Summary of INDEPENDENCE HOLDING CO

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of Independence Holding Company ("IHC") and its subsidiaries (collectively, the "Company") should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company and the related Notes thereto appearing in our annual report on Form 10-K for the fiscal year ended December 31, 2008, as filed with the Securities and Exchange Commission, and our unaudited Condensed Consolidated Financial Statements and related Notes thereto appearing elsewhere in this quarterly report.

Overview

Independence Holding Company, a Delaware corporation ("IHC"), is a holding company principally engaged in the life and health insurance business through:
(i) its 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 underwriters ("MGUs") in which it owns a significant voting interest, Health Plan Administrators, Inc. ("HPA"), GroupLink, Inc. ("GroupLink"), IHC Health Solutions, Inc. ("IHC Health Solutions"), and Actuarial Management Corporation ("AMC"). These companies are sometimes collectively referred to as the "Insurance Group," and IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred to as the "Company." At September 30, 2009, the Company also owned a 49.7% equity interest in American Independence Corp. ("AMIC"), which owns Independence American Insurance Company ("Independence American"), three MGUs and controlling interests in two agencies.

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

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

The results of operations for the three months and nine months ended September 30, 2009 and 2008 are summarized as follows (in thousands):

                                          Three Months Ended        Nine Months Ended
                                            September 30,             September 30,
                                          2009         2008         2009         2008

Revenues                              $   93,082   $   81,934   $  293,052   $  275,670
Expenses                                  90,989       97,234      284,150      297,689

Income (loss) from continuing
operations
     before income taxes (benefit)         2,093      (15,300)       8,902      (22,019)
Income taxes (benefit)                       212       (5,836)       1,709       (8,892)

     Income (loss) from continuing         1,881       (9,464)       7,193      (13,127)
     operations

Discontinued operations:
Income (loss) from discontinued               49          708         (305)         708
operations

Net income (loss)                          1,930       (8,756)       6,888      (12,419)

(Income) loss from noncontrolling
interests
     in subsidiaries                          (5)           8           15           50

        Net income (loss)             $    1,925   $   (8,748)  $    6,903   $  (12,369)
        attributable to IHC

Income from continuing operations increased $11.4 million to $1.9 million for the three months ended September 30, 2009 compared to a loss of $9.5 million for the three months ended September 30, 2008. Income from continuing operations increased $20.3 million to $7.2 million for the nine months ended September 20, 2009 compared to a loss of $13.1 million for the nine months ended September 30, 2008. Included in the 2008 results are losses for other-than-temporary impairments of $15.8 million and $33.3 million in the three months and nine months ended September 30, respectively, due to the write down in value of preferred stocks of certain financial institutions, fixed maturities (primarily Alt-A-securities) and common stocks. The 2009 results include a loss of $.3 million for other-than-temporary impairments in the nine months ended September 30;

Consolidated investment yields (on an annualized basis) of 5.4% and 5.2% for the three months and nine months ended September 30, 2009 compared to 5.3% and 5.0% for the comparable periods in 2008;

Revenues of $93.1 million and $293.1 million for the three months and nine months ended September 30, 2009, respectively, representing increases of 13.7% and 6.3% over the respective three-month and nine-month periods in 2008; and

Book value of $14.33 per common share, representing a 35.7% increase from December 31, 2008, primarily reflecting net income and net unrealized gains on securities for the nine months ended September 30, 2009.

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

The Medical Stop-Loss segment reported income before taxes of $.8 million and $.7 million for the three months ended September 30, 2009 and 2008, respectively, and reported $3.5 million of income before taxes for the nine months ended September 30, 2009, as compared to $4.1 million in the same period in 2008. The decrease is primarily a result of reduced production due to stricter underwriting guidelines and cancellation of underperforming managing general underwriters;

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

                                          Three Months Ended      Nine Months Ended
                                            September 30,           September 30,
                                          2009         2008        2009       2008

Premiums Earned                       $    29,832  $    38,124 $   99,121  $ 120,745
Insurance Benefits, Claims & Reserves      22,321       28,909     71,684     88,755
Expenses                                    7,523        9,642     26,455     30,532

Loss Ratio(A)                               74.8%        75.8%      72.3%      73.5%
Expense Ratio (B)                           25.2%        25.3%      26.7%      25.3%
Combined Ratio (C)                         100.0%       101.1%      99.0%      98.8%

(A)

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

(B)

Expense ratio represents net commissions (including profit commissions), administrative fees, premium taxes and other underwriting expenses divided by premiums earned.

(C)

The combined ratio is equal to the sum of the loss ratio and the expenses ratio.

The Fully Insured Health segment reported $3.0 million of loss before taxes for the three months ended September 30, 2009 as compared to a loss of $.6 million for the comparable period in 2008, and a loss before taxes of $3.8 million for the nine months ended September 30, 2009 as compared to $1.7 million of income before taxes for the nine months ended September 30, 2008;

Fee and other income decreased $1.8 million and $5.1 million for the three months and nine months ended September 30, 2009, respectively, as compared to the same periods in 2008 due to a decrease in gross premiums written by the Company and a decrease in other business administered by IAC. The Company also experienced a decrease in general expenses due to a reduction in work force and related expenses in response to its lower volume of business.

Underwriting experience, as indicated by its GAAP Combined Ratios, for the Fully Insured segment for the three months and nine months ended September 30, 2009 and 2008 is as follows (in thousands):

                                          Three Months Ended      Nine Months Ended
                                            September 30,           September 30,
                                          2009         2008        2009        2008

Premiums Earned                       $    21,109  $    19,977 $   63,362  $   61,726
Insurance Benefits, Claims & Reserves      16,225       13,083     44,802      39,544
Expenses                                    6,038        5,871     19,120      17,459

Loss Ratio                                  76.9%        65.5%      70.7%       64.0%
Expense Ratio                               28.6%        29.4%      30.2%       28.3%
Combined Ratio                             105.5%        94.9%     100.9%       92.3%

The loss ratio increased due to unusually large claims in the small group medical line and an increase in the frequency of claims in the dental line.

The underwriting expense ratio for the nine month-period increased primarily as a result of: (i) an increase in premium taxes and assessments due in part to a true-up of 2007 expenses recorded in the first quarter of 2008 thereby reducing the 2008 expense combined with higher state taxes and assessments recorded in the first quarter of 2009; and (ii) an increase in general expenses of Standard Security Life and Madison National Life.

Income before taxes from the Group disability, life, annuities and DBL segment decreased $1.0 million and $1.5 million for the three months and nine months ended September 30, 2009 compared to the three months and nine months ended September 30, 2008, primarily from decreased profitability in DBL and group term life lines of business partially offset by an increase in the LTD business. The DBL business has experienced decreases in group sizes coupled with rate reductions as a result of the overall economic downturn while the group term life business has experienced higher loss ratios;

Income before taxes from the Individual life, annuities and other segment increased $2.4 million and $.1 million for the three months and nine months ended September 30, 2009, respectively, compared to the same periods in 2008, primarily as a result of a commutation of a block of business in accordance with a reinsurance agreement during the third quarter of 2009 and the amortization of gain on a block of ordinary life and annuity business ceded in 2009;

Loss before taxes from the Corporate segment decreased $.4 million and $2.5 million for the three months and nine months ended September 30, 2009, respectively, primarily as a result of income from partnership investments recorded in 2009 versus losses from partnership investments recorded in the same periods of 2008;

Net realized investment gains were $.6 million and $3.5 million for the three months and nine months ended September 30, 2009, respectively, compared to net realized investment losses of $1.4 million for the three months ended September 30, 2008 and net realized investment gains of $1.1 million for the nine months ended September 30, 2008. Other-than-temporary impairment losses for the nine months ended September 30, 2009 were $.3 million. No other-than-temporary impairment losses were recorded in the three months ended September 30, 2009. For the three months and nine months ended September 30, 2008, other-than-temporary impairment losses were $15.8 million and $33.3 million, respectively, primarily due to the write down in value of preferred stocks of certain financial institutions, fixed maturities (primarily Alt-A securities) and common stocks due to the

severity of the decrease in market value and length of time that these securities were in a loss position; and

Premiums by principal product for the three months and nine months 2009 and 2008 are as follows (in thousands):

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

Gross Direct and Assumed
     Earned Premiums:                      2009         2008            2009                  2008

Medical Stop-Loss               $           47,920 $     60,978  $         156,367     $         194,363
Fully Insured Health                        47,538       49,205            142,970               152,463
Group disability, life,                     26,845       18,962             78,328                58,521
annuities and DBL
Individual, life, annuities                  7,403        7,860             22,960                24,265
and other

                                $          129,706 $    137,005  $         400,625   $           429,612




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

Net Premiums Earned:                      2009         2008            2009                  2008

Medical Stop-Loss             $            29,832 $     38,124  $          99,121     $         120,745
Fully Insured Health                       21,109       19,977             63,362                61,726
Group disability, life,                    14,178       11,436             41,993                35,109
annuities and DBL
Individual, life, annuities                 6,623        7,395             20,780                22,690
and other

                              $            71,742 $     76,932  $         225,256   $           240,270

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles ("GAAP"). The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires the Company's management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. A summary of the Company's significant accounting policies and practices is provided in Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Management has identified the accounting policies related to Insurance Premium Revenue Recognition and Policy Charges, Insurance Reserves, Deferred Acquisition Costs, Investments, Goodwill and Other Intangible Assets, and Deferred Income Taxes as those that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Consolidated Financial Statements and this Management's Discussion and Analysis. A full discussion of these policies is included under the heading, "Critical Accounting Policies" in Item 7 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2008. During the nine months ended September 30, 2009, there were no additions to or changes in the critical accounting policies disclosed in the 2008 Form 10-K except for the recently adopted accounting standards discussed in Note 1(C) of the Notes to Condensed Consolidated Financial Statements.

Results of Operations for the Three Months Ended September 30, 2009 Compared to the Three Months Ended September 30, 2008

Income from continuing operations was $1.9 million for the three months ended September 30, 2009, an increase of $11.4 million compared to a loss from continuing operations of $9.5 million for the three months ended September 30, 2008. The Company's income from continuing operations before taxes increased $17.4 million to $2.1 million for the three months ended September 30, 2009 from a loss of $15.3 million for the three months ended September 30, 2008. Information by business segment for the three months ended September 30, 2009 and 2008 is as follows:

                                             Equity            Benefits,  Amortization        Selling,
                                   Net       Income  Fee and    Claims    of  Deferred        General
                    Premiums    Investment    From    Other       and      Acquisition          And
September 30,        Earned       Income      AMIC    Income   Reserves       Costs        Administrative      Total
2009
(In thousands)

Medical Stop-Loss   $   29,832        1,170       40      180      22,321             -                8,129  $    772
Fully Insured           21,109          195       25    7,425      16,225             7               15,538    (3,016)
Health
Group disability,
     life,
     annuities
     and DBL            14,178        2,442       11       89      10,184           169                4,666     1,701
Individual life,
     annuities
     and
     other               6,623        7,042        -    1,714       6,737           825                4,569     3,248
Corporate                    -          454        -        -           -             -                  918      (464)

Sub total $ 71,742 $ 11,303 $ 76 $ 9,408 $ 55,467 $ 1,001 $ 33,820 2,241

Net realized investment gains                                                                                      553
Other-than-temporary impairment losses                                                                               -
Interest expense                                                                                                  (701)
Income from continuing operations before income                                                                  2,093
taxes
Income taxes                                                                                                       212
Income from continuing operations                                                                             $  1,881



                                             Equity                 Benefits,   Amortization      Selling,
                                  Net        Income      Fee and      Claims    of  Deferred      General
                   Premiums   Investment      From        Other        and       Acquisition        And
September 30,       Earned      Income        AMIC       Income      Reserves       Costs      Administrative    Total
 2008
(In thousands)

Medical            $ 38,124        1,304           223         279       28,909             -           10,313 $     708
Stop-Loss
Fully Insured        19,977          226            54       9,195       13,083            12           16,912      (555)
Health
Group
disability,
    life,
    annuities
    and DBL          11,436        2,540            20          90        7,290            38            4,063     2,695
Individual life,
    annuities         7,395        8,036             -         392       10,189         1,369            3,428       837
    and other
Corporate                 -         (219)            -           -            -             -              728      (947)

Sub total $ 76,932 $ 11,887 $ 297 $ 9,956 $ 59,471 $ 1,419 $ 35,444 2,738

Net realized investment losses                                                                                    (1,355)
Other-than-temporary impairment losses                                                                           (15,783)
Interest expense                                                                                                    (900)
Loss from continuing operations before income taxes                                                              (15,300)
Income tax benefits                                                                                               (5,836)
Loss from continuing operations                                                                                $  (9,464)

Premiums Earned

Total premiums earned decreased $5.2 million to $71.7 million in the third quarter of 2009 from $76.9 million in the comparable period of 2008. The decrease is primarily due to: (i) the Medical Stop-Loss segment which decreased $8.3 million, primarily due to reduced production from stricter underwriting guidelines and the termination of certain managing general underwriters; and
(ii) a decrease of $.8 million in premiums earned in the individual life, annuities and other segment primarily as a result of the ceding and commutation of certain ordinary life and annuity business during 2009; partially offset by
(iii) the Fully Insured Health segment which had a $1.1 million increase in premiums in the third quarter of 2009 compared to the third quarter of 2008, comprised primarily of a $1.2 million increase in dental premiums as a result of increased production, a $.5 million net increase in all other lines of this segment due to increased retention, offset by a $.6 million decrease in student accident premiums as a result of the cancellation of a producer of this product; and (iv) a $2.8 million increase in the group disability, life, annuities and DBL segment primarily from the LTD line due to an increase in retention and new business written.

Net Investment Income

Total net investment income decreased $.6 million primarily due to a decrease in assets due to the ceded block of life and annuity business. The overall annualized investment yields were 5.4% and 5.3% (approximately 5.7% and 5.4%, on a tax advantaged basis) in the third quarter of 2009 and 2008, respectively. The annualized investment yields on bonds, equities and short-term investments were 5.0% and 5.3% in the third quarter of 2009 and 2008, respectively. A decrease in interest and dividend income, as a result of a reallocation of the investment portfolio toward more liquid assets during 2009, was partially offset by a decrease in losses from partnership investments.

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

Net realized investment gains increased $2.0 million to $.6 million in 2009 compared to net realized investment losses of $1.4 million in 2008. These amounts include gains and losses from sales of 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. No other-than-temporary impairments were recorded in the three months ended September 30, 2009. For the three months ended September 30, 2008, the Company recorded pretax losses of $15.8 million from other-than-temporary impairments.

Fee Income and Other Income

Fee income decreased $2.2 million to $7.2 million in the three months ended September 30, 2009 from $9.4 million in the three months ended September 30, 2008 primarily as a result of a decrease in gross premiums from the small group line of business in the Fully Insured Health segment due in part to stricter underwriting guidelines and downward pressure on enrollment in medical plans due to the recession and due to a decrease in other business administered by IAC.

Total other income increased $1.6 million in the three months ended September 30, 2009 to $2.2 million from $.6 million in the three months ended September 30, 2008, primarily due (i) to income resulting from the commutation, in 2009, of a block of business, (ii) administrative fees associated with a coinsurance agreement, and (iii) deferred gain amortization associated with a block of ordinary life and annuities business ceded in the second quarter of 2009.

Insurance Benefits, Claims and Reserves

Benefits, claims and reserves decreased $4.0 million. The decrease is primarily due to: (i) a decrease of $6.6 million in the Medical Stop-Loss segment, largely resulting from a decrease in premiums

earned; and (ii) a decrease of $3.4 million in the individual life, annuities and other segment, primarily resulting from the commutation of reserves in the third quarter of 2009 and the ceding of a block of ordinary life and annuity policies in 2009; partially offset by (iii) an increase of $3.1 million in the Fully Insured Health segment, primarily as a result of the increase in claims and reserves of dental and small group businesses; and (iv) an increase of $2.9 million in the group disability, life, annuities and DBL segment as a result of increased LTD retention, new LTD business written and higher loss ratios on the LTD and GTL lines of business.

Amortization of Deferred Acquisition Costs

Amortization of deferred acquisition costs decreased $.4 million primarily due to lower investment income assumptions used in making this calculation in 2009 as a result of a decrease in yields on insurance investments.

Interest Expense on Debt

Interest expense decreased $.2 million primarily as a result of principal repayments and lower interest rates.

Selling, General and Administrative Expenses

Total selling, general and administrative expenses decreased $1.6 million in the third quarter of 2009 as compared to the third quarter of 2008. The decrease is primarily due to: (i) a $2.2 million decrease in commissions and other general expenses in the Medical Stop-Loss segment due to a decrease in volume as a result of reduced production; (ii) a $1.4 million decrease in the Fully Insured Health segment primarily consisting of a decrease in general expenses resulting from a lower volume of business and a reduction in work force; offset by (iii) a $1.2 million increase in compensation, commission and administrative expenses associated with the individual life, annuities and other segment, primarily as a result of the acquisition of a block of life and annuity business in the second quarter of 2008; and (iv) a $.6 million increase in the group disability, life, annuities and DBL segment primarily due to an increase premiums earned.

Income Taxes

Income tax expense increased $6.0 million to $.2 million for the third quarter ended September 30, 2009 from a tax benefit of $5.8 million for the third quarter of 2008. The effective tax rate was 9.5% for the third quarter of 2009 compared to (37.9)% for the third quarter of 2008. The difference in the effective tax rates is primarily attributable to an increased amount of tax benefits derived from tax advantaged investments in 2009 and state income taxes. The Company has significantly increased in 2009 its position in state and political subdivision investments that generate tax exempt interest, thereby resulting in a greater proportion of tax advantaged income to income before taxes.

Results of Operations for the Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008

Income from continuing operations was $7.2 million for the nine months ended September 30, 2009, an increase of $20.3 million compared to a loss from continuing operations of $13.1 million for the nine months ended September 30, 2008. The Company's income from continuing operations before taxes increased . . .