UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X]

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended~~September 30, 2006~~March 31, 2007

[ ]

Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from: ________ to _________

Commission File Number:0-10306

INDEPENDENCE HOLDING COMPANY

(Exact name of registrant as specified in its charter)


Delaware		58-1407235
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

96 CUMMINGS POINT ROAD, STAMFORD, CONNECTICUT 06902

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:(203) 358-8000

NOT APPLICABLE

Former name, former address and former fiscal year, if changed since last report.

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 [X] No [ ]

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

Large Accelerated Filer [ ] Accelerated Filer [ X ] Non-Accelerated Filer [ ]

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


Class	Outstanding at ~~November 8, 2006~~May 9, 2007
Common stock, $ 1.00 par value	~~15,048,567~~15,190,789 Shares

INDEPENDENCE HOLDING COMPANY

INDEX


PART I – FINANCIAL INFORMATION					PAGE
						NO.

		Item 1. Financial Statements

			Consolidated Balance Sheets -
			~~September 30, 2006~~March 31, 2007 (unaudited) and December 31, ~~2005~~2006		34

			Consolidated Statements of Operations -
			Three Months Ended March 31, 2007 and ~~Nine Months Ended September 30,~~ 2006 ~~and 2005~~
				(unaudited)	45

			Consolidated Statements of Cash Flows -
			~~Nine~~Three Months Ended ~~September 30,~~March 31, 2007 and 2006 ~~and 2005~~ (unaudited)		56

			Notes to Consolidated Financial Statements (unaudited)		67

		Item 2. Management's Discussion and Analysis of Financial Condition
			and Results of Operations		1716

		Item 3. Quantitative and Qualitative Disclosures about Market Risk			3124

		Item 4. Controls and Procedures			3125

PART II - OTHER INFORMATION

		Item 1. Legal Proceedings			3125

		Item 1A. Risk Factors			3225

		Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			3225

		Item 3. Defaults Upon Senior Securities			3226

		Item 4. Submission of Matters to a Vote of Security Holders			3226

		Item 5. Other Information			3226

		Item 6. Exhibits			3326

	Signatures				3327

Copies of the Company’s SEC filings can be found on its website at ~~www.independenceholding.com~~www.independenceholding.com.

Forward-Looking Statements

Certain statements in this document are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, cash flows, plans, objectives, future performance and business of the Company. In this context, forward-looking statements often address the Company’s expected future business and financial performance, and often (but not always) contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” or “will.” Forward-looking statements by their nature address matters that are, to differing degrees, uncertain. With respect to the Company, particular uncertainties that could adversely or positively affect its future results include, but are not limited to, economic conditions in the markets in whic h the Company operates, new federal or state governmental regulation, the Company’s ability effectively to operate, integrate and leverage any past or future strategic acquisition, and other factors which can be found in the Company’s news releases and filings with the Securities and Exchange Commission. These uncertainties may cause the Company’s actual future results to be materially different than those expressed in its forward-looking statements. The Company does not undertake to update its forward-looking statements.

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


						September 30,		December 31,						March 31,		December 31,
						2006		2005						2007		2006
						(unaudited)								(unaudited)
ASSETS:	ASSETS:								ASSETS:
									Investments:
	Investments:									Short-term investments			$	5,592	$	9,910
		Short-term investments			$	641	$	8,810		Securities purchased under agreements to resell				13,704		68,849
		Securities purchased under agreements to resell				45,229		44,399		Fixed maturities				720,353		665,340
		Fixed maturities				669,349		683,008		Equity securities				78,161		60,043
		Equity securities				68,128		62,300		Other investments				44,949		55,034
		Other investments				55,859		57,287
											Total investments			862,759		859,176
			Total investments			839,206		855,804
									Cash and cash equivalents					11,162		17,543
	Cash and cash equivalents					21,218		12,659	Due from securities brokers					8,176		660
	Due from securities brokers					19,358		1,951	Investment in American Independence Corp. ("AMIC")					40,604		39,942
	Investment in American Independence Corp. ("AMIC")					39,539		39,167	Deferred acquisition costs					54,377		55,021
	Deferred acquisition costs					55,008		62,000	Due and unpaid premiums					58,820		23,860
	Due and unpaid premiums					11,103		12,230	Due from reinsurers					125,486		111,476
	Due from reinsurers					104,920		111,135	Premium and claim funds					48,460		51,244
	Notes and other receivables					14,068		12,102	Notes and other receivables					18,111		13,994
	Goodwill					46,425		16,110	Goodwill					47,243		46,603
	Other assets					48,588		34,397	Other assets					45,881		40,165

		Total assets			$	1,199,433	$	1,157,555		Total assets			$	1,321,079	$	1,259,684

LIABILITIES AND STOCKHOLDERS' EQUITY:	LIABILITIES AND STOCKHOLDERS' EQUITY:								LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:	LIABILITIES:								LIABILITIES:
	Insurance reserves-health				$	160,823	$	159,600	Insurance reserves-health				$	199,311	$	175,048
	Insurance reserves-life and annuity					254,114		273,449	Insurance reserves-life and annuity					251,745		252,860
	Funds on deposit					377,336		370,701	Funds on deposit					386,403		387,757
	Unearned premiums					19,763		18,524	Unearned premiums					21,256		19,982
	Policy claims-health					7,163		4,839	Policy claims-health					7,516		7,407
	Policy claims-life					6,271		8,742	Policy claims-life					11,185		6,799
	Other policyholders' funds					18,014		18,350	Other policyholders' funds					18,230		18,299
	Due to securities brokers					22,123		4,856	Due to securities brokers					3,138		-
	Due to reinsurers					21,410		11,667	Due to reinsurers					53,810		38,109
	Accounts payable, accruals and other liabilities					36,341		37,430	Accounts payable, accruals and other liabilities					76,577		69,127
	Debt					15,000		12,500	Debt					15,000		15,000
	Junior subordinated debt securities					38,146		38,146	Junior subordinated debt securities					38,146		38,146

		Total liabilities				976,504		958,804		Total liabilities				1,082,317		1,028,534

STOCKHOLDERS' EQUITY:	STOCKHOLDERS' EQUITY:								STOCKHOLDERS' EQUITY:
	Preferred stock (none issued)					-		-	Preferred stock (none issued)					-		-
	Common stock $1.00 par value, 20,000,000 shares authorized;								Common stock $1.00 par value, 20,000,000 shares authorized;
			15,126,828 and 14,235,066 shares issued, respectively;								15,307,180 and 15,293,862 shares issued, respectively;
			15,033,616 and 14,132,149 shares outstanding, respectively			15,127		14,235			15,188,785 and 15,175,467 shares outstanding, respectively			15,307		15,294
	Paid-in capital					95,525		78,554	Paid-in capital					98,353		97,873
	Accumulated other comprehensive loss					(11,743)		(8,414)	Accumulated other comprehensive loss					(6,785)		(9,302)
	Treasury stock, at cost 93,212 and 102,917 shares,								Treasury stock, at cost, 118,395 shares					(2,237)		(2,237)
				respectively		(1,727)		(1,829)	Retained earnings					134,124		129,522
	Retained earnings					125,747		116,205
										Total stockholders' equity				238,762		231,150
		Total stockholders' equity				222,929		198,751
												Total liabilities and stockholders' equity	$	1,321,079	$	1,259,684
				Total liabilities and stockholders' equity	$	1,199,433	$	1,157,555

The accompanying notes are an integral part of these consolidated financial statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

Three Months Ended
Nine Months Ended

September 30,
September 30,

2006

2005

2006

2005
REVENUES:

Premiums earned:

Health
$
60,711
$
52,130
$
176,495
$
138,328

Life and annuity
10,840
10,561
32,634
29,572

Net investment income
11,855
10,928
35,188
29,464

Fee income
8,791
2,933
23,904
7,262

Net realized investment gains and

and losses
253
994
720
2,078

Equity income from AMIC
47
478
406
1,464

Other income
597
411
2,056
4,922

93,094

78,435

271,403

213,090

EXPENSES:

Insurance benefits, claims and reserves:

Health
38,673
34,072
115,763
85,396

Life and annuity
13,693
11,923
39,404
33,047

Selling, general and administrative

expenses
31,716
21,982
90,530
59,518

Amortization of deferred acquisition

costs
2,352
2,442
7,541
7,766

Interest expense on debt

990

883

2,821

2,593

87,424

71,302

256,059

188,320

Income before income taxes
5,670
7,133
15,344
24,770

Income tax expense

1,601

2,345

4,880

8,364

Net income
$
4,069
$
4,788
$
10,464
$
16,406

Basic income per common share
$
.27
$
.34
$
.71
$
1.17

Weighted average shares outstanding

15,028

14,019

14,797

13,981

Diluted income per common share
$
.27
$
.34
$
.69
$
1.15

Weighted average diluted shares

outstanding

15,235

14,286

15,117

14,255


					Three Months Ended
					March 31,
					2007		2006
REVENUES:
	Premiums earned:
		Health		$	72,822	$	55,373
		Life and annuity			11,665		10,915
	Net investment income				12,034		11,931
	Fee income				10,187		7,411
	Net realized investment gains				420		417
	Equity income from AMIC				535		176
	Other income				1,408		617

					109,071		86,840

EXPENSES:
	Insurance benefits, claims and reserves:
		Health			48,641		37,296
		Life and annuity			13,638		12,884
	Selling, general and administrative expenses				36,467		27,149
	Amortization of deferred acquisitions costs				2,491		2,518
	Interest expense on debt				1,056		903

					102,293		80,750

	Income before income taxes				6,778		6,090
	Income tax expense				2,176		2,061

			Net income	$	4,602	$	4,029

Basic income per common share				$	.30	$	.28

Weighted average shares outstanding					15,182		14,495

Diluted income per common share				$	.30	$	.27

Weighted average diluted shares outstanding					15,335		14,869

The accompanying notes are an integral part of these consolidated financial statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


						Nine Months Ended								Three Months Ended
						September 30,								March 31,
						2006		2005						2007		2006
CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:	CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:								CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:
	Net income				$	10,464	$	16,406	Net income				$	4,602	$	4,029
	Adjustments to reconcile net income to net change in cash from								Adjustments to reconcile net income to net change in cash from
			operating activities:								operating activities:
			Amortization of deferred acquisition costs			7,541		7,766			Amortization of deferred acquisition costs			2,491		2,518
			Net realized investment gains and losses			(720)		(2,078)			Net realized investment gains			(420)		(417)
			Equity income from AMIC and other equity method investments			(1,169)		(3,109)			Equity income from AMIC and other equity method investments			(535)		(342)
			Depreciation and amortization			2,013		1,537			Depreciation and amortization			1,089		577
			Share-based compensation expenses			1,066		-			Share-based compensation expenses			440		336
			Deferred tax expense			283		5,058			Deferred tax expense			274		71
			Other			982		599			Other			386		288
Changes in assets and liabilities:	Changes in assets and liabilities:								Changes in assets and liabilities:
											Net sales of trading securities			134		163
											Change in insurance liabilities			26,578		(3,983)
			Net sales of trading securities			705		434			Deductions from (additions to) deferred acquisition costs, net			(2,483)		801
			Change in insurance liabilities			(20,134)		(3,618)			Change in net amounts due from and to reinsurers			1,690		1,743
			Deductions from (additions to) deferred acquisition costs, net			322		(13,595)			Change in premium and claim funds			2,784		(669)
			Change in net amounts due from and to reinsurers			15,958		14,684			Change in income tax liability			747		178
			Change in income tax liability			(643)		798			Change in due and unpaid premiums			(34,961)		997
			Change in due and unpaid premiums			1,128		(2,033)			Change in other assets			(5,447)		(3,848)
			Other			(7,005)		(6,514)			Change in other liabilities			6,026		(4,646)

				Net change in cash from operating activities		10,791		16,335				Net change in cash from operating activities		3,395		(2,204)

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:	CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:								CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:
			Change in net amount due from and to securities brokers			(140)		(1,975)			Change in net amount due from and to securities brokers			(4,378)		(2,922)
			Net proceeds of short-term investments			8,178		12,434			Net proceeds of short-term investments			4,334		8,180
			Net (purchases) sales of securities under resale and repurchase agreements			(830)		77,641			Net (purchases) sales of securities under resale and repurchase agreements			55,145		38,347
			Sales of equity securities			88,613		7,553			Sales of equity securities			23,347		7,282
			Purchases of equity securities			(94,843)		(54,419)			Purchases of equity securities			(40,181)		(14,930)
			Sales of fixed maturities			217,048		637,572			Sales of fixed maturities			93,837		84,189
			Maturities of fixed maturities			1,700		1,300			Maturities and other repayments of fixed maturities			21,129		13,252
			Purchases of fixed maturities			(210,700)		(783,160)			Purchases of fixed maturities			(166,763)		(110,210)
			Sales of other investments			3,611		6,273			Sales of other investments			10,334		-
			Additional investments in other investments, net of distributions			(1,836)		(703)			Additional investments in other investments, net of distributions			(250)		(220)
			Cash paid in acquisitions of companies, net of cash acquired			(20,950)		(12,049)			Cash paid in acquisitions of companies, net of cash acquired			(3,500)		(20,950)
			Investment in AMIC			-		(4,749)			Cash (paid) received in purchases of policy blocks			-		(224)
			Cash (paid) received in purchases of policy blocks			(224)		90,970			Change in notes and other receivables			(2,999)		(1,639)
			Change in notes and other receivables			(3,456)		(2,238)			Other			(390)		(1,011)
			Other			(4,735)		(2,593)
												Net change in cash from investing activities		(10,335)		(856)
				Net change in cash from investing activities		(18,564)		(28,143)

CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES:	CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES:								CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES:
		Proceeds from issuance of common stock				2,500		-
		Repurchases of common stock				(670)		(5,624)
		Increase in long-term debt				2,500		-		Proceeds from issuance of common stock				-		2,500
		Exercises of common stock options				2,119		653		Exercises of common stock options				17		77
		Excess tax benefits from exercise of stock options				1,252		-		Excess tax benefits from exercise of stock options				6		96
		Proceeds of investment-type insurance contracts				9,361		14,875		Proceeds of investment-type insurance contracts				916		5,918
		Dividends paid				(730)		(700)		Dividends paid				(380)		(353)

				Net change in cash from financing activities		16,332		9,204				Net change in cash from financing activities		559		8,238

Net change in cash and cash equivalents	Net change in cash and cash equivalents					8,559		(2,604)	Net change in cash and cash equivalents					(6,381)		5,178
Cash and cash equivalents, beginning of year	Cash and cash equivalents, beginning of year					12,659		13,196	Cash and cash equivalents, beginning of year					17,543		12,659

Cash and cash equivalents, end of period	Cash and cash equivalents, end of period				$	21,218	$	10,592	Cash and cash equivalents, end of period				$	11,162	$	17,837

The accompanying notes are an integral part of these consolidated financial statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Note 1.

Significant Accounting Policies and Practices

(A)

Business and Organization

Independence Holding Company, a Delaware corporation ~~(NYSE: IHC)~~("IHC"), is a holding company principally engaged in the life and health insurance business through: (i) its ~~wholly-owned~~wholly owned insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life") and Madison National Life Insurance Company, Inc. ("Madison National Life"); and (ii) its marketing and administrative companies, including Insurers Administrative Corporation (“IAC”), managing general ~~underwriter (“MGU”~~underwriters ("MGUs") ~~affiliates,~~in which it owns a significant voting interest, Health Plan Administrators (“HPA”), GroupLink, Inc. (“GroupLink”), IHC Health Solutions, Inc. (“IHC Health Solutions”), and Community America Insurance Services, Inc. (“CAIS”~~, formerly CA Insurance Services LLC)~~). These companies are sometimes collectively referred to as the "Insurance Group," and IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred ~~t o~~to as the "Company." The Company also owns a 48% equity interest in American Independence Corp. ~~(NASDAQ:AMIC)~~("AMIC"), which owns Independence American Insurance Company (“Independence American”) and several ~~MGU’s.~~MGUs.

Geneve Corporation, a diversified financial holding company, and its affiliated entities held approximately 54% of IHC's outstanding common stock at ~~September 30, 2006.~~March 31, 2007.

(B)

Basis of Presentation

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles and include the accounts of IHC and its consolidated subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect: (i) the reported amounts of assets and liabilities; (ii) the disclosure of contingent assets and liabilities at the date of the financial statements; and (iii) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. IHC’s annual report on Form 10-K as filed with the Securities and Exchange Commission should be read in conjunction with the accompanying consolidated financial statements.

In the opinion of management, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been included. The consolidated results of operations for the three months ~~and nine months~~ ended ~~September 30, 2006~~March 31, 2007 are not necessarily indicative of the results to be anticipated for the entire year.

(C)

Reclassifications

Certain amounts in prior years' Consolidated Financial Statements and ~~notes~~Notes thereto have been reclassified to conform to the ~~2006~~2007 presentation.

(D)

~~Share-Based Compensation~~Recent Accounting Pronouncements

~~Effective January 1,~~In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 would create a fair value option of accounting for qualifying financial assets and liabilities under which an irrevocable election could be made at inception to measure such assets and liabilities initially and subsequently at fair value, with all changes in fair value reported in earnings. SFAS 159 is effective as of the beginning of the first fiscal year beginning after

November 15, 2007. The adoption of SFAS 159 is optional. The Company is in the process of analyzing the effects of adoption of SFAS 159 on the Company’s consolidated financial statements.

In February 2006, ~~under~~ the ~~modified prospective method, the Company adopted the provisions of~~Financial Account Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. ~~123R, "Share-Based Payment" ("~~155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS ~~123R"~~155”), which ~~revises~~amends SFAS No. ~~123,~~133, “Accounting for ~~Stock-Based Compensation”~~Derivative Instruments and Hedging Activities” (“SFAS ~~123”~~133”) and ~~supersedes APB Opinion~~SFAS No. ~~25,~~140, “Accounting for ~~Stock Issued to Employees”~~Transfers and ~~its related interpretations~~Servicing of Financial Assets and Extinguishments of Liabilities” (“~~APB 25”~~SFAS 140”). SFAS ~~123R applies~~155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all ~~awards granted~~financial instruments acquired, issued or subject to a re-measurement event occurring in fiscal years beginning after ~~its effective date and to modifications, repurchases or cancellations~~September 15, 2006. The adoption of ~~existing awards after that date. Results for prior periods~~

6SFAS 155 did not have a material impact on the Company's consolidated financial statements.

~~have not been restated. Additionally, under~~In June 2006, the ~~modified prospective method~~FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes – An Interpretation of ~~adoption, the Company recognizes compensation expense~~FASB Statement No. 109" ("Interpretation 48"), which prescribes a recognition threshold and measurement attribute for the ~~portion~~financial statement recognition and measurement of ~~outstanding awards~~a tax position taken or expected to be taken in a tax return. The recognition threshold is based on ~~the adoption date for which the requisite service period has~~a determination of whether it is more likely than not ~~yet been rendered~~that a tax position will be sustained upon examination based on the ~~grant-date~~technical merits of the position. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. Interpretation 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Interpretation 48 is effec tive for fiscal years beginning after December 15, 2006. The cumulative effect of applying the provisions of Interpretation 48 is reported as an adjustment to retained earnings as of the beginning of the year of adoption. The amount of the cumulative-effect adjustment is the difference between the net amount of assets and liabilities recognized in the balance sheet prior to the application of Interpretation 48 and the net amount of assets and liabilities recognized as a result of applying Interpretation 48. The adoption of Interpretation 48 on January 1, 2007 did not have a material impact on the Company's consolidated financial statements and the Company believes there are no significant tax positions that would require disclosure under Interpretation 48. The Internal Revenue Service is currently auditing our 2003 and 2004 consolidated income tax returns. It is anticipated that this examination will be completed within the next twelve months. Management believes that it has made adequate provision for all i ncome tax uncertainties, such that the outcome of any unresolved issues or claims will not result in a material change to our financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, ofestablishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those ~~awards calculated under SFAS 123 for purposes of pro forma disclosures.~~

For the three month and nine month periods ended September 30, 2006, total share-based compensation expense was $428,000 and $1,136,000, respectively, including $264,000 and $839,000, respectively, of incremental share-based compensation expense resulting from thefiscal years. The adoption of SFAS ~~123R. This incremental expense resulted in decreases of $159,000 and $505,000, respectively,~~157 is not expected to ~~net income, after income tax benefits of $105,000 and $334,000, respectively, for~~have a material effect on the ~~three months and nine months ended September 30, 2006.~~Company’s consolidated financial statements.

~~Prior~~ In September 2005, the AICPA's Accounting Standards Executive Committee issued Statement of Position 05-1, "Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts" ("SOP 05-1"). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in SFAS 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments". SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the ~~adoption~~election of ~~SFAS 123R, the Company~~a featu re or coverage within a contract. A replacement contract that is substantially changed will be accounted for its share-based awards under APB 25. The following table details the effect on net income and earnings per share had compensation expense for employee share-based awards been recorded in the three month and nine month periods ended September 30, 2005 based on the fair value method under SFAS 123 (in thousands, except per share data):

Three Months

Nine Months

Ended

Ended

September 30,

September 30,

2005

2005

Net income, as reported
$
4,788

$
16,406
Add stock-based employee compensation expense included

in reported net income, net of related tax effects

-

-
Deduct total stock-based compensation expense determined

under fair value based method for all awards, net of

related tax effects
$
(155)

$
(495)
Proforma net income
$
4,633

$
15,911

Basic earnings per share:

As reported
$
.34

$
1.17

Proforma
$
.33

$
1.14

Diluted earnings per share:

As reported
$
.34

$
1.15

Proforma
$
.32

$
1.12

Under the terms of the Company’s stock-based compensation plans, option exercise prices are equal to the quoted market price of the shares at the date of grant; option terms range from five to ten years; and vesting periods are three years for employee options. The Company may also grant shares of restricted stock. These shares are valued at the quoted market price of the shares at the date of grant, and have a three year vesting period. There were 1,127,464 shares available for future option or restricted-stock grants under the shareholder-approved plans at September 30, 2006. Substantially all of these available shares relate to the Company’s 2006 Stock Incentive Plan that was approved by shareholders in June 2006.

The total intrinsic value of options exercised during the three month periods ended September 30, 2006 and 2005 was $536,000 and $464,000, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2006 and 2005 was $4,607,000 and $1,162,000, respectively. Cash proceeds received from options exercised for the three months ended September 30, 2006 and 2005 were $337,000 and $303,000, respectively. Cash proceeds received from options exercised for the nine months ended September 30, 2006 and 2005 were $2,119,000 and $653,000, respectively.

~~The Company’s stock option activity for the nine months ended September 30, 2006 is as follows:~~

Shares

Weighted-Average

Under Option

Exercise Price

December 31, 2005

1,108,371

$
11.89
Granted

230,000

21.58
Exercised

(312,590)

6.78
Expired

(1,800)

20.89
September 30, 2006

1,023,981

$
15.61

~~The following table summarizes information regarding outstanding and exercisable options as of September 30, 2006:~~

Outstanding

Exercisable

Number of options

1,023,981

681,781
Weighted average exercise price per share
$
15.61
$
12.86
Aggregate intrinsic value for all options
$
6,297,000
$
6,102,000
Weighted average contractual term remaining

2.4 years

1.6 years

The fair value of each option award is estimated on the date of grant using the Black Scholes option valuation model. The weighted average grant-date fair-value of options granted during the nine months ended September 30, 2006 was $7.25. No stock options were granted during the nine months ended September 30, 2005. The Company issued 49,325 and 2,250 restricted stock awards during the nine month periods ended September 30, 2006 and 2005, respectively, with weighted-average grant-date fair values of $22.20 and $17.82 per share, respectively. The assumptions set forth in the table below were used to value the stock options granted during the nine month period ended September 30, 2006.


~~Weighted-average risk-free interest rate~~		~~4.9%~~
~~Annual dividend rate per share~~	$	~~.05~~
~~Weighted-average volatility factor of the Company's common stock~~		~~32.1%~~
~~Weighted-average expected term of options~~		~~4.5 years~~

As of September 30, 2006, there was $1,861,000 and $902,000 of total unrecognized compensation expense related to non-vested options and non-vested restricted stock awards, respectively, which will be recognized over the remaining requisite weighted-average service periods of 1.6 years and 2.4 years, respectively.

Prior to the adoption of SFAS 123R, the Company presented the tax benefit resulting from the exercise of stock options and restricted stock awards as operating cash flows in the Consolidated Statements of Cash Flows. SFAS 123R requires such benefits to be reported as a financing cash flow, rather than as an operating cash flow. In the nine month period ended September 30, 2006, excess tax benefits of $1,252,000 were classified as financing cash inflows. In the nine month period ended September 30, 2005, excess tax benefits of $407,000 were classified as operating cash inflows.

extinguishment

of the replaced contract resulting in a release of the unamortized deferred acquisition costs, unearned revenue, and deferred sales inducements associated with the replaced contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The adoption of SOP 05-1 did not have a material impact on the Company's consolidated financial statements.

Note 2.

American Independence Corp.

AMIC is an insurance holding company engaged in the insurance and reinsurance business as a result of its acquisition of First Standard Holdings Corp. ("FSHC") from the Company in November 2002. AMIC does business with the Insurance Group, including reinsurance treaties under which, in ~~2005,~~2006, Standard Security Life and Madison National Life ceded to Independence American an average of 22% of their medical stop-loss business, 10% of a majority of their ~~fully-insured~~fully insured health business and 20% of their New York Statutory Disability business. IHC owned 48% of AMIC's outstanding common stock at ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005,~~2006, which was purchased in various transactions ~~beginning in 2002.~~from 2002 through 2005. IHC accounts for its investment in AMIC under the equity method. At ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005,~~2006, IHC's investment in AMIC had a total carrying value of ~~$44,009,000~~$45,075,000 and ~~$43,637,000,~~$44,412,000, respectively, including ~~goodwill~~goo dwill of $4,470,000 at both dates. This goodwill represents the excess of IHC's cost over the underlying equity in AMIC's net assets at the respective purchase dates. At ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005,~~2006, based on the closing market price of AMIC's common stock, the fair value of the AMIC shares owned by IHC was approximately ~~$46,262,000~~$42,282,000 and ~~$46,668,000,~~$43,866,000, respectively.

For the ~~three months~~quarter ended March 31, 2007 and ~~nine months ended September 30,~~ 2006, IHC recorded ~~$47,000~~$535,000 and ~~$406,000, respectively,~~$176,000 of equity income from its investment in AMIC, representing IHC's proportionate share of income based on its ownership interests during those periods. ~~IHC's equity income for the three months and nine months ended September 30, 2005 was $478,000 and $1,464,000, respectively.~~ AMIC paid no dividends on its common stock in the three month ~~and nine month~~ periods ended ~~September 30, 2006~~March 31, 2007 and ~~2005.~~2006.

IHC and its subsidiaries earned ~~$138,000~~$200,000 and ~~$136,000~~$139,000 for the ~~three months~~quarters ended ~~September 30,~~March 31, 2007 and 2006, ~~and 2005, respectively, and $394,000 and $442,000 for the nine months ended September 30, 2006 and 2005,~~ respectively, from service agreements with AMIC and its subsidiaries. These are reimbursements to IHC and its subsidiaries, at agreed upon rates including an overhead factor, for management services provided by IHC and its subsidiaries, including accounting, legal, compliance, underwriting and claims. The Company ceded premiums to AMIC of $16,101,000 and $13,674,000 for the three months ended March 31, 2007 and 2006, respectively. Benefits to policyholders on business ceded to AMIC were $11,155,000 in the first quarter of 2007 and $9,317,000 in the first quarter of 2006. Additionally, AMIC subsidiaries market, underwrite and provide administrative services (including premium collection, medical management and claims adjudication) for a substantial portion of the Medical Stop-Loss business written by th e insurance subsidiaries of IHC. IHC recorded net commission expense of $1,050,000 and $1,316,000 in the first quarter of 2007 and 2006, respectively, for these services. The Company also contracts for several types of insurance coverage (e.g. directors and officers and professional ~~liability)~~liability converge) jointly with AMIC. The cost of this coverage is allocated between the Company and AMIC according to the type of risk, and IHC’s portion is recorded in Selling, General and Administrative Expenses. The Company ceded premiums to AMIC of $14,279,000 and $14,450,000 for the three months ended September 30, 200 6 and 2005, respectively, and $41,527,000 and $41,574,000 for the nine months ended September 30, 2006 and 2005, respectively.

Included in the Company’s Consolidated Balance Sheets at ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005,~~2006, respectively, are the following balances arising from transactions in the normal course of business with AMIC and its subsidiaries: Due from reinsurers ~~$13,764,000~~$15,572,000 and ~~$14,122,000;~~$15,324,000; Other assets ~~$8,782,000~~$7,392,000 and ~~$10,565,000;~~$5,971,000; and Other liabilities ~~$494,000~~$533,000 and ~~$249,000.~~$518,000.

Note 3.

Income Per Common Share

Included in the diluted income per share calculations are ~~207,000~~153,000 and ~~267,000~~374,000 shares for the three months ended ~~September 30,~~March 31, 2007 and 2006, ~~and 2005, respectively, and 320,000 and 274,000 shares for the nine months ended September 30, 2006 and 2005,~~ respectively, from the assumed exercise of options and vesting of restricted stock, using the treasury stock method. Net income does not change as a result of the assumed dilution.

Note 4.

~~Acquisitions~~

The Company completed the following acquisitions in the first quarter of 2006. The results of operations of the acquired companies are included in IHC's Consolidated Financial Statements from the respective acquisition dates. None of the goodwill recognized in these acquisitions is deductible for income tax purposes. Pro forma results of operations for the nine months ended September 30, 2006 and for the three months and nine months ended September 30, 2005, as though these acquisitions had been completed at the beginning of those periods, have not been presented since the effect of the acquisitions was not material.

~~IAC Acquisition~~

In January 2006, the Company entered into a stock purchase agreement to purchase all of the voting and non-voting shares of the common stock of Insurers Administrative Corporation ("IAC") and Interlock Corporation for a total purchase price of $21,360,000 in cash and 446,663 shares of IHC common stock, which were issued at a value of $21.54 per share or $9,622,000. The Company recorded goodwill of $25,673,000 and other intangible assets consisting of $7,000,000 for the value of agent relationships and $1,800,000 for the value of computer software. The relationship intangible and the capitalized software are being amortized over periods of 13 years and 8.7 years, respectively (a weighted-average period of 12.1 years). Prior to entering into this agreement, IAC owned the minority interest in Strategic Health Associates (“SHA”) and administered IHC’s block of fully-insured group health in surance. As a consequence of IHC’s acquisition of the minority interest in SHA through the IAC purchase, IHC owns 100% of SHA and therefore recognized additional goodwill and other intangibles, and eliminated the minority interest previously reported.

IAC, which is based in Phoenix, Arizona, is a leading administrator, manager and distributor of Consumer Driven Health Plans (“CDHPs”). It currently administers approximately $270 million of individual and group health and life premiums and premium-equivalents. Of this business, approximately 40% is currently insured by Standard Security Life and Madison National Life. IAC, in combination with IHC’s other fully-insured subsidiaries (HPA and GroupLink) administers, manages and distributes a full range of health products, including CDHPs, short-term medical, limited medical, dental and vision.

IHC issued a stock put on 194,443 of the IHC shares issued in the acquisition which vests on January 31, 2007 at a price of $17.00 per share and expires on January 31, 2008. The put was recorded at a fair value of $228,000 at the acquisition date. For the three months and nine months ended September 30, 2006, IHC recorded unrealized gains of $3,000 and $82,000, respectively, in the Consolidated Statements of Operations, representing the net change in fair value of the put.

~~CAIS Acquisition~~

On March 1, 2006, IHC acquired the remaining 55% membership interest in CA Insurance Services, LLC (“CAIS”) by merging CAIS into Community America Insurance Services, Inc., a newly created and wholly-owned direct subsidiary of IHC. The 55% interest was acquired for 46,250 shares of IHC common stock, which were issued at a value of $22.87 per share or $1,058,000. The Company recorded goodwill of $1,163,000 and other intangible assets of $370,000 for the value of agent relationships in connection with the acquisition. The other intangible assets are being amortized over a period of nine years.

On March 31, 2006, CAIS acquired a marketing organization, including key management and health insurance sales staff, which controls a block of approximately $50 million of fully-insured group major medical business (including CDHPs) for $750,000, which is recorded as an intangible asset. This acquired block of group major medical business began to be transitioned to Madison National Life effective August 1, 2006.

~~Goodwill and Other Intangible Assets~~

At September 30, 2006 and December 31, 2005, the Company had goodwill of $46,425,000 and $16,110,000, respectively, and other intangible assets (included in Other assets in the Consolidated Balance Sheets) of $13,044,000 and $3,838,000, respectively. The change in the carrying amount of goodwill and other intangible assets for the first nine months of 2006 is as follows (in thousands):

Other Intangible

Goodwill

Assets

Balance at December 31, 2005
$
16,110

$
3,838
IAC acquisition

25,673

8,800
SHA minority interest

1,840

644
CAIS acquisition and other additions

2,802

1,120
Amortization expense

-

(1,358)
Balance at September 30, 2006
$
46,425

$
13,044

~~Note 5.~~

~~New Accounting Pronouncements~~

In May 2005, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces Accounting Principles Board Opinion No. 20, “Accounting Changes” (“APB 20”) and Statement of Financial Accounting Standards No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 applies to all voluntary changes in accounting principle, and changes the requirements for accounting and reporting a change in accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. APB 20 previously required that most voluntary changes in accounting principle be recognized as a cumulative effect adjustment in net income o f the period of the change. SFAS 154 is effective for accounting changes made in annual periods beginning after December 15, 2005. The adoption of SFAS 154 had no impact on the Company’s consolidated financial statements.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”), which amends Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”). SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a re-measurement event occurring in fiscal years beginning after September 15, 2006. Adoption of SFAS 155 is not expected to have a material effect on the Company’s consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 ("Interpretation 48"), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Interpretation 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Interpretation 48 is effective for fiscal years beginning after December 15, 2006. The Company has not yet determined the impact that FIN 48 will have on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement applies under other

accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Adoption of SFAS 157 is not expected to have a material effect on the Company’s consolidated financial statements.

In September 2006, the staff of the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for years ending on or after November 15, 2006. Adoption of SAB 108 is not expected to have a material effect on the Company’s consolidated financial statements.

In September 2005, the Accounting Standards Executive Committee (AcSEC) issued Statement of Position 05-1, "Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts" (SOP 05-1). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in FAS 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments". SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. A replacement contract that is substantially changed will be accounted for as an extinguishment of the replaced contract resulting in a release of the unamortized deferred acquisition costs, unearned revenue, and deferred sales inducements associated with the replaced contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. The Company has not yet determined the impact, if any, that SOP 05-1 may have on its consolidated financial statements.

~~Note 6.~~

Investments

The following tables summarize, for all securities in an unrealized loss position at ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005,~~2006, respectively, the aggregate fair value and gross unrealized loss by length of time those securities had continuously been in an unrealized loss position:


				Less than 12 Months				12 Months or Longer				Total							Less than 12 Months				12 Months or Longer				Total

				Fair		Unrealized		Fair		Unrealized		Fair		Unrealized					Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
September 30, 2006				Value		Losses		Value		Losses		Value		Losses
March 31, 2007																March 31, 2007			Value		Losses		Value		Losses		Value		Losses
				(In thousands)															(In thousands)

Corporate securities	Corporate securities		$	103,445	$	3,319	$	207,350	$	11,490	$	310,795	$		14,809	Corporate securities		$	51,891	$	855	$	216,715	$	7,839	$	268,606	$		8,694
CMOs and ABS⁽¹⁾				39,169		489		73,994		2,254		113,163	2,743
U.S. Government and
CMO and ABS⁽¹⁾																CMO and ABS⁽¹⁾			48,363		165		82,463		2,213		130,826	2,378
U.S. Government																U.S. Government
		Agencies		-		-		60,781		2,233		60,781	2,233				obligations		-		-		36,532		1,151		36,532	1,151
Agency MBS⁽²⁾	Agency MBS⁽²⁾			-		-		20,244		538		20,244	538			Agency MBS⁽²⁾			-		-		18,542		461		18,542	461
GSE⁽³⁾	GSE⁽³⁾			7,255		161		41,564		1,721		48,819			1,882	GSE⁽³⁾			33,079		205		46,018		1,532		79,097			1,737
States and political	States and political															States and political
		subdivisions		9,387		141		11,123		143		20,510			284		subdivisions		13,974		49		5,638		224		19,612			273
Total fixed	Total fixed															Total fixed
	maturities			159,256		4,110		415,056		18,379		574,312	22,489			maturities			147,307		1,274		405,908		13,420		553,215	14,694
Common stock	Common stock			3,402		276		-		-		3,402	276			Common stock			5,512		227		-		-		5,512	227
Preferred stock	Preferred stock			25,884		103		7,662		340		33,546			443	Preferred stock			16,706		325		2,562		107		19,268			432
Total temporarily	Total temporarily															Total temporarily
	impaired securities		$	188,542	$	4,489	$	422,718	$	18,719	$	611,260	$		23,208	impaired securities		$	169,525	$	1,826	$	408,470	$	13,527	$	577,995	$		15,353


				Less than 12 Months				12 Months or Longer				Total						Less than 12 Months				12 Months or Longer				Total

				Fair		Unrealized		Fair		Unrealized		Fair	Unrealized					Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2005				Value		Losses		Value		Losses		Value	Losses
December 31, 2006															December 31, 2006			Value		Losses		Value		Losses		Value		Losses
				(In thousands)														(In thousands)

Corporate securities	Corporate securities		$	232,488	$	8,085	$	45,608	$	3,159	$	278,096	$	11,244	Corporate securities		$	115,055	$	2,255	$	194,932	$	7,896	$	309,987	$		10,151
CMOs and ABS⁽¹⁾				50,118		984		38,495		1,358		88,613	2,342
U.S. Government and
CMO and ABS⁽¹⁾															CMO and ABS⁽¹⁾			55,126		430		73,582		2,289		128,708	2,719
U.S. Government															U.S. Government
		Agencies		40,250		842		21,266		798		61,516	1,640			obligations		-		-		60,566		2,398		60,566	2,398
Agency MBS⁽²⁾	Agency MBS⁽²⁾			16,534		239		7,761		117		24,295	356		Agency MBS⁽²⁾			-		-		19,447		481		19,447	481
GSE⁽³⁾	GSE⁽³⁾			51,655		1,024		14,647		664		66,302		1,688	GSE⁽³⁾			9,250		121		47,494		1,696		56,744			1,817
States and political	States and political														States and political
		Subdivisions		75,821		888		-		-		75,821		888		subdivisions		14,303		20		5,615		254		19,918			274
Total fixed
	Maturities			466,866		12,062		127,777		6,096		594,643	18,158
Total fixed maturities															Total fixed maturities			193,734		2,826		401,636		15,014		595,370			17,840
Common stock	Common stock			1,137		76		96		58		1,233	134		Common stock			4,664		312		-		-		4,664	312
Preferred stock	Preferred stock			6,979		245		1,445		55		8,424		300	Preferred stock			7,216		40		2,607		135		9,823			175
Total temporarily	Total temporarily														Total temporarily
	impaired securities		$	474,982	$	12,383	$	129,318	$	6,209	$	604,300	$	18,592	impaired securities		$	205,614	$	3,178	$	404,243	$	15,149	$	609,857	$		18,327

(1)

Collateralized mortgage obligations (“~~CMOs”~~CMO”) and asset-backed securities (“ABS”).

(2)

Mortgage-backed securities (“MBS”).

(3)

Government-sponsored enterprises (“~~GSEs”~~GSE”) which are the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association and Federal Home Loan Banks. GSEs are private enterprises established and chartered by the Federal Government.

The Company reviews its investment securities regularly and determines whether ~~other than~~other-than- temporary impairments have occurred. If a decline in fair value is judged by management to be ~~other than temporary,~~other- than-temporary, a loss is recognized by a charge to the Consolidated Statements of Operations, establishing a new cost basis for the security. The factors considered by management in its regular review include, but are not limited to: the length of time and extent to which the fair value has been less than cost; the financial condition and near-term prospects of the issuer; adverse changes in ratings announced by one or more rating agencies; whether the issuer of a debt security has remained current on principal and interest payments; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry ~~conditions;~~conditions (including, in the case o f fixed maturities, the effect of changes in market interest rates); and the Company's intent and ability to hold the security ~~fo r~~for a period of time sufficient to allow for a recovery in fair value. For securities within the scope of Emerging Issues Task Force Issue 99-20, such as purchased interest-only securities, an impairment loss is recognized when there has been a decrease in expected cash flows combined with a decline in the security's fair value below cost. Based on management’s ~~consideration~~review of the portfolio, which considered these factors, the ~~unrealized losses~~Company did not consider these investments to be other-than-temporarily impaired at ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005 were deemed to be temporary impairments in value.~~2006. For the ~~nine~~three months ended ~~September 30, 2006,~~March 31, 2007, the Company ~~recorded a~~did not record any realized ~~loss of $247,000~~losses for other-than-temporary impairments.

Substantially all of the unrealized losses at ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005~~2006 relate to investment grade securities and are attributable to changes in market interest rates subsequent to purchase. There were no securities with unrealized losses that were individually significantdollar amounts at ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005.~~2006. At ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005,~~2006, a total of 6571 and ~~121~~76 securities,respectively, were in a continuous unrealized loss position for less than 12 months and 8183 and 2276 securities, respectively, had continuous unrealized losses for 12 months or longer. For fixed maturities, there are no securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the investment.

Note 7.5.

~~Debt~~Other Investments

~~On August 22,~~The Company had invested $8,288,000 at December 31, 2006 in Dolphin Limited Partnership – A ("DLP-A"), a domestic feeder fund for Dolphin Limited Partnership I L.P., a Delaware limited partnership. The Company's net investment income for the three months ended March 31, 2007 and 2006 includes $46,000 and $566,000, respectively, for its proportionate share of net income of DLP-A. The Company liquidated its investment in DLP-A in February 2007.

Note 6.

CAM Acquisition

In January 2007, IHC Health Solutions, Inc., a wholly owned subsidiary of IHC, ~~amended~~acquired 100% of the outstanding membership interests in CA Marketing and Management Services, LLC ("CAM") for a total purchase price of $3,500,000. The Company recorded goodwill of $640,000 and other intangible assets of $2,860,000 primarily for the fair value of agent and management services relationships, which is being amortized over a weighted average period of 9.06 years. CAM was previously 100% owned by a senior officer of IHC. The Audit Committee of the Board of Directors of IHC unanimously approved the transaction, and upon recommendation by the Audit Committee, it was unanimously approved by the Board of Directors.

Pro forma results of operations for the quarter ended March 31, 2006, as though this acquisition had been completed at the beginning of such period, have not been presented since the effect of the acquisition was not material.

Note 7.

Goodwill and Other Intangible Assets

At March 31, 2007 and December 31, 2006, the Company had goodwill of $47,243,000 and $46,603,000, respectively, and other intangible assets (included in other assets in the Consolidated Balance Sheets) of $16,961,000 and $13,984,000 (which includes $1,308,000 capitalized software classified in Fixed Assets at December 31, 2006), respectively. The change in the carrying amount of goodwill and other intangible assets for the first quarter of 2007 is as follows (in thousands):


			Other Intangible
		Goodwill	Assets

Balance at December 31, 2006	$	46,603	$	13,984
CAM acquisition		640	2,860
Capitalized software development		-		828
Amortization expense		-		(711)
Balance at March 31, 2007	$	47,243	$	16,961

Note 8.

Share-Based Compensation

Effective January 1, 2006, under the modified prospective method, the Company adopted the provisions of SFAS No. 123R, "Share-Based Payment" ("SFAS 123R"), which revises SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and its related interpretations (“APB 25”). SFAS 123R applies to all awards granted after its effective date and to modifications, repurchases or cancellations of existing awards after that date. Additionally, under the modified prospective method of adoption, the Company recognizes compensation expense for the portion of outstanding ~~$12,500,000 credit agreement with a commercial bank. The~~awards on the adoption date for which the requisite service period has not yet been rendered based on the grant-date fair value of those awards.

For the three months ended March 31, 2007 and 2006, total share-based compensation expense was $440,000 and $336,000, respectively,

Under the terms of the amended agreement increase the principal amount outstanding to $15,000,000, with principal reductions of $2,500,000 due on August 22, 2007 and 2008 and the remaining principal balance due on August 22, 2009. Interest on the debt is at a variable rate equal to LIBOR plus 1.25%. The subsidiary simultaneously entered into an interest rate swap with the commercial bank lender, with a notional amountCompany’s stock-based compensation plans, option exercise prices are equal to the ~~debt principal amount,~~quoted market price of the shares at the date of grant; option terms range from five to ten years; and vesting periods are three years for employee options. The Company may also grant shares of restricted stock. These shares are valued at the quoted market price of the shares at the date of grant, and have a three year vesting period. There were 1,005,522 shares available for future option or restricted-stock grants under ~~which~~ the ~~Company receives a variable rate equal~~shareholder-approved plans at March 31, 2007. All of these available shares relate to the ~~rate on~~Company’s 2006 Stock Incentive Plan that was approved by shareholders in June 2006.

The Company’s stock option activity for the ~~debt~~three months ended March 31, 2007 is as follows:


	Shares	Weighted- Average
	Under Option	Exercise Price

December 31, 2006	858,351	$	17.03
Granted	32,000	21,49
Exercised	(1,800)	9.39
March 31, 2007	888,551		17.21

The following table summarizes information regarding outstanding and ~~pays a fixed rate~~exercisable options as of ~~6.65%.~~ March 31:


		Outstanding		Exercisable

Number of options		888,551		547,681
Weighted average exercise price per share	$	17.21	$	14.77
Aggregate intrinsic value for all options	$	4,230,000	$	3,943,000
Weighted average contractual term remaining		2.4 years		1.6 years

The fair value of each option award is estimated on the ~~swap, which is accounted~~date of grant using the Black Scholes option valuation model. The weighted average grant-date fair-value of options granted during the three months ended March 31, 2007 and 2006 was $6.51 and $7.14 per share, respectively. The assumptions set forth in the table below were used to value the stock options granted during the three month period ended March 31:


			2007		2006

Weighted-average risk-free interest rate		4.44%			4.48%
Annual dividend rate per share	$	.05		$	.05
Weighted-average volatility factor of the Company's common stock		30.3%			32.4%
Weighted-average expected term of options		4.5 years			4.4 years

Compensation expense of $273,000 and $288,000 was recognized in the three months ended March 31, 2007 and 2006, respectively, for ~~as a cash flow hedge,~~the portion of the grant-date fair value of stock options vesting during that period.

The total intrinsic value of options exercised during the three month periods ended March 31, 2007 and 2006 was ~~insignificant at September 30,~~$23,000 and $304,000, respectively. Cash proceeds received from those options exercised during the three months ended March 31, 2007 and 2006 were $17,000 and $77,000, respectively.

The Company issued 4,800 and 37,075 restricted stock awards during the three months ended March 31, 2007 and 2006, respectively, with weighted-average grant-date fair values of $21.19 and $22.56 per share, respectively. The total fair value of restricted stock that vested during the first three months of 2007 was $278,000. No shares of restricted stock vested during the first three months of 2006. Restricted stock expense was $93,000 and $47,000, respectively, for the three months ended March 31, 2007 and 2006.

The following table summarizes restricted stock activity for the three months ended March 31, 2007:


			Weighted-Average
	No. of		Grant-Date
	Shares		Fair Value

December 31, 2006	50,325	$	22.11
Granted	4,800		21.19
Vested	(12,323)		22.56
Forfeited	(100)		22.69
March 31, 2007	42,702		21.88

As of March 31, 2007, there was $1,537,000 and $815,000 of total unrecognized compensation expense related to non-vested options and non-vested restricted stock awards, respectively, which will be recognized over the remaining requisite weighted-average service periods of 1.2 years and 2.1 years, respectively.

Note 8.9.

Income Taxes

The provision for income taxes shown in the Consolidated Statements of Operations was computed based on the Company's estimate of the effective tax rate expected to be applicable for the current fiscal year.

The deferred income tax ~~benefit~~expense for the ~~nine~~three months ended ~~September 30, 2006~~March 31, 2007 allocated to stockholders' equity (principally for net unrealized ~~losses~~gains on investment securities) was ~~$1,842,000,~~$1,355,000, representing the ~~increase~~decrease in the related net deferred tax asset to ~~$6,523,000~~$3,783,000 at ~~September 30, 2006~~March 31, 2007 from ~~$4,681,000~~$5,138,000 at December 31, ~~2005.~~2006

Note 9.10.

Supplemental Disclosures of Cash Flow Information

Cash payments for income taxes were ~~$4,220,000~~$1,080,000 and ~~$2,526,000~~$1,695,000 for the ~~nine~~three months ended ~~September 30,~~March 31, 2007 and 2006, ~~and 2005,~~ respectively. Cash payments for interest were ~~$2,638,000~~$1,002,000 and ~~$2,544,000~~$847,000 for the ~~nine~~three months ended ~~September 30,~~March 31, 2007 and 2006, ~~and 2005,~~ respectively. Common stock issued in acquisitions (a non-cash financing activity) amounted to $10,679,000 during the nine months ended September 30, 2006. Non-cash assets acquired (other than intangibles) and liabilities assumed in these transactions were not significant.

Note ~~10.~~11.

Comprehensive Income (Loss)

The components of comprehensive income (loss) include (i) net income or loss reported in the Consolidated Statements of Operations, and (ii) certain amounts reported directly in stockholders’ equity, principally the after-tax net unrealized gains and losses on securities available for sale (net of deferred acquisition costs). The comprehensive income (loss) for the three months ended March 31, 2007 and ~~nine months ended September 30,~~ 2006 ~~and 2005~~ is summarized as follows:


			Three Months Ended					Nine Months Ended						Three Months Ended
			September 30,					September 30,						March 31,
			2006		2005			2006		2005				2007		2006
			(In thousands)											(In thousands)

Net income	Net income	$	4,069	$		4,788	$	10,464	$		16,406	Net income	$	4,602	$	4,029
Unrealized gains (losses) arising during	Unrealized gains (losses) arising during											Unrealized gains (losses) arising during
	the period, net of income taxes		11,580			(8,374)		(3,329)			(5,273)	the period, net of income taxes		2,517		(8,328)
Comprehensive income (loss)	Comprehensive income (loss)	$	15,649	$		(3,586)	$	7,135	$		11,133	Comprehensive income (loss)	$	7,119	$	(4,299)

1514

Note ~~11.~~12.

Segment Reporting

The Insurance Group principally engages in the life and health insurance business. ~~Certain allocations of items within segments have been reclassified in the 2005 information to reflect how management analyzes these segments currently.~~ Information by business segment for the three months ended March 31, 2007 and ~~nine months ended September 30,~~ 2006 ~~and 2005~~ is presented below:


		Three Months Ended					Nine Months Ended				Three Months Ended
		September 30,					September 30,				March 31,
		2006		2005			2006		2005		2007			2006
		(In thousands)									(In thousands)
Revenues:
Medical stop-loss	$	42,165	$	38,282	$	121,292		$	103,741
Fully-insured health		16,251		6,386			45,155		14,467

Revenues:
Medical Stop-Loss^(A)										$	42,062	$	37,089
Fully Insured Health											29,717		14,258
Group disability, life, annuities and DBL		13,203		12,971			39,521		37,173		14,254		13,113
Individual life, annuities and other		15,208		13,948			46,560		38,276		16,580		15,393
Credit life and disability		5,750		5,470			16,807		16,378		5,672		5,462
Corporate		264		384			1,348		977		366		1,108
		92,841		77,441			270,683		211,012		108,651		86,423
Net realized investment gains and losses		253		994			720		2,078
Net realized investment gains											420		417
	$	93,094	$	78,435	$		271,403	$	213,090	$	109,071	$	86,840


Income (loss) before income taxes:
Medical stop-loss	$	2,954	$	3,637	$	9,616	$	19,643
Fully-insured health *		(134)		203		(7)		(833)
Income Before Income Taxes:
Medical Stop-Loss									$	4,749	$	3,766
Fully Insured Health^(B)										291		505
Group disability, life, annuities and DBL		2,819		1,049		4,525		3,431		1,299		502
Individual life, annuities and other		2,375		2,863		7,060		4,942		3,267		2,122
Credit life and disability		(139)		(236)		(489)		110		(836)		(148)
Corporate		(1,468)		(494)		(3,260)		(2,008)		(1,356)		(171)
		6,407		7,022		17,445		25,285		7,414		6,576
Net realized investment gains and losses		253		994		720		2,078		420		417
Interest expense		(990)		(883)		(2,821)		(2,593)		(1,056)		(903)
	$	5,670	$	7,133	$	15,344	$	24,770	$	6,778	$	6,090

~~(*)~~

(A)

The ~~Fully-insured health~~amount includes equity income from AMIC of $535,000 and $176,000 for the three months ended March 31, 2007 and 2006, respectively.

(B)

The Fully Insured Health segment includes amortization of intangible assets recorded as a result of the recent acquisitions of CAM, IAC, HPA, GroupLink and CAIS. Total amortization expense was ~~$435,000~~$663,000 and ~~$187,000~~$343,000 for the three months ended ~~September 30,~~March 31, 2007 and 2006, ~~and 2005, respectively, and $1,172,000 and $527,000 for the nine months ended September 30, 2006 and 2005,~~ respectively. Amortization expense for the other segments is insignificant.

Note ~~12.~~13.

Subsequent Event

~~On October 5, 2006, IHC Health Solutions, Inc., a wholly-owned subsidiary of IHC, entered into an agreement to acquire 100% of~~Effective April 2, 2007 the ~~outstanding membership interests in CA Marketing and~~Company acquired Actuarial Management ~~Services, LLC~~Corporation ("~~CAM"~~AMC") for a total purchase price ~~payable at closing~~ of ~~$3,500,000, one third of which is payable in shares of IHC common stock. CAM~~$5,000,000. AMC is currently responsible for all actuarial aspects of the Company's Fully Insured health business. AMC was previously 100% owned by an individual who became a senior officer of ~~IHC. The Audit Committee of~~IHC prior to the Board of Directors of IHC unanimously approved the transaction, and upon recommendation by the audit committee, it was unanimously approved by the Board of Directors. The acquisition agreement includes customary representations and warranties for a transaction of this nature. The closing of the transaction is subject to such representations and warranties being correct, and IHC has a one-year indemnification period with respect to damages arising from a breach of this condition, with IHC's recovery capped at 100% of the total purchase price. The acquisition agreement will expire if the transaction has not closed by February 28, 2007. It is anticipated that the transaction will close during the first week of January 2007.acquisition.

1615

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

This Form 10-Q contains forward-looking statements that involve risks and uncertainties. The future consolidated results of Independence Holding Company. (“IHC”) and Subsidiaries (collectively referred to as the "Company") could differ significantly from those set forth herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors " as set forth in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2005, as filed with the Securities and Exchange Commission, as well as those discussed here in Item 2 and elsewhere in this quarterly report. Statements contained herein that are not historical facts are forward-looking statements that are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Words such as "believes", "anticipa tes", "expects", "intends", “estimates”, "likelihood", “unlikelihood”, “assessment”, and “foreseeable” and other similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. A number of important factors could cause the Company's actual results for the year ending December 31, 2006, and beyond to differ materially from past results and those expressed or implied in any forward-looking statements made by the Company, or on its behalf. The Company undertakes no obligation to release publicly the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The following discussion of the financial condition and results of operations of the Independence Holding Company ("IHC") and its subsidiaries (collectively, the "Company") should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company and the related Notes thereto appearing in our annual report on Form 10-K for the fiscal year ended December 31, ~~2005,~~2006, as filed with the Securities and Exchange Commission, and our unaudited Consolidated Financial Statements and related Notes thereto appearing elsewhere in this quarterly report.

Overview

Independence Holding Company, a Delaware corporation (NYSE: IHC), is a holding company principally engaged in the life and health insurance business through: (i) its ~~wholly-owned~~wholly owned insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life") and Madison National Life Insurance Company, Inc. ("Madison National Life"); and (ii) its marketing and administrative companies, including Insurers Administrative Corporation (“IAC”), managing general ~~underwriter~~underwriters in which it owns a significant voting interest (“~~MGU”~~Affiliated MGUs”) ~~affiliates,~~, Health Plan Administrators (“HPA”), GroupLink Inc. (“GroupLink”), IHC Health Solutions, Inc. (“IHC Health Solutions”), and Community America Insurance Services Inc. (“CAIS”~~, formerly CA Insurance Services LLC)~~). These companies are sometimes collectively referred to as the "Insurance Group," and IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred to as the "Company." The Company also owns a 48% equity interest in American Independence Corp. (NASDAQ:AMIC), which owns Independence American Insurance Company (“Independence American”) and several MGU’s.

While management considers a wide range of factors in its strategic planning and decision-making, underwriting profit is consistently emphasized as the primary goal in all decisions as to whether or not to increase ~~our~~the Company's retention in a core line, expand into new products, acquire an entity or a block of business, or otherwise change ~~our~~the Company's business model. Management's assessment of trends in healthcare and morbidity, with respect to medical stop-loss, ~~major~~fully insured medical, ~~STM, dental, vision,~~ disability and DBL; mortality rates with respect to life insurance; and changes in market conditions in general play a significant role in determining the rates charged, deductibles and attachment points quoted, and the percentage of business retained. The Company believes that the acquisition of Actuarial Management Corp. (“AMC”) in the second quarter of 2007 will further enable it to make these assessments. The Company seeks transactions that permit it to leverage its vertically integrated organizational structure by generating fee income from production and administrative operating companies as well as risk income for its carriers and profit commissions. Management has always focused on managing costs of its operations and providing its insureds with the ~~Company believes that the acquisition of IAC in January 2006 affords it an opportunity to effect further~~best cost ~~efficien cies.~~

17containment tools available.

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

Net income of ~~$4.1~~$4.6 million ~~and $10.5 million~~in the first three months of 2007 ($~~.27 and $.69~~.30 per share, diluted) ~~for the three months and nine months ended September 30, 2006, respectively,~~ as compared to ~~$4.8~~$4.0 million ~~and $16.4 million~~ ($~~.34 and $1.15~~.27 per share, diluted), for the first three months ~~and nine months ended September 30, 2005;~~of 2006;

Consolidated investment yield of ~~5.3%~~5.4% for the three months ended March 31, 2007, and ~~nine months ended September 30, 2006, as compared to 5.2% and 5.1%, respectively, in the comparable periods in 2005;~~2006;

Revenues of ~~$93.1 million and $271.4~~$109.1 million for the three months ~~and nine months~~ ended ~~September 30, 2006, respectively,~~March 31, 2007, representing ~~increases~~an increase of ~~18.7% and 27.4%~~25.6% over the respective three month ~~and nine month periods of 2005;~~period in 2006; primarily due to an increase in revenues from the ~~fully-insured health~~Fully Insured Health segment and an increase in ~~net retention of~~assumed premiums in the ~~Company’s direct medical stop-loss line to 51.5% in 2006 from 43.7% in 2005 (“retention” refers to net earned premiums after reinsurance) and the life and annuity acquisitions in 2005;~~Medical Stop-Loss line;

Book value of ~~$14.83~~$15.72 per common share; a ~~5.5%~~3.2% increase from December 31, ~~2005,~~2006, reflecting net income ~~stock issuances~~ and ~~option exercises partially offset by~~ net unrealized ~~losses~~gains on securities;

AsAcquired CA Marketing and Management Services, LLC ("CAM") through merger with IHC Health Solutions, Inc. as of January ~~31, 2006, acquired IAC, a leading producer~~2, 2007; and ~~administrator of group and individual major medical insurance (including Consumer Driven Health Plans (CDHPs)) and other life and health policies;~~

~~As of March 1, 2006,~~Effective April 2, 2007, acquired the remaining 55% of CAIS to further the marketing reach for CDHPs and other products; by March 31, 2006, CAIS acquired a block of $50 million of fully-insured group major medical business, which began to be transitioned to Madison National Life effective August 1, 2006;

~~On October 5, 2006, announced the acquisition of CAM, expected to be effective January 1, 2007;~~

~~Approved to write a variety of fully-insured medical products in a majority of states.~~Actuarial Management Corporation ("AMC").

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

Income before taxes from the Medical Stop-Loss segment ~~decreased $.6~~increased $1.0 million for the three months ended ~~September 30, 2006, and $10.0 million for the nine months ended September 30, 2006,~~March 31, 2007, compared to the same ~~periods~~period in ~~2005:~~

~~The~~2006 due to a combination of an increase in assumed premiums and a decrease in the Net Loss Ratio (defined as insurance benefits, claims and reserves divided by (premiums earned less underwriting expenses)):

The Net Loss Ratio for the Medical Stop-Loss line of business for the three months ~~and nine months~~ ended ~~September 30, 2006~~March 31, 2007 was ~~94.6% and 94.9%~~91.3%, ~~respectively,~~ compared to ~~94.5% and 88.8%~~92.0% for the three months ~~and nine months~~ ended ~~September 30, 2005, respectively;~~

Included in operating results for the Medical Stop-Loss segment for the first nine months of 2005 was $3.5 million of income from a commutation agreement and a loss cover that did not repeat in the first nine months ofMarch 31, 2006;

~~Fully-Insured~~The Fully Insured Health segment reported ~~a loss~~income before taxes of ~~$.1~~$.3 million for the three months ended ~~September 30, 2006 and break even for the nine months ended September 30, 2006,~~March 31, 2007 as compared

to income of ~~$.2 million and a loss of $.8~~$.5 million for the three months ended March 31, 2006. Total amortization expense from purchase accounting was $.7 million and ~~nine~~$.3 million for the three months ended ~~September 30, 2005, respectively. Although revenues~~March 31, 2007 and 2006, respectively;

Premiums earned from this segment have increased $12.5 million while benefits, claims and ~~losses~~reserves have ~~decreased, continuing losses on this line are due to~~ increased ~~expense from~~$9.3 million. $8.4 million of the ~~amortization of intangible assets recorded as~~increase in benefits, claims and reserves is a result of the ~~recent acquisitions~~increase in premiums and $.9 million of the increase in reserves is due to adverse development in business written in 2006 largely related to implementation of a new cost containment program initiated in 2006. While this program had a positive impact on the results of our small group major medical line, in the first quarter of 2007 we determined that the impact was not as large as we had anticipated when setting reserves in 2006. We do not believe that this will have a material impact on our reserving methodology in 2007 or beyond.

Total selling, general and administrative expenses for this segment increased $6.4 million. Of this amount, $5.6 million relates to (i) the acquisition of CAM in the first quarter of 2007 and a full three months of operations of IAC ~~HPA, GroupLink,~~in 2007 (which was not acquired until January 31, 2006), and ~~CAIS, which will decline over~~(ii) an overall increase in operating costs (reported as SGA expense) at our third party administrators (“TPAs”). These higher operating expenses at our TPAs are largely attributable to (i) the ~~useful lives~~costs of development and implementation for the new fully insured programs being initiated in 2006 and 2007 and (ii) higher costs of implementing new administration systems. Costs associated with new programs include product development, pricing, product filing and staffing, and are often incurred during a three to six month period prior to the effective date of the assets, and from higher selling, general, marketing and legal expenses related to the expansion of staff and product filings in anticipation of upcoming growth in this line. Total amortization expense was $1.2 million and $.5 million for the nine months ended September 30, 2006 and 2005, respectively;first policy sold.

Income before taxes from the Group disability, life annuities and DBL segment increased ~~$1.8~~$.8 million for the three months ended ~~September 30, 2006, and $1.1 million for the nine months ended September 30, 2006,~~March 31, 2007, compared to a year earlier, primarily due to ~~a decrease in LTD paid claims~~lower loss ratios and ~~net claims reservesduring the current quarter;~~improved experience;

Income before taxes from the Individual life, annuities and other segment ~~decreased $.5~~increased $1.1 million, ~~for the three months ended September 30, 2006, and increased $2.2 million for the nine months ended September 30, 2006,~~ compared to the prior year as a ~~year earlier,~~result of an increase in other income primarily due to ~~acquisitions~~adjustments in settlement of ~~policy blocks of life and annuity business in 2005;~~a reinsurance agreement;

Loss before taxes from the Credit life and disability segment ~~decreased $.1~~increased $.7 million for the three months ended ~~September 30, 2006, and increased $.6 million for the nine months ended September 30, 2006,~~March 31, 2007, compared to a year earlier, primarily due to higher death and disability claims;

Loss before taxes from the Corporate segment increased ~~$1.0~~$1.2 million for the three months ended ~~September 30, 2006, and $1.3 million for the nine months ended September 30, 2006,~~March 31, 2007, compared to a year earlier, primarily due to ~~share-based~~lower partnership income and higher compensation ~~expense from the adoption of SFAS 123R on January 1, 2006; and~~expenses;

Net realized investment gains ~~and losses~~ of ~~$.3 million and $.7~~$.4 million for the three ~~month~~months ended March 31, 2007, and ~~nine month periods ended September 30, 2006, respectively, as compared to $1.0 million~~March 31, 2006; and ~~$2.1 million for the three month and nine month periods ended September 30, 2005.~~

Premiums by principal product for the three ~~month~~months ended March 31, 2007 and ~~nine month periods ended September 30,~~ 2006 ~~and 2005~~ are as follows (in thousands):


		Three Months Ended				Nine Months Ended					Three Months Ended
Gross Direct and Assumed		September 30,				September 30,			Gross Direct and Assumed		March 31,
Earned Premiums:		2006		2005		2006		2005
									Earned Premiums:		2007		2006
Medical stop-loss	$	71,277	$	68,891	$	204,570	$	203,442
Fully-insured health		20,129		12,573		56,190		28,503

Medical Stop-Loss									Medical Stop-Loss	$	67,759	$	62,300
Fully Insured Health									Fully Insured Health		54,473		18,950
Group disability, life, annuities and DBL		21,086		19,680		61,507		58,415	Group disability, life, annuities and DBL		20,204		20,878
Individual, life, annuities and other		7,712		8,480		24,116		22,788	Individual, life, annuities and other		8,187		8,034
Credit life and disability		5,800		5,369		16,917		16,139	Credit life and disability		5,669		5,501

	$	126,004	$	114,993	$	363,300	$	329,287		$	156,292	$	115,663

Three Months Ended

Nine Months Ended

September 30,

September 30,
Net Premiums Earned:

2006

2005

2006

2005

Medical stop-loss
$
40,304
$
35,441
$
115,654
$
92,600
Fully-insured health

7,747

4,285

22,693

9,465
Group disability, life, annuities and DBL

10,848

10,776

32,523

30,560
Individual, life, annuities and other

7,072

7,037

22,067

19,731
Credit life and disability

5,580

5,152

16,192

15,544

$
71,551
$
62,691
$
209,129
$
167,900


		Three Months Ended
		March 31,
Net Premiums Earned:		2007		2006

Medical Stop-Loss	$	40,128	$	35,363
Fully Insured Health		19,857		7,444
Group disability, life, annuities and DBL		11,540		10,865
Individual, life, annuities and other		7,489		7,340
Credit life and disability		5,473		5,276

	$	84,487	$	66,288

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles ("GAAP"). The preparation of the Consolidated Financial Statements in conformity with GAAP requires the Company's management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. A summary of the Company's significant accounting policies and practices is provided in Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, ~~2005.~~2006. Management has identified the accounting policies related toInsurance Premium Revenue Recognition and Policy Charges, Insurance Reserves, Deferred Acquisition Costs,and Investmentsas those that, due to the judgments, estimates and assumptions ~~inherent~~inhere nt in ~~th ose~~those policies, are critical to an understanding of the Company's Consolidated Financial Statements and this Management's Discussion and Analysis. A full discussion of these policies is included under the heading, “Critical Accounting Policies” in Item 7 of the Annual Report on Form 10-K for the fiscal year ended December 31, ~~2005.~~2006. During the ~~nine~~three months ended ~~September 30, 2006,~~March 31, 2007, there were no additions to or changes in the critical accounting policies disclosed in the ~~2005~~2006 Form 10-K.

2018

Results of Operations for the Three Months Ended ~~September 30, 2006~~March 31, 2007 Compared to the Three Months Ended ~~September 30, 2005~~March 31, 2006

Net income was ~~$4.1~~$4.6 million, or $.30 per share, diluted, for the three months ended March 31, 2007, an increase of $.6 million compared to net income of $4.0 million, or $.27 per share, diluted, for the three months ended ~~September 30, 2006, a decrease of $.7 million compared to net income of $4.8 million, or $.34 per share, diluted, for the three months ended September 30, 2005.~~March 31, 2006. The Company's income before taxes ~~decreased $1.4~~increased $.7 million to ~~$5.7~~$6.8 million for the three months ended ~~September 30, 2006~~March 31, 2007 from ~~$7.1~~$6.1 million for the three months ended ~~September 30, 2005.~~March 31, 2006. Information by business segment for the three months ended ~~September 30,~~March 31, 2007 and 2006 ~~and 2005~~ is as follows:


								Equity						Benefits,			Amortization			Selling,														Equity								Benefits,		Amortization				Selling,
						Net		Income			Fee and			Claims			of Deferred			General												Net		Income				Fee and				Claims		of Deferred				General
September 30,			Premiums			Investment		From			Other			and			Acquisition			And
	2006		Earned			Income		AMIC			Income			Reserves			Costs			Administrative			Total						Premiums			Investment		From				Other				and		Acquisition				And
March 31, 2007																												March 31, 2007	Earned			Income		AMIC				Income				Reserves		Costs				Administrative		Total
(In thousands)	(In thousands)																											(In thousands)

Medical stop-loss	Medical stop-loss		$	40,304	1,146				47			668			28,847			-			10,364			$		2,954		Medical stop-loss	$	40,128	918			535			481				26,883			-			10,430				$		4,749
Fully-Insured			7,747			58		-			8,446			4,365			13			12,007			(134)
Fully Insured Health																												Fully Insured Health	19,857			112		-				9,748				13,753		89				15,584		291
Group disability,	Group disability,																											Group disability,
	life, annuities																											life, annuities
	and DBL		10,848			2,253		-			102			6,826			43			3,515			2,819					and DBL	11,540			2,594		-				120				8,666		8				4,281		1,299
Individual life,	Individual life,																											Individual life,
	annuities																											annuities
	and other		7,072			7,977		-			159			9,716			1,035			2,082			2,375					and other	7,489			7,851		-				1,240				9,741		1,211				2,361		3,267
Credit life and	Credit life and																											Credit life and
	disability			5,580			157			-			13			2,612			1,261			2,016					(139)	disability		5,473			193			-				6			3,236			1,183			2,089					(836)
Corporate	Corporate			-			264			-			-			-			-			1,732					(1,468)	Corporate		-			366			-				-			-			-			1,722					(1,356)
Sub total	Sub total		$	71,551			11,855			47			9,388			52,366			2,352			31,716					6,407	Sub total	$	84,487		$	12,034		$	535			$	11,595	$		62,279		$	2,491		$	36,467					7,414
Net realized invest-
	ment gains and
		losses																							253
Net realized investment gains																												Net realized investment gains																								420
Interest expense	Interest expense																								(990)			Interest expense																								(1,056)
Income before
	income taxes																						5,670
Income before income taxes																												Income before income taxes																						6,778
Income taxes	Income taxes																								1,601			Income taxes																								(2,176)
Net income	Net income																						$		4,069			Net income																						$		4,602

Equity

Benefits,
Amortization
Selling,

Net
Income
Fee and
Claims
of Deferred
General

September 30,
Premiums
Investment
From
Other
and
Acquisition
And

2005
Earned
Income
AMIC
Income
Reserves
Costs
Administrative
Total
(In thousands)

Medical stop-loss
$
35,441
1,427
478
936
25,256
-
9,389
$
3,637
Fully-Insured
4,285
(66)
-
2,167
2,633
149
3,401
203
Group disability,

life, annuities

and DBL
10,776
2,062
-
133
7,553
40
4,329
1,049
Individual life,

annuities and

other
7,037
6,825
-
86
7,954
1,056
2,075
2,863
Credit life and

disability

5,152

296

-

22

2,599

1,197

1,910
(236)
Corporate

-

384

-

-

-

-

878

(494)
Sub total
$
62,691

10,928

478

3,344

45,995

2,442

21,982

7,022
Net realized invest-

ment gains and

losses

994
Interest expense

(883)
Income before

income taxes

7,133
Income taxes

2,345
Net income

$
4,788


						Equity				Benefits,		Amortization		Selling,
				Net		Income		Fee and		Claims		of Deferred		General
		Premiums		Investment		From		Other		and		Acquisition		And
March 31, 2006		Earned		Income		AMIC		Income		Reserves		Costs		Administrative				Total
(In thousands)

Medical stop-loss		$	35,363	770		176		780		24,120		-		9,203				$	3,766
Fully Insured Health		7,444		30		-		6,784		4,507		63		9,183				505
Group disability,
	life, annuities
	and DBL	10,865		2,135		-		113		9,221		39		3,351				502
Individual life,
	annuities and
	other	7,340		7,725		-		328		9,817		1,231		2,223				2,122
Credit life and
	disability		5,276		171		-		15		2,515		1,185		1,910		(148)
Corporate			-		1,100		-		8		-		-		1,279						(171)
Sub total		$	66,288	$	11,931	$	176	$	8,028	$	50,180	$	2,518	$	27,149						6,576


Net realized investment gains																				417
Interest expense																				(903)
Income before income taxes																						6,090
Income taxes																						(2,061)
Net income																$						4,029

2119

Premiums Earned

Total premiums earned grew ~~$8.9~~$18.2 million to ~~$71.6~~$84.5 million in the ~~third~~first quarter of ~~2006~~2007 from ~~$62.7~~$66.3 million in the comparable period of ~~2005.~~2006. The increase is primarily due to: (i) the Medical Stop-Loss segment which increased ~~$4.9~~$4.7 million primarily due to ~~increased retentions;~~an increase in assumed business; and (ii) the ~~Fully-Insured~~Fully Insured Health segment which had a ~~$3.4~~$12.5 million increase in premiums ~~from~~in the ~~third~~first quarter of ~~2005~~2007 compared to the first quarter of 2006 which comprised of an $8.3 million increase in small group premiums as a result of the acquisition of a block of business which transitioned to the Company's paper in the third quarter of 2006, ~~comprised of~~ a ~~$.8~~$2.7 million increase in short-term medical premiums, and a $.3 million increase in dental premiums ~~a $1.9 million increase in short-term medical and a $.7 million increase in group major medical~~ primarily due to new ~~business.~~business and increased retentions, and a $1.0 million increase due to new vision and mini-medical products in 2007.

Net Investment Income

Total net investment income increased $.1 million primarily due to slightly higher yields on the bond portfolio offset by less partnership income in the first three months of 2007 compared to the same period in 2006 as a result of the liquidation of certain partnership interests. The overall investment yield was 5.4% in both the 2007 and 2006 first quarter.

Net Realized Investment Gains ~~and Losses~~

Net realized investment gains in the first quarter of 2007 are comparable to the same period in 2006. These amounts include gains and losses ~~decreased by $.7 million compared to the third quarter~~from sales of ~~2005.~~fixed maturities and equity securities available-for-sale, as well as trading securities and other investments. Decisions to sell securities are based on management's ongoing evaluation of investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from period to period.

~~Net Investment Income~~

Total net investment income increased $1.0 million primarily due to the maintenance of a higher level of invested assets due to the acquisitions of policy blocks in 2005, and a slight increase in the investment rate of return during the current year period. The annualized return on total investments was 5.3% in the third quarter of 2006 versus 5.2% in the third quarter of 2005.

Equity Income

Equity income from AMIC ~~decreased $.4 million from~~in the ~~third~~first quarter of ~~2005, as lower~~2007 increased $.3 million compared to the first quarter of 2006 due to higher income earned by AMIC was slightly offset by an increase in IHC's ownership which was approximately 48% during the third quarter of 2006 compared to an average 44% in the third quarter of 2005. The reduction in income is primarily due to an increase in net loss ratios of AMIC's Medical Stop-Loss business.AMIC.

Fee Income and Other Income

Fee income increased ~~$5.9~~$2.8 million to ~~$8.8 million from $2.9~~$10.2 million in the ~~three months ended September 30, 2005,~~first quarter of 2007 from $7.4 million in the first quarter of 2006 primarily due to an increase in administrative fees of ~~$7.4~~$2.0 million earned by IAC ~~which is a subsidiary that was not part~~in addition to $.6 million of ~~the Company during the third quarter of 2005, partially offset by $1.4 million~~fees earned by ~~GroupLink that is eliminated in 2006~~IHC Health Solutions, Inc. as a result of ~~transferring business from outside insurance carriers to insurance subsidiaries~~the acquisition of ~~IHC.~~CAM in January 2007.

Total other income increased ~~$.2 million to $.6 million from $.4~~$.8 million in the ~~three months ended September 30, 2005.~~first quarter of 2007 to $1.4 million from $.6 million in the first quarter of 2006 primarily due to adjustments in settlement of a reinsurance agreement.

Insurance Benefits, Claims and Reserves

Benefits, claims and reserves increased ~~$6.4~~$12.1 million. The increase is due to: (i) an increase of ~~$3.6~~$2.8 million in the Medical Stop-Loss segment primarily resulting from increased premiums and a ~~3% increase in retention and an increase~~decrease in Net Loss Ratios to ~~94.6%~~91.3% in the first quarter of 2007 as compared to ~~94.5%~~92.0% for the ~~third~~first quarter of ~~2005 (see “Outlook” for a discussion of factors affecting the recent underwriting profitability of the Medical Stop-Loss segment);~~2006; (ii) an increase of ~~$1.8~~$9.3 million in the ~~Fully-Insured~~Fully Insured Health segment primarily due to the increase in ~~premiums;~~small group ($6.7 million), short-term medical ($1.7 million) and dental premiums ($.2 million) ($.9 million of the increase in this segment is due to adverse development of reserves related to the 2006 year as described above); (iii) a ~~$1.8~~$.7 million increase in the ~~Individual~~Credit life and ~~Other segment~~disability line due to higher ~~losses, surrenders and interest credited on policies due to acquisitions made in 2005;~~loss ratios; and (iv) a decrease of ~~$.8~~$.5 million in the Group segment primarily due to ~~a $1.9 million decrease~~lower loss ratios and improved experience in ~~LTD paid claims and net claims reserves, partially offset by a $.5 million increase related to new business written for~~the group A&H ~~in point~~and DBL lines of ~~s ervice and a $.4 increase in DBL.~~business.

Amortization of Deferred Acquisition Costs

Amortization of deferred acquisition costs ~~were~~was relatively ~~unchanged with a $.1 million decrease in Fully-Insured being offset by a $.1 million increase in Credit.~~unchanged.

Interest Expense on Debt

Interest expense increased ~~$.1~~$.2 million, primarily due to ana $2.5 million increase in outstanding debt under a line of credit from $12.5 million to $15.0 million during the third quarter of 2006. The interest rate paid on that line was 6.65% in 2007 compared to 3.96% in 2006. In addition, the interest rate on $12.4 million of floating rate junior subordinated debt ~~to 9.6%~~averaged 9.3% in the ~~third~~first quarter of ~~2006~~2007 as compared to ~~7.5%~~8.4% in the ~~third quarter of 2005, in addition to a $2.5 million increase in outstanding debt during the third~~first quarter of 2006.

Selling, General and Administrative Expenses

Total selling, general and administrative expenses increased ~~$9.7~~$9.4 million in the ~~third quarter~~first-quarter of ~~2006~~2007 as compared to the ~~third~~first quarter of ~~2005.~~2006. The increase is primarily due to (i) an ~~$8.6~~$6.4 million increase in commission and administrative expenses associated with the operation of the ~~Fully-Insured~~Fully Insured Health segment, primarily due to (a) higher volume of business; (b) the acquisition of CAM and inclusion of IAC ~~GroupLink,~~for a full three months in 2007; and ~~higher commission expenses from~~(c) the ramping up of people and systems to prepare for the expected increase in ~~Fully-Insured premiums;~~business as described above; (ii) a ~~$1.0~~$1.2 million increase in commissions and other general expenses in the Medical Stop-Loss segment due to a higher level of premiums earned, slightly offset by a decrease in profit commission expense due to the increase in net loss ratios; (iii) a ~~$.8~~$.9 million ~~decrease~~increase in the Group segment primarily due to ~~loss experience refunds which reduced~~the increased profit commissions in ~~the~~ group A&H ~~business as a result of higher loss ratios~~busine ss in ~~2006 compared~~2007 due to the ~~prior year;~~increased profitability of the business; and (iv) a ~~$.9~~$.4 million increase in other corporate ~~expenses, inclu ding $.4 million of expenses related to share-based compensation due to the adoption of SFAS 123R in the first quarter of 2006.~~expenses.

Income Taxes

Income tax expense ~~decreased $.7~~increased $.1 million to ~~$1.6~~$2.2 million for the quarter ended ~~September 30, 2006~~March 31, 2007 from ~~$2.3~~$2.1 million for the ~~third~~first quarter of ~~2005~~2006 primarily due to the ~~decrease~~increase in pre-tax income in ~~2006.~~2007. The effective tax rates were ~~28.2% for the third quarter of 2006 and 32.9% for the third quarter of 2005.~~

~~Results of Operations for the Nine Months Ended September 30, 2006 Compared to the Nine Months Ended September 30, 2005~~

Net income was $10.5 million, or $.69 per share, diluted, for the nine months ended September 30, 2006, a decrease of $5.9 million compared to net income of $16.4 million, or $1.15 per share, diluted, for the nine months ended September 30, 2005. The Company's income before taxes decreased $9.5 million to $15.3 million for the nine months ended September 30, 2006 from $24.8 million for the nine months ended September 30, 2005. Information by business segment for the nine months ended September 30, 2006 and 2005 is as follows:

Equity

Benefits,
Amortization
Selling,

Net
Income
Fee and
Claims
of Deferred
General

September 30,
Premiums
Investment
From
Other
and
Acquisition
and

2006
Earned
Income
AMIC
Income
Reserves
Costs
Administrative
Total
(In thousands)

Medical stop-loss
$
115,654
2,928
406
2,304
81,436
-
30,240
$
9,616
Fully-Insured
22,693
123
-
22,339
13,103
89
31,970
(7)
Group disability,

life, annuities

and DBL
32,523
6,671
-
327
23,819
124
11,053
4,525
Individual life,

annuities

and other
22,067
23,558
-
935
29,214
3,671
6,615
7,060
Credit life and

disability

16,192

560

-

55

7,595

3,657

6,044

(489)
Corporate

-

1,348

-

-

-

-

4,608

(3,260)
Sub total
$
209,129

35,188

406

25,960

155,167

7,541

90,530

17,445
Net realized invest-

ment gains and

losses

720
Interest expense

(2,821)
Income before

income taxes

15,344
Income taxes

4,880
Net income

$
10,464

Equity

Benefits,
Amortization
Selling,

Net
Income
Fee and
Claims
of Deferred
General

September 30,
Premiums
Investment
From
Other
and
Acquisition
and

2005
Earned
Income
AMIC
Income
Reserves
Costs
Administrative
Total
(In thousands)

Medical stop-loss
$
92,600
3,533
1,464
6,144
59,163
-
24,935
$
19,643
Fully-Insured
9,465
(51)
-
5,053
6,136
450
8,714
(833)
Group disability,

life, annuities

and DBL
30,560
6,269
-
344
21,722
115
11,905
3,431
Individual life,

annuities and

other
19,731
18,092
-
453
24,178
3,717
5,439
4,942
Credit life and

disability

15,544

744

-

90

7,244

3,484

5,540
110
Corporate

-

877

-

100

-

-

2,985

(2,008)
Sub total
$
167,900

29,464

1,464

12,184

118,443

7,766

59,518

25,285
Net realized invest-

ment gains and

losses

2,078
Interest expense

(2,593)
Income before

income taxes

24,770
Income taxes

8,364
Net income

$
16,406

~~Premiums Earned~~

Total premiums earned grew $41.2 million to $209.1 million in the first nine months of 2006 from $167.9 million in the comparable period of 2005. The increase is due to: (i) the Medical Stop-Loss segment which increased $23.1 million primarily due to increased retentions; (ii) the Fully-Insured segment which had a $13.2 million increase in premiums, comprised of a $5.1 million increase in dental premiums, a $3.8 million increase in short-term medical and a $4.3 million increase in group major medical primarily due to new business that did not exist during the first nine months of 2005; (iii) the Individual and Other segment which increased $2.4 million, primarily from a $2.4 million increase in ordinary life due to higher premiums from policy blocks acquired at the end of the third quarter of 2005 and a $.3 million increase in blanket accident and sickness policy premiums, partially offset by decreases of $.3 million in a ll other lines; (iv) an increase of $1.9 million in the Group segment primarily due to a $2.2 million increase in point of service, a $.6 million increase in group term life, partially offset by a $.9 million decrease in DBL caused by a reduction in statutory rates; and (v) a $.6 million increase in the Credit Life and Disability segment due to new business.

~~Net Realized Investment Gains and Losses~~

Net realized investment gains and losses decreased by $1.4 million compared to the first nine months of 2005. Decisions to sell securities are based on management's ongoing evaluation of investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from period to period.

~~Net Investment Income~~

Total net investment income increased $5.7 million primarily due to the maintenance of a higher level of invested assets due to the acquisitions of policy blocks in 2005, and a slight increase in the investment rate of return during the current year period. The annualized return on total investments was 5.3% in the first nine months of 2006 versus 5.1% in the first nine months of 2005.

~~Equity Income~~

Equity income from AMIC decreased $1.1 million from the first nine months of 2005, as lower income earned by AMIC was slightly offset by an increase in IHC's ownership which was approximately 48% during the first nine months of 2006 compared to an average 42% in the first nine months of 2005. The reduction in income is primarily due to an increase in net loss ratios of AMIC's Medical Stop-Loss business.

~~Fee Income and Other Income~~

Fee income increased $16.6 million to $23.9 million from $7.3 million in the nine months ended September 30, 2005, primarily due to fees of $18.8 million earned by IAC, which is a subsidiary that was not part of the Company during the first nine months of 2005, partially offset by $2.2 million earned by GroupLink that is eliminated in 2006 as a result of transferring business from outside insurance carriers to subsidiaries of IHC.

Total other income decreased $2.8 million to $2.1 million from $4.9 million in the nine months ended September 30, 2005. This was primarily due to the inclusion of $3.5 million of other income in the first nine months of 2005 from a commutation agreement and a loss ratio cover with a reinsurer that have no equivalent in the first nine months of 2006.

~~Insurance Benefits, Claims and Reserves~~

Benefits, claims and reserves increased $36.8 million. The increase is due to: (i) $22.3 million in the Medical Stop-Loss segment resulting primarily from an 8% increase in retention and an increase in Net Loss Ratios to 94.9% as compared to 88.8%32.1% for the first nine months of 2005 (see “Outlook” for a discussion of factors affecting the recent underwriting profitability of the Medical Stop-Loss segment); (ii) an increase of $7.0 million in the Fully-Insured segment due to an increase in premiums; (iii) a $5.0 million increase in the Individual and Other segment due to higher losses on assumed blocks of annuity and life business and surrenders and interest credited on policies due to acquisitions made in 2005; (iv) an increase of $2.1 million in the Group segment primarily due to a $2.3 million increase related to new business written for group A&H in point of service, a $.8 million increase in group term lif e losses, a $.5 million increase in interest credited in group annuities partially offset by a $1.5 million decrease in LTD paid claims and net claims reserves; and (v) a $.4 million increase in the Credit Life and Disability segment caused by higher loss ratios and new business.

~~Amortization of Deferred Acquisition Costs~~

Amortization of deferred acquisition costs decreased $.3 million, primarily due to costs associated with the purchase of a block of business in 2005 that is eliminated in 2006 as a result of certain acquisitions of subsidiaries in 2006.

~~Interest Expense on Debt~~

Interest expense increased $.2 million, primarily due to an increase in the interest rate on $12.4 million of floating rate junior subordinated debt to 9.0% in the first nine months of 2006 as compared to 7.1% in the first nine months of 2005, in addition to a $2.5 million increase in outstanding debt during the third quarter of ~~2006.~~

~~Selling, General and Administrative Expenses~~

Total selling, general and administrative expenses increased $31.0 million in the first nine months of 2006 as compared to the first nine months of 2005. The increase is primarily due to (i) a $23.3 million increase in expenses associated with the operation of the Fully-Insured segment, primarily due to the acquisition of IAC, GroupLink, and higher commission expense due to the increase in premiums; (ii) a $5.3 million increase in commissions and other general expenses in the Medical Stop-Loss segment due to a higher level of premiums earned; (iii) a $1.2 million increase in the Individual and Other segment due to the block acquisitions in 2005; (iv) a $.9 million decrease in the Group segment primarily due to loss experience refunds which reduced commissions in the group A&H business as a result of higher loss ratios in 2006 compared to the prior year; (v) a $.5 million increase in the Credit Life and Disability segm ent due to new business; and (vi) a $1.6 million increase in other corporate expenses, including $1.1 million of expenses related to share-based compensation due to the adoption of SFAS 123R in 2006.

~~Income Taxes~~

Income tax expense decreased $3.5 million to $4.9 million for the nine months ended September 30, 2006 from $8.4 million for the first nine months of 2005 primarily due to the decrease in pre-tax income in 2006. The effective tax rates were 31.8% for the first nine months of 20062007 and 33.8% for the first ~~nine months~~quarter of ~~2005.~~

262006.

LIQUIDITY

Insurance Group

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

Corporate

Corporate derives its funds principally from: (i) dividends from the Insurance Group; (ii) management fees from its subsidiaries; and (iii) investment income from Corporate liquidity. Regulatory constraints historically have not affected the Company's consolidated liquidity, although state insurance laws have provisions relating to the ability of the parent company to use cash generated by the Insurance Group.

Total Corporate liquidity (cash, cash equivalents, resale agreements, short-term investments, fixed maturities, equity securities, partnership interests and certain other assets, net of liabilities) amounted to ~~$21.0~~$23.0 million at ~~September 30, 2006.~~ March 31, 2007.

BALANCE SHEET

Total investments and cash and cash equivalents decreased ~~$8.0~~$2.8 million during the ~~nine~~three months ended ~~September 30, 2006~~March 31, 2007 largely due to ~~$21.0~~$3.5 million in cash used for acquisitions and a ~~$5.4~~$4.4 million increase in amounts due from and to brokers, partially offset by $4.4 million decrease in unrealized losses on available for sale ~~securities, partially offset by a $16.0~~securities.

The Company had net receivables from reinsurers of $71.7 million ~~decrease in net amounts~~at March 31, 2007. Substantially all of the business ceded to such reinsurers is of short duration. All of such receivables are either due from ~~and to reinsurers and $2.5 million of debt proceeds.~~

~~Insurance reserves-life and annuity decreased $19.3 million primarily due to~~ the ~~recapture of an ordinary life block of business~~Company's affiliate, Independence American, highly rated companies or are adequately secured. No allowance for doubtful accounts was necessary at Standard Life of $9.5 million, the runoff of acquired blocks of $8.0 million and $4.5 million due to the final settlement of several life and annuity acquisitions made in 2005. Reserves on block acquisitions are subject to change at final settlement. Deferred acquisition costs decreased $7.0 million of which $4.5 million is also due to the final settlement of the 2005 acquisitions.March 31, 2007.

Major factors that affect the Projected Net Loss Ratio assumption in reserving for Medical Stop-Loss relate to: (i) frequency and severity of claims; (ii) changes in medical trend resulting from the influences of underlying cost inflation, changes in utilization and demand for medical services, the impact of new medical technology and changes in medical treatment protocols; and (ii) the adherence by the MGUs that produce and administer this business to the Company's underwriting guidelines. Changes in these underlying factors are what determine the reasonably likely changes in the Projected Net Loss Ratio.

The Company's health reserves by segment ~~at September 30, 2006 and December 31, 2005~~ are as follows (in thousands):


		Total Health Reserves
		2006		2005		Total Health Reserves
						March 31,		December 31,
						2007		2006

Medical Stop-Loss	$	79,534	$	72,860	$	88,322	$	86,265
Fully-Insured Health		7,114		4,000
Fully Insured Health						35,598		14,526
Group Disability		63,806		65,256		68,189		64,786
Credit A&H		7,249		7,363		7,597		7,426
Individual A&H and Other		10,283		14,960		7,121		9,452

	$	167,986	$	164,439	$	206,827	$	182,455

The ~~$24.2~~$7.6 million increase in total stockholders' equity in the first ~~nine~~three months of ~~2006~~2007 is primarily due to ~~$10.5~~$4.6 million in net income and a ~~$17.9~~$2.5 million ~~net increase in common stock and paid-in capital mostly from issuances of common shares in acquisitions, partially offset by a $3.3 million increase~~decrease in net unrealized losses on investments.

The Company had net receivables from reinsurers of $83.5 million at September 30, 2006. Substantially all of the business ceded to such reinsurers is of short duration. All of such receivables are either due from the Company's affiliate, Independence American, highly rated companies or are adequately secured. No allowance for doubtful accounts was necessary at September 30, 2006.

Asset Quality

The nature and quality of insurance company investments must comply with all applicable statutes and regulations, which have been promulgated primarily for the protection of policyholders. Of the aggregate carrying value of the Insurance Group's investment assets, approximately ~~88.7%~~89.4% was invested in investment grade fixed maturities, resale agreements, policy loans and cash and cash equivalents at ~~September 30, 2006.~~March 31, 2007. Also at such date, approximately ~~98.5%~~98.9% of the Insurance Group's fixed maturities were investment grade. These investments carry less risk and, therefore, lower interest rates than other types of fixed maturity investments. At ~~September 30, 2006,~~March 31, 2007, approximately ~~1.5%~~1.1% of the carrying value of fixed maturities was invested in diversified non-investment grade fixed maturities (investments in such securities have different risks than investment grade securities, including greater risk of loss upon default, and thinn er trading markets). The Company does not have any mortgage loans or non-performing fixed maturities at ~~September 30, 2006.~~March 31, 2007.

The Company reviews its investments regularly and monitors its investments continually for impairments. For the ~~nine~~three months period ended ~~September 30,~~March 31, 2007 and 2006, the Company ~~recorded a realized loss of $247,000 for other-than-temporary impairments. For the three months and nine months ended September 30, 2005, the Company recorded an insignificant realized loss~~did not record any losses for other-than-temporary impairments.

The Company's gross unrealized losses on fixed maturities totaled ~~$22.5~~$14.7 million at ~~September 30, 2006.~~March 31, 2007. Substantially all of these securities were investment grade. The Company holds all fixed maturities as available-for-sale securities and, accordingly, marks all of its fixed maturities to market through accumulated other comprehensive income or loss. The unrealized losses on all available-for-sale securities have been evaluated in accordance with the Company's policy and were determined to be temporary in nature at ~~September 30, 2006.~~March 31, 2007.

CAPITAL RESOURCES

Due to its strong capital ratios, broad licensing and excellent asset quality and credit-worthiness, the Insurance Group remains well positioned to increase or diversify its current activities. It is anticipated that future acquisitions or other expansion of operations will be funded internally from existing capital and surplus and parent company liquidity. In the event additional funds are required, it is expected that they would be borrowed or raised in the public or private capital markets to the extent determined to be necessary or desirable.

IHC enters into a variety of contractual obligations with third-parties in the ordinary course of its operations, including liabilities for insurance reserves, funds on deposit, debt and operating lease obligations. However, IHC does not believe that its cash flow requirements can be fully assessed based solely upon an analysis of these obligations. Future cash outflows, whether they are contractual obligations or not, also will vary based upon IHC’s future needs. Although some outflows are fixed, others depend on future events. The maturity distribution of the Company’s obligations, as of ~~September 30, 2006,~~March 31, 2007, is not materially different from that reported in the schedule of such obligations at December 31, ~~2005~~2006 which was included in Item 7 of the Company’s Annual Report on Form 10-K.

In accordance with SFAS No. 115, the Company may carry its portfolio of fixed maturities either as held to maturity (carried at amortized cost), as trading securities (carried at fair market value) or as available-for-sale (carried at fair market value). The Company has chosen to carry all of its debt securities as available-for-sale. In the first ~~nine~~three months of ~~2006,~~2007, the Company experienced an ~~increase~~decrease in net unrealized losses of ~~$5.7~~$4.5 million which, net of deferred tax ~~benefits~~expenses of ~~$1.8~~$1.4 million and net of deferred policy acquisition costs of $.6 million, ~~decreased~~increased stockholders' equity by ~~$3.3~~$2.5 million (reflecting net unrealized losses of ~~$11.7~~$6.8 million at ~~September 30, 2006~~March 31, 2007 compared to net unrealized losses of ~~$8.4~~$9.3 million at December 31, ~~2005)~~2006). From time to time, as warranted, the Company employs investment strategies to mitigate interest rate and other market exposures.

OUTLOOK

~~IHC has historically been a life and health insurance holding company~~For 2007, IHC’s business plan is for its two insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life") and Madison National Life Insurance Company, Inc. ("Madison National Life")~~, which relied~~ to: (i) continue to expand into the Fully Insured Health sector with particular emphasis on ~~independent general agents, managing general underwriters (MGUs)~~transactions that leverage IHC’s vertically integrated strategy of generating fee income at multiple levels of marketing and ~~administrators~~administration, as well as risk profit and profit commission income, (ii) continue to perform the majority of all marketing, underwriting, claims and administrative functions for its two primary product segments ( M edical S top- L oss and G roup Disability, L ife, Annuities and DBL). The Company's operating results have been heavily dependent on the results of its Medical Stop-Loss line of business, particularly as IHC has increased its risk retention in recent years. For 2006, IHC’s business plan has been to: (i) improve the profitability of ~~its~~their core lines of business, ~~in particular Medical Stop-Loss,~~ while expanding distribution, ~~(ii) lay a solid foundation for substantial growth in~~(iii) diversify the ~~Fully-Insured health insurance sector,~~distribution of their life and ~~thereby seek to reduce both the volatility of its portfolio~~disability products, and ~~its exposure to market cycles , and (iii) seek opportunities to~~(iv) acquire blocks of life and annuity business, , and blocks of ~~fully-insured~~fully insured health and dental ..to the extent opportunities arise. The following summarizes ~~what IHC has accomplish ed and the~~IHC's outlook for the remainder of ~~2006 and 2007 by segment.~~

When an excess product, such as Medical Stop-Loss, experiences several consecutive years of underwriting profitability, it is not unusual for there to be more competitors entering that line, which can increase pressure on pricing and create a "softer" market. The Medical Stop-Loss market began to "soften" in 2003, and less favorable conditions continued through 2005. During 2005, the ~~Company increased rates and made changes in its underwriting guidelines in response to~~year g iven the results of ~~its underwriting audits. For~~ the ~~nine months ended September 30, 2006,~~first quarter of 2007 by segment:

Fully Insured Health Segment

IHC completed the ~~Medical Stop-Loss line was affected by further development~~acquisition of Actuarial Management Corp. in the second quarter of 2007. This acquisition will not only bring in-house the actuarial expertise necessary to maintain the profitability of the block, but will add another source of fee income and potentially profit commission.

Based on ~~business incepting~~premiums written in ~~2005 and in 2004, which caused reduced underwriting profitability. The~~the first quarter of 2007, the Company believes that the experience on business written in 2004 should now be nearly complete; and consequently, that business written in 2005 will be nearing completion during the third quarter of 2007. Based upon the Company’s best estimate, due to the changes made in underwriting guidelines made during 2005, the experience on business incepting in 2005 is tracking better than business written in 2004, and business written in 2006 is tracking better than business incepting in 2005 at this point in time.

During the second half of 2005 and 2006, IHC has expanded into multiple new Fully-Insured Health product s, including short-term medical (“ST M ”), group major medical (including Consumer Driven Health Plans (“CDHPs”)), limited medical, dental and vision (the “ Fully-Insured Health Products”). IHC will further expand its F ully- I nsured H ealth P roducts in 2006 to include major medical for individuals and families including CDHPs and limited medical .. The Company believes that , on a gross annualized basis, by the end of 2007, on an annualized basis, its ~~Fully-Insured~~Fully Insured Health premiums will equal or exceed those generated by its Medical Stop-Loss premiums. The commercial F ully- I nsured H ealth market is a much larger market than the excess market, estimated at $500 billion compared to a Medical Stop-Loss market of approximately $4 billion. The Company's Fully-Insured Health net earned premiums increased 140% for the first nine months of 2006 compared to the same period in 2005 and will continue to increase for the year 2007. IHC has invested heavily in systems and personnel during 2006 in order to administer this increased business, which has contributed to the essentially break-even profitability of the Fully-Insured segment for the first nine months of 2006.line. As a result of its multiple product filings, distribution sources, and the sheer size of the market, the Company is optimistic that its ~~F ully- I nsured~~Fully Insured Health business will continue to grow rapidly and yield profitable results. Although, as demonstrated by the reserve strengthening in the first quarter of 2007, our fully insured results ~~which , if achieved, would help balance the more~~may change on a quarterly basis, in general, Fully Insured Health tends to be less volatile and cyclical ~~M edical S top- L oss business.~~in nature than Medical Stop-Loss business on an annual basis. IHC’s total fully insured program produced underwriting profits of 8% or greater in both 2005 and 2006.

Medical Stop-Loss Segment

The Medical Stop-Loss market began to "soften" in 2003, and less favorable conditions continued through 2006. Despite these market conditions, the Company recorded Net Loss Ratios of 91.3% and 92.0% for the three months ended March 31, 2007 and 2006, respectively, and 95.2% for the year ended December 31, 2006 from its Medical Stop-Loss line. While still profitable, the Company did not consider the Net Loss Ratio for such years to be acceptable. In 2005, and throughout 2006, the Company increased rates and made changes in its underwriting guidelines in response to the results of its underwriting audits. Based on currently available information, business incepting in 2006, of which a material portion will be earned and recorded in 2007, is projected to achieve a Net Loss Ratio that is meaningfully lower than that of business incepting in 2005, just as the Net Loss Ratio on business incepting in 2005 was meaningfully lower than that of business incepting in 2004. The Company does not anticipate significant growth or shrinkage in Medical Stop-Loss.

Group Disability, Life, Annuities and DBL

The Company anticipates modest growth in its group disability, life, annuities and DBL segment.

Individual Life, Annuities and Other

IHC did not acquire any life or annuity blocks in the first quarter of 2007, but will continue to ~~look for~~consider financially viable life and annuity ~~acquisitions during 2006 and 2007 .. Although the source and timing of new acquisitions is unpredictable, the Company believes that there exists an ample supply of~~ acquisition ~~prospects for 2007, but it may not close on any significant blocks~~opportunities during the remainder of ~~2006.~~2007.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company manages interest rate risk by seeking to maintain a portfolio with a duration and average life that falls within the band of the duration and average life of the applicable liabilities. Options may be utilized to modify the duration and average life of such assets.

The Company monitors its investment portfolio on a continuous basis and believes that the liquidity of the Insurance Group will not be adversely affected by its current investments. This monitoring includes the maintenance of an asset-liability model that matches current insurance liability cash flows with current investment cash flows.

The expected change in fair value as a percentage of the Company's fixed income portfolio at ~~September 30, 2006~~March 31, 2007 given a 100 to 200 basis point rise or decline in interest rates is not materially different than the expected change at December 31, ~~2005~~2006 included in Item 7A of the Company’s Annual Report on Form 10-K. In the Company's analysis of the asset-liability model, a 100 to 200 basis point change in

interest rates on the Insurance Group's liabilities would not be expected to have a material adverse effect on the Company. With respect to its liabilities, if interest rates were to increase, the risk to the Company is that policies would be surrendered and assets would need to be sold. This is not a material exposure to the Company since a large portion of the Insurance Group's interest sensitive policies are burial policies that are not subject to the typical surrender patterns of other interest sensitive policies, and many of the Insurance Group's universal life and annuity policies were issued by liquidated companies which tend to exhibit lower surrender rates than such policies of continuing companies. Additionally, there are charges to help offset the benefits being surrendered. If interest rates were to decrease substantially, the risk to the Company is that some of its investment assets would be ~~subject~~s ubject to early redemption. This is not a material exposure because the Company would have additional unrealized gains in its investment portfolio to help offset the future reduction of investment income.

ITEM 4.

CONTROLS AND PROCEDURES

IHC’s Chief Executive Officer and Chief Financial Officer supervised and participated in IHC’s evaluation of its disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in IHC’s periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based upon that evaluation, IHC’S Chief Executive Officer and Chief Financial Officer concluded that IHC’s disclosure controls and procedures are effective.

There has been no change in IHC’s internal control over financial reporting during the fiscal quarter ended ~~September 30, 2006~~March 31, 2007 that has materially affected, or is reasonably likely to materially affect, IHC's internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

The Company is involved in legal proceedings and claims ~~which~~that arise in the ordinary course of its businesses. The Company has established reserves that it believes are sufficient given information presently available related to its outstanding legal proceedings and claims. The Company believes the results of pending legal proceedings and claims are not expected to have a material adverse effect on its financial condition or cash flows, although there could be such an effect on its results of operations for a particular period.

ITEM 1A.

RISK FACTORS

There were no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2005~~2006 in Item 1A to Part 1 of Form 10-K.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not Applicable

Share Repurchase Program

IHC has a program, initiated in 1991, under which it repurchases shares of its common stock. As of ~~September 30, 2006, 76,705~~March 31, 2007, 51,522 shares were still authorized to be repurchased under the plan. ~~Share~~There were no share repurchases during ~~2006 are summarized as follows:~~the first quarter of 2007.

2006

Maximum Number

Number of

Average Price

of Shares Which
Month of

Shares

of Repurchased

Can be
Repurchase

Repurchased

Shares

Repurchased
January

-

$
-

109,837
February

-

-

109,837
March

-

-

109,837
April

-

-

109,837
May

2,931

20.34

106,906
June

-

-

106,906
July

-

-

106,906
August

17,283

20.04

89,623
September

12,918

20.21

76,705

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

ITEM 5.

OTHER INFORMATION

Not applicable

ITEM 6.

EXHIBITS

31.1

Certification of the Chief Executive Officer and President Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

INDEPENDENCE HOLDING COMPANY

(REGISTRANT)

By:

/s/Roy T. K. Thung

Date:

~~November 9, 2006~~May 10, 2007

Roy T.K. Thung

Chief Executive Officer and President

By:

/s/Teresa A. Herbert

Date:

~~November 9, 2006~~May 10, 2007

Teresa A. Herbert

Senior Vice President and

Chief Financial Officer

3327


			Three Months	Nine Months
			Ended	Ended
			September 30,	September 30,
			2005	2005

Net income, as reported		$	4,788	$	16,406
Add stock-based employee compensation expense included
	in reported net income, net of related tax effects		-	-
Deduct total stock-based compensation expense determined
	under fair value based method for all awards, net of
	related tax effects	$	(155)	$	(495)
Proforma net income		$	4,633	$	15,911

Basic earnings per share:
	As reported	$	.34	$	1.17
	Proforma	$	.33	$	1.14

Diluted earnings per share:
	As reported	$	.34	$	1.15
	Proforma	$	.32	$	1.12


2006				Maximum Number
	Number of		Average Price	of Shares Which
Month of	Shares		of Repurchased	Can be
Repurchase	Repurchased		Shares	Repurchased
January	-	$	-	109,837
February	-		-	109,837
March	-		-	109,837
April	-		-	109,837
May	2,931		20.34	106,906
June	-		-	106,906
July	-		-	106,906
August	17,283		20.04	89,623
September	12,918		20.21	76,705