in the fourth quarter of 2009, arising from a review of claim processing for state mandated benefits. As a result of this refinement, during the three months ended September 30, 2010, the Company recognized a decrease in claim liabilities of $15.9 million.

2. FAIR VALUE MEASUREMENTS

In accordance with ASC 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 which 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 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, 2010, 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 $202.4 million of “Corporate debt and other” classified as Level 2, and $1.0 million of “Commercial-backed” investments classified as Level 3. The “Corporate debt and other” investments classified as Level 2 noted above includes $103.4 million of an investment grade corporate bond issued by UnitedHealth Group Inc. that was received as consideration for the sale of the Company’s former Student Insurance Division in December 2006 and $90.2 million of an investment grade corporate bond received from a unit of the CIGNA Corporation as consideration for the receipt of the former Star HRG assets (see Note 5 of Notes to Consolidated Condensed Financial Statements).

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 at September 30, 2010
		Level 1				Level 2				Level 3				Total
		(In thousands)
U.S. and U.S. Government agencies		$	4,650			$	52,131			$	—			$	56,781
Corporate debt and other			—				407,775				—				407,775
Collateralized debt obligations			—				—				—				—
Residential-backed issued by agencies			—				79,548				—				79,548
Commercial-backed issued by agencies			—				8,718				—				8,718
Residential-backed			—				2,847				—				2,847
Commercial-backed			—				45,445				1,023				46,468
Asset-backed			—				8,813				—				8,813
Municipals			—				147,645				—				147,645
Other invested assets (1)			—				—				1,645				1,645
Short-term investments (2)			292,641				—				—				292,641
		$	297,291			$	752,922			$	2,668			$	1,052,881

		Liabilities at Fair Value at September 30, 2010
		Level 1				Level 2				Level 3				Total
		(In thousands)
Interest rate swaps		$	—			$	3,493			$	—			$	3,493
Agent and employee plans			—				—				5,867				5,867
		$	—			$	3,493			$	5,867			$	9,360

		Assets at Fair Value at December 31, 2009
		Level 1				Level 2				Level 3				Total
		(In thousands)
U.S. and U.S. Government agencies		$	8,943			$	40,847			$	—			$	49,790
Corporate debt and other			—				344,509				—				344,509
Collateralized debt obligations			—				—				2,905				2,905
Residential-backed issued by agencies			—				105,898				—				105,898
Commercial-backed issued by agencies			—				8,710				—				8,710
Residential-backed			—				3,882				—				3,882
Commercial-backed			—				44,715				1,297				46,012
Asset-backed			—				15,337				465				15,802
Municipals			—				171,434				7,238				178,672
Trading securities			—				—				9,893				9,893
Put options (1)			—				—				657				657
Short-term and other investments (2)			344,011				6,164				937				351,112
		$	352,954			$	741,496			$	23,392			$	1,117,842

		Liabilities at Fair Value at December 31, 2009
		Level 1				Level 2				Level 3				Total
		(In thousands)
Interest rate swaps		$	—			$	8,766			$	—			$	8,766
Agent and employee plans			—				—				16,651				16,651
		$	—			$	8,766			$	16,651			$	25,417

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 agency bonds, corporate bonds, mortgage-backed and asset-backed securities, and municipal 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 fixed income commercial asset-backed investment for which it estimates the fair value using an internal pricing matrix with some unobservable inputs that are significant to the valuation. Consequently, the lack of transparency in the inputs and availability of independent third party pricing information for this investment resulted in its fair value being classified within the Level 3 of the hierarchy. As of September 30, 2010, the fair value of such commercial asset-backed security which represents approximately 0.1% of the Company’s total fixed income investments is reflected within the Level 3 of the fair value hierarchy.

Trading securities & Put Options

Prior to June 30, 2010, the Company held fixed income trading securities which consisted of auction rate securities, for which the fair value was determined based on unobservable inputs. Accordingly, the fair value of this asset was reflected within Level 3 of the fair value hierarchy.

The put options that the Company owned were directly related to agreements the Company entered into with UBS during 2008 to facilitate the repurchase of certain auction rate municipal securities. The options were carried at fair value, which was related to the fair value of the auction rate securities, and were recorded in “Other assets” on the consolidated condensed balance sheets. The Company accounted for such put options in accordance with ASC 320, Investments — Debt and Equity Securities, which provided 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.

During 2009, the Company redeemed $4.6 million of its auction rate securities with UBS at par. At December 31, 2009, the Company held auction rate securities with a face value of $10.6 million. These remaining auction rate securities were redeemed by UBS at par on June 30, 2010.

Other invested assets

The Company’s other invested assets consist of one alternative investment that owns a portfolio of collateralized debt obligation equity investments managed by a third party management group. The Company calculates the fair market value of such investment using the net asset value per share, which is determined based on unobservable inputs. Accordingly, the fair value of this asset is reflected within Level 3 of the fair value hierarchy.

The Company has committed to fund $5.0 million to such equity investment, of which the entire amount has been funded to date. There are no redemption opportunities, and the fund will terminate when the underlying collateralized debt obligation deals mature.

Short-term investments

The Company’s short-term investments primarily consist of highly liquid money market funds, which are reflected within Level 1 of the fair value hierarchy.

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 certain 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 (see Note 11 of Notes to Consolidated Condensed Financial Statements). 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, 2010.

Changes in Level 3 Assets and Liabilities Measured at Fair Value For The Three Months Ended September 30, 2010

										Purchases,
										Sales,
						Unrealized				Payments				Realized				Transfer
		Beginning				Gains or				and				Gains or				in/(out) of				Ending
		Balance				(Losses)				Issuances, Net				(Losses)(1)				Level 3, Net				Balance
		(In thousands)
Assets
Collateralized debt obligations		$	2,202			$	(116	)		$	(1,541	)		$	(545	)		$	—			$	—
Commercial-backed			1,117				(2	)			(92	)			—				—				1,023
Asset-backed			—				—				—				—				—				—
Municipals			—				—				—				—				—				—
Trading securities			—				—				—				—				—				—
Put options			—				—				—				—				—				—
Other invested assets			1,522				123				—				—				—				1,645
		$	4,841			$	5			$	(1,633	)		$	(545	)		$	—			$	2,668
Liabilities
Agent and employee stock plans		$	5,772			$	25			$	70			$	—			$	—			$	5,867

Changes in Level 3 Assets and Liabilities Measured at Fair Value For The Nine Months Ended September 30, 2010

										Purchases,
										Sales,
						Unrealized				Payments				Realized				Transfer
		Beginning				Gains or				and				Gains or				in/(out) of				Ending
		Balance				(Losses)				Issuances, Net				(Losses)(1)				Level 3, Net				Balance
		(In thousands)
Assets
Collateralized debt obligations		$	2,905			$	(835	)		$	(1,525	)		$	(545	)		$	—			$	—
Commercial-backed			1,297				(5	)			(269	)			—				—				1,023
Asset-backed			465				—				—				—				(465	)			—
Municipals			7,238				762				(8,000	)			—				—				—
Trading securities			9,893				657				(10,550	)			—				—				—
Put options			657				(657	)			—				—				—				—
Other invested assets			937				755				(47	)			—				—				1,645
		$	23,392			$	677			$	(20,391	)		$	(545	)		$	(465	)		$	2,668
Liabilities
Agent and employee stock plans		$	16,651			$	(3,441	)		$	(7,343	)		$	—			$	—			$	5,867

During the three months ended September 30, 2010, there were sales and redemptions of Level 3 financial instruments in the amount of $1.6 million, of which $95,000 is classified as “Commercial-backed,” and $1.5 million is classified as “Collateralized Debt Obligations,” in the table above. The Company had a net settlement gain of $3,000 during the three months ended September 30, 2010, all of which is classified as “Commercial-backed” in the table above. The Company had no purchases and no issuances of Level 3 financial instruments during the third quarter of 2010.

During the nine months ended September 30, 2010, there were sales and redemptions of Level 3 financial instruments in the amount of $20.4 million, of which $1.5 million is classified as “Collateralized Debt Obligations”, $280,000 is classified as “Commercial-backed,” $8.0 million is classified as “Municipals,” and $10.6 million is classified as “Trading securities” in the table above. The Company had a net settlement loss of $(20,000) during the nine months ended September 30, 2010, of which $(47,000) is classified as “Other invested assets,” $16,000 is classified as “Collateralized debt obligations” and $11,000 is classified as “Commercial-backed” in the table above. The Company had no purchases and no issuances of Level 3 financial instruments during the first nine months of 2010.

During the three months ended September 30, 2010, the Company did not transfer securities between Level 1, Level 2 and Level 3. During the nine months ended September 30, 2010, the Company transferred one security out of Level 3 to Level 2. Prior to 2010, the Company valued this security internally; however, during the first quarter of 2010, the security began being priced by a pricing service. Furthermore, the Company determined there were adequate observable inputs that were sufficient for pricing the security.

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

During the three and nine months ended September 30, 2009, the Company had no purchases and no issuances of Level 3 financial instruments. Additionally, the Company did not transfer securities between Level 1, Level 2 and Level 3.

Investments not reported at fair value

Other investments 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.

3. INVESTMENTS

The Company’s investments consist of the following at September 30, 2010 and December 31, 2009:

		September 30,				December 31,
		2010				2009
		(In thousands)
Securities available for sale
Fixed maturities		$	758,595			$	756,180
Equity securities			—				234
Trading securities			—				9,893
Short-term and other investments			316,921				371,534
Total investments		$	1,075,516			$	1,137,841

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

		September 30, 2010
						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		$	55,384			$	1,403			$	(6	)		$	—			$	56,781
Collateralized debt obligations			—				—				—				—				—
Residential-backed issued by agencies			75,248				4,307				(7	)			—				79,548
Commercial-backed issued by agencies			8,150				568				—				—				8,718
Residential-backed			2,758				95				(6	)			—				2,847
Commercial-backed			43,918				2,550				—				—				46,468
Asset-backed			8,648				451				(5	)			(281	)			8,813
Corporate bonds and municipals			433,817				32,588				(1,219	)			—				465,186
Other			78,396				11,838				—				—				90,234
Total fixed maturities		$	706,319			$	53,800			$	(1,243	)		$	(281	)		$	758,595

		December 31, 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		$	48,600			$	1,229			$	(39	)		$	—			$	49,790
Collateralized debt obligations			2,070				990				(155	)			—				2,905
Residential-backed issued by agencies			102,497				3,580				(179	)			—				105,898
Commercial-backed issued by agencies			8,337				373				—				—				8,710
Residential-backed			3,934				2				(54	)			—				3,882
Commercial-backed			45,054				998				(40	)			—				46,012
Asset-backed			16,176				306				(399	)			(281	)			15,802
Corporate bonds and municipals			509,862				14,626				(6,474	)			—				518,014
Other			6,100				—				(933	)			—				5,167
Total fixed maturities		$	742,630			$	22,104			$	(8,273	)		$	(281	)		$	756,180

The amortized cost and fair value of available for sale fixed maturities at September 30, 2010, 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, 2010
		Amortized
		Cost				Fair Value
		(In thousands)
Maturity:
One year or less		$	36,460			$	37,218
Over 1 year through 5 years			174,571				184,640
Over 5 years through 10 years			218,229				236,569
Over 10 years			138,337				153,774
			567,597				612,201
Mortgage-backed and asset-backed securities			138,722				146,394
Total fixed maturities		$	706,319			$	758,595

See Note 2 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,
		2010				2009				2010				2009
		(In thousands)
Fixed maturities		$	8,559			$	9,290			$	27,160			$	28,980
Equity securities			—				19				—				36
Short-term and other investments			390				273				1,866				(937	)
Agent receivables			163				613				857				1,959
Student loan interest income			1,030				1,149				3,153				3,625
			10,142				11,344				33,036				33,663
Less investment expenses			413				471				1,196				1,439
		$	9,729			$	10,873			$	31,840			$	32,224