10-Q

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

For Quarterly Period Ended September 30, 2004

OR

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

For the Transition Period from              to             

Commission file number 0-18298

Unitrin, Inc.

(Exact name of registrant as specified in its charter)

Delaware	95-4255452
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

One East Wacker Drive, Chicago, Illinois	60601
(Address of principal executive offices)	(Zip Code)

(312) 661-4600

(Registrant’s telephone number, including area code)

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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

68,571,156 shares of common stock, $0.10 par value, were outstanding as of October 26, 2004.

UNITRIN, INC.

INDEX

		Page
PART I.	FINANCIAL INFORMATION.
Item 1.	Financial Statements.
	Condensed Consolidated Statements of Income for the Nine and Three Months Ended September 30, 2004 and 2003 (Unaudited).	1
	Condensed Consolidated Balance Sheets as of September 30, 2004 (Unaudited) and December 31, 2003.	2
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003 (Unaudited).	3
	Notes to the Condensed Consolidated Financial Statements (Unaudited).	4-17
Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition.	18-34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	34-37
Item 4.	Controls and Procedures.	38
PART II.	OTHER INFORMATION.
Item 1.	Legal Proceedings.	38
Item 6.	Exhibits.	38-40
Signatures		41

UNITRIN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in millions, except per share amounts)

(Unaudited)

	Nine Months Ended					Three Months Ended
	Sept. 30, 2004		Sept. 30, 2003			Sept. 30, 2004		Sept. 30, 2003
Revenues:
Earned Premiums	$	1,862.5	$	1,833.1		$	630.7	$	634.3
Consumer Finance Revenues		150.6		145.1			51.1		50.1
Net Investment Income		189.1		167.2			65.9		58.3
Other Income		11.7		21.4			6.3		4.4
Net Realized Investment Gains		67.2		25.5			24.7		8.8
Total Revenues		2,281.1		2,192.3			778.7		755.9
Expenses:
Insurance Claims and Policyholders’ Benefits		1,266.1		1,314.4			429.3		443.2
Insurance Expenses		625.5		637.1			220.3		214.5
Consumer Finance Expenses		116.1		110.3			37.0		37.8
Interest and Other Expenses		43.5		31.0			14.4		10.0
Total Expenses		2,051.2		2,092.8			701.0		705.5
Income before Income Taxes and Equity in Net Income (Loss) of Investee		229.9		99.5			77.7		50.4
Income Tax Expense		65.6		19.0			22.2		7.4
Income before Equity in Net Income (Loss) of Investee		164.3		80.5			55.5		43.0
Equity in Net Income (Loss) of Investee		2.6		(1.3	)		1.0		0.1
Net Income	$	166.9	$	79.2		$	56.5	$	43.1
Net Income Per Share	$	2.44	$	1.17		$	0.82	$	0.64
Net Income Per Share Assuming Dilution	$	2.42	$	1.17		$	0.82	$	0.64

The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.

1

UNITRIN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions, except per share amounts)

	September 30, 2004		December 31, 2003
	(Unaudited)
Assets:
Investments:
Fixed Maturities at Fair Value (Amortized Cost: 2004 - $4,129.5; 2003 - $3,531.6)	$	4,257.2	$	3,634.7
Northrop Grumman Corporation Preferred Stock at Fair Value (Cost: 2004 - $177.5; 2003 - $177.5)		232.5		220.9
Northrop Grumman Corporation Common Stock at Fair Value (Cost: 2004 - $371.9; 2003 - $572.2)		459.6		633.9
Other Equity Securities at Fair Value (Cost: 2004 - $342.6; 2003 - $342.7)		419.3		432.8
Investee (UNOVA, Inc.) at Cost Plus Cumulative Undistributed Earnings (Fair Value: 2004 - $177.8; 2003 - $290.5)		69.7		64.7
Short-term Investments at Cost which Approximates Fair Value		294.9		495.5
Other		327.4		300.4
Total Investments		6,060.6		5,782.9
Cash		67.8		65.7
Consumer Finance Receivables at Cost (Fair Value: 2004 - $960.7; 2003 - $906.7)		956.1		904.8
Other Receivables		872.9		899.4
Deferred Policy Acquisition Costs		421.5		400.2
Goodwill		344.7		344.7
Other Assets		145.6		139.1
Total Assets	$	8,869.2	$	8,536.8
Liabilities and Shareholders’ Equity:
Insurance Reserves:
Life and Health	$	2,318.6	$	2,265.1
Property and Casualty		1,522.9		1,426.3
Total Insurance Reserves		3,841.5		3,691.4
Investment Certificates and Savings Accounts at Cost (Fair Value: 2004 - $916.0; 2003 - $918.9)		915.9		915.2
Unearned Premiums		824.1		794.7
Accrued and Deferred Income Taxes		260.0		382.0
Notes Payable at Amortized Cost (Fair Value: 2004 - $516.9; 2003 - $519.4)		502.6		495.7
Accrued Expenses and Other Liabilities		562.3		438.9
Total Liabilities		6,906.4		6,717.9
Shareholders’ Equity:
Common Stock, $0.10 par value, 100 million Shares Authorized; 68,542,898 Shares Issued and Outstanding at September 30, 2004 and 67,778,023 Shares Issued and Outstanding at December 31, 2003		6.9		6.8
Paid-in Capital		599.6		537.8
Retained Earnings		1,129.0		1,079.8
Accumulated Other Comprehensive Income		227.3		194.5
Total Shareholders’ Equity		1,962.8		1,818.9
Total Liabilities and Shareholders’ Equity	$	8,869.2	$	8,536.8

The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.

2

UNITRIN, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)

	Nine Months Ended
	September 30, 2004			September 30, 2003
Operating Activities:
Net Income	$	166.9		$	79.2
Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities:
Increase in Deferred Policy Acquisition Costs		(19.2	)		(17.8	)
Equity in Net (Income) Loss of Investee before Taxes		(4.0	)		2.0
Amortization of Investments		9.5			8.6
Decrease in Other Receivables		26.6			17.4
Increase in Insurance Reserves and Unearned Premiums		175.1			263.1
Increase (Decrease) in Accrued and Deferred Income Taxes		(135.2	)		33.0
Increase in Accrued Expenses and Other Liabilities		14.5			54.8
Net Realized Investment Gains		(67.2	)		(25.5	)
Provision for Loan Losses		34.7			36.0
Other, Net		31.6			32.3
Net Cash Provided by Operating Activities		233.3			483.1
Investing Activities:
Sales and Maturities of Fixed Maturities		602.8			1,204.1
Purchases of Fixed Maturities		(1,206.1	)		(1,742.0	)
Sales of Northrop Grumman Corporation Common Stock		234.8			—
Sales of Other Equity Securities		90.6			80.1
Purchases of Equity Securities		(59.4	)		(30.0	)
Change in Short-term Investments		200.3			(35.1	)
Acquisition and Improvements of Investment Real Estate		(26.7	)		(19.9	)
Sale of Investment Real Estate		4.3			—
Change in Other Investments		3.7			(4.3	)
Change in Consumer Finance Receivables		(86.8	)		(116.8	)
Other, Net		(33.4	)		(9.7	)
Net Cash Used by Investing Activities		(275.9	)		(673.6	)
Financing Activities:
Change in Investment Certificates and Savings Accounts		0.8			83.8
Change in Universal Life and Annuity Contracts		4.4			3.4
Change in Liability for Funds Held for Securities on Loan		104.2			124.6
Notes Payable Proceeds		—			180.0
Notes Payable Payments		—			(120.0	)
Cash Dividends Paid		(85.0	)		(84.1	)
Common Stock Repurchases		—			(1.4	)
Cash Exercise of Stock Options		20.3			0.6
Net Cash Provided by Financing Activities		44.7			186.9
Increase (Decrease) in Cash		2.1			(3.6	)
Cash, Beginning of Year		65.7			16.9
Cash, End of Period	$	67.8		$	13.3

The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.

3

UNITRIN, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation

The unaudited Condensed Consolidated Financial Statements included herein have been prepared by Unitrin, Inc. (“Unitrin” or the “Company”) pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain financial information that is normally included in annual financial statements, including certain financial statement footnote disclosures, prepared in accordance with accounting principles generally accepted in the United States of America, is not required by the rules and regulations of the SEC and have been condensed or omitted. In the opinion of the Company’s management, the unaudited Condensed Consolidated Financial Statements include all adjustments necessary for a fair presentation. The preparation of interim financial statements relies heavily on estimates. This factor and certain other factors, such as the seasonal nature of some portions of the insurance business, as well as market conditions, call for caution in drawing specific conclusions from interim results. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K, filed with the SEC for the year ended December 31, 2003 (the “2003 Annual Report”).

Stock-Based Compensation

Effective January 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” and as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” prospectively to all awards granted, modified or settled on or after January 1, 2003.

The effects on Net Income, Net Income Per Share and Net Income Per Share Assuming Dilution if the fair value based method had been applied to all awards since the effective date of SFAS No. 123 for the periods presented below were:

	Nine Months Ended						Three Months Ended
(Dollars in Millions, Except Per Share Amounts)	Sept. 30, 2004			Sept. 30, 2003			Sept. 30, 2004			Sept. 30, 2003
Net Income, As Reported	$	166.9		$	79.2		$	56.5		$	43.1
Add: Stock-Based Compensation Expense Included in Reported Net Income, Net of Related Tax Effects		4.3			1.3			1.4			0.4
Deduct: Total Stock-Based Employee Compensation Expense Determined under Fair Value Based Method for All Awards, Net of Related Tax Effects		(5.0	)		(3.2	)		(1.6	)		(1.0	)
Pro Forma Net Income	$	166.2		$	77.3		$	56.3		$	42.5
Net Income Per Share:
As Reported	$	2.44		$	1.17		$	0.82		$	0.64
Pro Forma	$	2.43		$	1.14		$	0.82		$	0.63
Net Income Per Share Assuming Dilution:
As Reported	$	2.42		$	1.17		$	0.82		$	0.64
Pro Forma	$	2.41		$	1.14		$	0.81		$	0.63

4

UNITRIN, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2 - Acquisition of Businesses

In June 2002, the Company acquired the personal lines property and casualty insurance business of the Kemper Insurance Companies (“KIC”). Pursuant to the agreements among the parties, KIC retained all liabilities for policies issued by Kemper Auto and Home (“KAH”) prior to the closing, while Trinity Universal Insurance Company (“Trinity”), a subsidiary of Unitrin, is entitled to premiums written for substantially all policies issued or renewed by the Kemper Auto and Home segment after the closing and is liable for losses and expenses incurred thereon. The purchase price was $42.3 million (the “Determinable Purchase Price Component”), plus 1% of premiums written over a three-year period beginning January 1, 2003 (the “Variable Purchase Price Component”). Due to the nature of the Variable Purchase Price Component, at the acquisition date the Company could not reasonably determine the contingent consideration that would be paid. Pursuant to the provisions of SFAS No. 141, “Business Combinations”, the Variable Purchase Price Component is not reflected as a cost of the acquisition until such determination can reasonably be made. The Variable Purchase Price Component is allocated to the policies written. At June 30, 2004, the Company had recorded $9.9 million in Other Assets for the amount of the Variable Purchase Price Component that had been determined through that date. As further consideration under the agreements, KIC was eligible for performance bonuses if the business met certain loss ratio criteria over the same three years. Such performance bonuses are expensed as incurred. At June 30, 2004, the Company estimated that KIC had not earned a performance bonus to date for 2004 and 2003.

In connection with the acquisition, the Company also acquired the stock of KIC’s direct distribution personal lines subsidiaries (“Kemper Direct”), which sell personal automobile insurance to consumers over the Internet. Pursuant to the provisions of the stock acquisition agreement between the Company and KIC, KIC agreed to indemnify the Company for 90% of any adverse loss and loss adjustment expense reserve development for policy losses incurred by Kemper Direct prior to the acquisition date, while KIC was entitled to 90% of any favorable development on such policy losses. At June 30, 2004, the Company had recorded a receivable of $0.9 million from KIC resulting from unfavorable development.

On August 20, 2004, the Company and KIC agreed to settle and extinguish certain liabilities and obligations arising under the acquisition including but not limited to the Variable Purchase Price Component and the performance bonus (the “KIC Settlement”). On August 31, 2004, the Company paid KIC $13.0 million to settle the Variable Purchase Price Component for all remaining periods, $18.4 million to settle the performance bonus, and $5.0 million for premium taxes and certain other accrued costs. At the same time, KIC paid the Company $3.6 million to settle its obligation to reimburse the Company for the cost of administering certain business of KIC which was excluded from the acquisition and $0.9 million to settle KIC’s obligation under the loss indemnification described above.

During the third quarter of 2004, the Company recorded a consolidated charge of $14.9 million before-tax in connection with the KIC Settlement due primarily to the performance bonus of $18.4 million before-tax, which is included in Insurance Expenses in the Condensed Consolidated Statements of Income, partially offset by certain service fee adjustments, which are included in Other Income in the Condensed Consolidated Statements of Income. The Variable Purchase Price Component of $13.0 million was capitalized and recorded in Other Assets.

At the acquisition date, Unitrin’s property and casualty insurance subsidiaries were not licensed in all the states where the KAH business is written nor were certain computer and data processing modifications completed to allow for the migration of the KAH business to the Company’s property and casualty insurance subsidiaries. Accordingly, to facilitate the transition of such business to Unitrin’s property and casualty insurance subsidiaries, KIC and Trinity entered into a quota share reinsurance agreement whereby Trinity reinsured, on a 100% indemnity basis, substantially all of the KAH business written or renewed by KIC after the acquisition date. KIC’s financial condition deteriorated rapidly after the acquisition, and accordingly, Unitrin accelerated its transition of the business directly to its property and casualty insurance subsidiaries. Unitrin’s property and casualty insurance subsidiaries have obtained all necessary licenses and have completed all necessary computer and data processing modifications. The transition of the business directly to Unitrin’s property and casualty insurance companies is substantially complete. The amount of business yet to be transitioned directly to Unitrin’s property and casualty insurance companies is insignificant.

5

UNITRIN, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 - Investment in Investee

Equity in Net Income (Loss) of Investee was income of $2.6 million and income of $1.0 million for the nine and three months ended September 30, 2004, respectively, compared to a loss of $1.3 million and income of $0.1 million for the nine and three months ended September 30, 2003, respectively. Unitrin accounts for its investment in its investee, UNOVA, Inc. (“UNOVA”), under the equity method of accounting using the most recent and sufficiently timely publicly-available financial reports and other publicly-available information, which generally results in a three month delay in the inclusion of UNOVA’s results in Unitrin’s consolidated financial statements. Prior to the periods presented in the Condensed Consolidated Financial Statements, Unitrin determined that a decline in the fair value of its investment in UNOVA was other than temporary under applicable accounting standards. Accordingly, Unitrin reduced the carrying value of its investment in UNOVA to its then current estimated realizable value and allocated the reduction to Unitrin’s proportionate share of UNOVA’s non-current assets. Accordingly, Unitrin’s reported equity in the net income of UNOVA differs from Unitrin’s proportionate share of UNOVA’s reported results to the extent that such results include depreciation, amortization or other charges related to such non-current assets. The fair value of Unitrin’s investment in UNOVA subsequently recovered such that the fair value exceeded the carrying value of Unitrin’s investment in UNOVA by $108.1 million and $225.8 million at September 30, 2004 and December 31, 2003, respectively. In accordance with applicable accounting standards, such excess is not included in the unaudited Condensed Consolidated Financial Statements.

Note 4 - Other Receivables

As previously disclosed in the 2003 Annual Report, under the agreement governing the 1999 acquisition of Valley Group, Inc. (“VGI”), the Company was entitled to recover 90% of unfavorable development on VGI’s pre-acquisition loss and loss adjustment expense reserves from the seller, White Mountains Insurance Group, Ltd. (“White Mountains”) (formerly Fund American Enterprise Holdings, Inc.). Recovery was subject to a maximum limit of $50 million. Such reserves experienced unfavorable development, 90% of the amount of which exceeded the maximum recovery under the agreement. Accordingly, the recoverable had been recorded at the maximum limit.

The Company delivered a final reserve report to White Mountains on March 7, 2003. On April 4, 2003, White Mountains responded to the Company and indicated, among other things, that it believed that “the final reserve report does not constitute an appropriate calculation of the [unfavorable development] and that White Mountains would not pay Unitrin the amount indicated.” An exchange of information between the parties ensued. The Company believed it had accurately calculated the reserve amount in question and began pursuing resolution of the matter in accordance with the dispute resolution process provided in the agreement.

6

UNITRIN, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 4 - Other Receivables (continued)

On June 23, 2004, Unitrin and White Mountains entered into an agreement that settled this matter for substantially all of the amount that Unitrin had previously recorded as a recoverable. On June 25, 2004, White Mountains paid the negotiated settlement amount to Unitrin. The effect of the negotiated settlement was not material to the Company’s consolidated financial statements.

On December 31, 2002, Unitrin completed the acquisition of two insurance companies, General Security Insurance Company and General Security Property and Casualty Company (the “SCOR Companies”), from SCOR Reinsurance Company (“SCOR”). Other Receivables at September 30, 2004 and December 31, 2003 included reinsurance recoverables of $206.2 million and $234.4 million, respectively, from General Security National Insurance Company (“GSNIC”), a subsidiary of SCOR. Under the agreement governing the acquisition of the SCOR Companies, SCOR and/or GSNIC are responsible for all liabilities of the SCOR Companies incurred prior to the acquisition. Accordingly, in connection with the sale, GSNIC entered into a reinsurance agreement with the SCOR Companies whereby GSNIC reinsured all of the business written by the seller using the SCOR Companies. To the extent the SCOR Companies are not fully relieved of their legal obligations to policyholders under the reinsurance agreement, Unitrin reports an obligation to policyholders as a liability of the SCOR Companies, with an offsetting and corresponding reinsurance recoverable from GSNIC. The ceding of the SCOR Companies’ insurance liabilities does not discharge the primary liability of the SCOR Companies; therefore, the SCOR Companies remain contingently liable should GSNIC not be financially able to meet the obligations. Pursuant to the reinsurance agreement, should GSNIC become unauthorized in any jurisdiction where authorization or licensure by governmental authorities is required in order for the SCOR Companies to take full credit on their statutory financial statements for reinsurance ceded to GSNIC, or should GSNIC be notified that it is required to file a risk-based capital (“RBC”) plan as a result of its RBC falling below required levels, certain remedies are available. In either case, the reinsurance agreement requires GSNIC to collateralize its outstanding reinsured obligation. On April 1, 2004, A.M. Best Co., Inc., the principal insurance company rating agency, reaffirmed the “B++” (Very Good) rating of GSNIC, assigned the rating an outlook of “stable” and removed the “under review” status of the rating. The Company believes that its reinsurance recoverable from GSNIC continues to be fully collectable at September 30, 2004.

Note 5 - Income Taxes

During the third quarter of 2004, an income tax benefit of $0.9 million was recorded for federal income tax adjustments related to the tax year that ended on December 31, 2000. During the third quarter of 2004, the statute of limitations expired for the tax year that ended on December 31, 2000. During the third quarter of 2003, an income tax benefit of $6.0 million was recorded for federal income tax adjustments primarily related to tax years ending on or before December 31, 1999. During the third quarter of 2003, the Company either reached agreement with the Internal Revenue Service (the “IRS”) or the statute of limitations expired for all tax years ending on or before December 31, 1999. The IRS is currently examining the 2001 and 2002 tax years. The Company believes it is adequately accrued for any possible adjustments that may result from this examination and that resolution of this examination will not have a material adverse effect on the Company’s financial position. However, there can be no assurance that resolution of any open tax year will not produce an adjustment which could have a material effect on the Company’s financial results for any given period.

During the third quarter of 2004, Fireside Securities Corporation (“Fireside”), a subsidiary of Unitrin, received and paid a final assessment from the California Franchise Tax Board regarding its California franchise tax returns for 1998, 1999 and 2000. The impact of this assessment was not material to the Company’s consolidated financial statements.

7

UNITRIN, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6 - Notes Payable

Total Debt Outstanding at September 30, 2004 and December 31, 2003 was:

(Dollars in Millions)	Sept. 30, 2004		Dec. 31, 2003
Senior Notes at Amortized Cost:
5.75% Senior Notes due July 1, 2007	$	298.2	$	297.7
4.875% Senior Notes due November 1, 2010		198.2		198.0
Mortgage Note Payable at Amortized Cost		6.2		—
Total Debt Outstanding	$	502.6	$	495.7

The Company had no outstanding advances under its unsecured revolving credit agreement at September 30, 2004 and December 31, 2003. On June 23, 2004, the Company acquired certain investment real estate for $5.3 million in cash and the assumption of an existing mortgage note payable of $6.3 million.

Interest Paid, including facility fees, for the nine and three months ended September 30, 2004 and 2003 was:

	Nine Months Ended				Three Months Ended
(Dollars in Millions)	Sept. 30, 2004		Sept. 30, 2003		Sept. 30, 2004		Sept. 30, 2003
Notes Payable under Revolving Credit Agreement	$	0.3	$	1.4	$	0.1	$	0.6
5.75% Senior Notes due July 1, 2007		17.2		17.2		8.6		8.6
4.875% Senior Notes due November 1, 2010		4.9		—		—		—
Mortgage Note Payable		0.1		—		0.1		—
Total Interest Paid	$	22.5	$	18.6	$	8.8	$	9.2

Interest Expense, including facility fees and accretion of discount, for the nine and three months ended September 30, 2004 and 2003 was:

	Nine Months Ended				Three Months Ended
(Dollars in Millions)	Sept. 30, 2004		Sept. 30, 2003		Sept. 30, 2004		Sept. 30, 2003
Notes Payable under Revolving Credit Agreement	$	0.3	$	1.5	$	0.1	$	0.6
5.75% Senior Notes due July 1, 2007		13.4		13.4		4.5		4.5
4.875% Senior Notes due November 1, 2010		7.5		—		2.5		—
Mortgage Note Payable		0.1		—		0.1		—
Total Interest Expense	$	21.3	$	14.9	$	7.2	$	5.1

Note 7 - Securities Lending

Some of the Company’s subsidiaries are parties to securities lending agreements whereby unrelated parties, primarily large brokerage firms, borrow securities from the subsidiaries’ accounts. Borrowers of these securities must deposit cash collateral with the subsidiaries equal to 102% of the fair value of the securities loaned. The subsidiaries continue to receive the interest on loaned securities as beneficial owners, and accordingly, the loaned securities are included in Fixed Maturities. The amount of collateral received is invested in short-term securities and is included in the Condensed Consolidated Financial Statements as Short-term Investments with a corresponding Liability for Funds Held for Securities on Loan included in Accrued Expenses and Other Liabilities. The fair value of collateral held was $104.2 million at September 30, 2004. No securities were on loan at December 31, 2003.

8

UNITRIN, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8 – Shareholders’ Equity

On August 4, 2004 the Company’s Board of Directors decided to extend for an additional 10 years the protections provided by the shareholder rights plan previously adopted in 1994. In order to implement the extension, the Company’s Board of Directors declared a dividend distribution of one new right for each outstanding share of Unitrin common stock to shareholders of record at the close of business on August 16, 2004 (the “2004 Rights”). The 2004 Rights replaced the previously outstanding rights which had expired in accordance with their terms on August 3, 2004. The description and terms of the 2004 Rights are set forth in a rights agreement between the Company and Wachovia Bank, National Association, as rights agent.

Note 9 - Net Income Per Share

Net Income Per Share and Net Income Per Share Assuming Dilution for the nine and three months ended September 30, 2004 and 2003 were as follows:

	Nine Months Ended					Three Months Ended
(Dollars and Shares in Millions, Except Per Share Amounts)	Sept. 30, 2004			Sept. 30, 2003		Sept. 30, 2004		Sept. 30, 2003
Net Income	$	166.9		$	79.2	$	56.5	$	43.1
Dilutive Effect on Net Income from Investee’s Equivalent Shares		(0.1	)		—		—		—
Net Income Assuming Dilution	$	166.8		$	79.2	$	56.5	$	43.1
Weighted Average Common Shares Outstanding		68.3			67.6		68.5		67.5
Dilutive Effect of Unitrin Stock Option Plans		0.5			0.1		0.5		0.1
Weighted Average Common Shares and Equivalent Shares Outstanding Assuming Dilution		68.8			67.7		69.0		67.6
Net Income Per Share	$	2.44		$	1.17	$	0.82	$	0.64
Net Income Per Share Assuming Dilution	$	2.42		$	1.17	$	0.82	$	0.64

Options outstanding at September 30, 2004 and 2003 to purchase 1.2 million shares and 5.2 million shares, respectively, of Unitrin common stock were excluded from the computation of Net Income Per Share Assuming Dilution for the nine months ended September 30, 2004 and 2003, respectively, because the exercise price exceeded the average market price.

9

UNITRIN, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 - Other Comprehensive Income (Loss)

Other Comprehensive Income (Loss) for the nine and three months ended September 30, 2004 and 2003 was:

	Nine Months Ended						Three Months Ended
(Dollars in Millions)	Sept. 30, 2004			Sept. 30, 2003			Sept. 30, 2004			Sept. 30, 2003
Increase (Decrease) in Unrealized Gains, Net of Reclassification Adjustment for Gains Included in Net Income	$	48.8		$	(97.1	)	$	85.5		$	(74.2	)
Other		1.8			3.9			(0.6	)		4.2
Effect of Income Taxes		(17.8	)		32.6			(29.9	)		24.6
Other Comprehensive Income (Loss)	$	32.8		$	(60.6	)	$	55.0		$	(45.4	)

The Company’s Investment in Investee is accounted for under the equity method of accounting and, accordingly, changes in its fair value are excluded from the determination of Total Comprehensive Income and Other Comprehensive Income (Loss). Total Comprehensive Income for the nine months ended September 30, 2004 and 2003 was $199.7 million and $18.6 million, respectively. Total Comprehensive Income for the three months ended September 30, 2004 was $111.5 million. Total Comprehensive Loss for the three months ended September 30, 2003 was $2.3 million.

Note 11 - Income from Investments

Net Investment Income for the nine and three months ended September 30, 2004 and 2003 was:

	Nine Months Ended				Three Months Ended
(Dollars in Millions)	Sept. 30, 2004		Sept. 30, 2003		Sept. 30, 2004		Sept. 30, 2003
Investment Income:
Interest and Dividends on Fixed Maturities	$	143.9	$	125.4	$	51.4	$	43.5
Dividends on Northrop Preferred Stock		9.3		6.2		3.1		3.1
Dividends on Northrop Common Stock		6.9		9.2		2.0		3.1
Dividends on Other Equity Securities		8.7		9.3		2.8		2.9
Short-term		3.8		3.9		1.4		1.0
Real Estate		18.2		17.9		6.5		6.0
Other		12.7		9.0		4.1		3.4
Total Investment Income		203.5		180.9		71.3		63.0
Investment Expenses:
Real Estate		13.4		12.7		4.9		4.4
Other		1.0		1.0		0.5		0.3
Total Investment Expenses		14.4		13.7		5.4		4.7
Net Investment Income	$	189.1	$	167.2	$	65.9	$	58.3

Dividends on Northrop Preferred Stock increased for the nine months ended September 30, 2004, compared to the same period in 2003, due to the timing of the ex-dividend date.

10

UNITRIN, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 11 - Income from Investments (continued)

The components of Net Realized Investment Gains for the nine and three months ended September 30, 2004 and 2003 were:

	Nine Months Ended						Three Months Ended
(Dollars in Millions)	Sept. 30, 2004			Sept. 30, 2003			Sept. 30, 2004			Sept. 30, 2003
Fixed Maturities:
Gains on Dispositions	$	1.4		$	10.3		$	0.3		$	2.7
Losses on Dispositions		(0.4	)		(0.7	)		(0.2	)		(0.6	)
Losses from Write-downs		(0.1	)		(2.5	)		(0.1	)		(0.8	)
Northrop Common Stock:
Gains on Dispositions		34.4			—			2.8			—
Other Equity Securities:
Gains on Dispositions		36.4			34.5			24.7			7.5
Losses on Dispositions		(0.7	)		(2.4	)		(0.3	)		—
Losses from Write-downs		(4.5	)		(11.8	)		(2.6	)		—
Other Investments:
Gains on Dispositions		1.0			0.1			0.1			—
Losses on Dispositions		(0.3	)		(0.2	)		—			—
Losses from Write-downs		—			(1.8	)		—			—
Net Realized Investment Gains	$	67.2		$	25.5		$	24.7		$	8.8

Net Realized Investment Gains were $67.2 million and $24.7 million for the nine and three months ended September 30, 2004, respectively, compared to $25.5 million and $8.8 million for the same periods in 2003. Net Realized Investment Gains for the nine months ended September 30, 2004 includes pre-tax gains of $34.4 million from sales of a portion of the Company’s investment in Northrop Grumman Corporation (“Northrop”) common stock, pre-tax gains of $26.3 million from sales of a portion of the Company’s investment in Baker Hughes, Inc. (“Baker Hughes”) common stock and pre-tax gains of $3.6 million resulting from sales of a portion of the Company’s investment in Hartford Financial Services Group, Inc. (“Hartford”) common stock. Net Realized Investment Gains for the three months ended September 30, 2004 includes pre-tax gains of $2.8 million from sales of a portion of the Company’s investment in Northrop common stock and pre-tax gains of $21.9 million from sales of a portion of the Company’s investment in Baker Hughes common stock. The fair value of the Company’s remaining investments in Northrop common stock, Baker Hughes common stock and Hartford common stock was $459.6 million, $50.9 million and $18.7 million, respectively, at September 30, 2004. The Company cannot anticipate when or if similar investment gains may occur in the future.

Net Realized Investment Gains for the nine months ended September 30, 2003 includes pre-tax gains of $12.0 million from sales of a portion of the Company’s investment in ITT Industries, Inc. (“ITT”) common stock, pre-tax gains of $6.6 million from sales of the Company’s investment in Insurance Services Office, Inc. (“ISO”) common stock and pre-tax gains of $4.4 million resulting from sales of a portion of the Company’s investment in Baker Hughes common stock. Net Realized Investment Gains for the three months ended September 30, 2003 includes pre-tax gains of $2.8 million from sales of the Company’s investment in Hartford common stock. Net Realized Investment Gains for the nine months ended September 30, 2003, includes a pre-tax loss of $1.8 million to write down investment real estate. The Company cannot anticipate when or if similar investment gains or losses may occur in the future.

11

UNITRIN, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 11 - Income from Investments (continued)

The Company continues to regularly review its investment portfolio for factors that may indicate that a decline in the fair value of an investment is other than temporary. Some factors considered in evaluating whether or not a decline in fair value is other than temporary include: 1) the Company’s ability and intent to retain the investment for a period of time sufficient to allow for a recovery in value; 2) the duration and extent to which the fair value has been less than cost; and 3) the financial condition and prospects of the issuer. Net Realized Investment Gains for the nine and three months ended September 30, 2004 includes pre-tax losses of $4.6 million and $2.7 million, respectively, resulting from other than temporary declines in the fair value of investments. Net Realized Investment Gains for the nine and three months ended September 30, 2003 includes pre-tax losses of $14.3 million and $0.8 million, respectively, resulting from other than temporary declines in the fair value of investments. Net Realized Investment Gains for the nine months ended September 30, 2003 includes a pre-tax loss of $1.8 million to write down investment real estate. The Company cannot anticipate when or if similar investment losses may occur in the future.

Note 12 - Pension Benefits and Postretirement Benefits Other Than Pensions

The components of Pension Expense for the nine and three months ended September 30, 2004 and 2003 were:

	Nine Months Ended						Three Months Ended
(Dollars in Millions)	Sept. 30, 2004			Sept. 30, 2003			Sept. 30, 2004			Sept. 30, 2003
Service Cost Benefits Earned	$	9.7		$	12.4		$	2.9		$	4.0
Interest Cost on Projected Benefit Obligations		12.9			13.1			4.2			4.2
Expected Return on Plan Assets		(14.9	)		(12.8	)		(4.7	)		(4.0	)
Net Amortization and Deferral		(0.1	)		—			(0.1	)		—
Total Pension Expense	$	7.6		$	12.7		$	2.3		$	4.2

Based on the Company’s most recent actuarial valuation, the Company does not expect to make contributions to its pension plans in 2004.

The components of Postretirement Benefits Other than Pensions Expense for the nine and three months ended September 30, 2004 and 2003 were:

	Nine Months Ended						Three Months Ended
(Dollars in Millions)	Sept. 30, 2004			Sept. 30, 2003			Sept. 30, 2004			Sept. 30, 2003
Service Cost Benefits Earned	$	0.1		$	0.4		$	—		$	0.2
Interest Cost on Projected Benefit Obligations		2.7			2.5			0.9			0.8
Net Amortization and Deferral		(0.6	)		(1.1	)		(0.2	)		(0.3	)
Total Postretirement Benefits Other than Pensions Expense	$	2.2		$	1.8		$	0.7		$	0.7

Based on the Company’s most recent actuarial valuation, the Company expects to contribute $5.1 million to its postretirement benefits other than pensions plan in 2004.

12

UNITRIN, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 13 - Business Segments

The Company is engaged, through its subsidiaries, in the property and casualty insurance, life and health insurance and consumer finance businesses. The Company conducts its operations through six operating segments: Multi Lines Insurance, Specialty Lines Insurance, Kemper Auto and Home, Unitrin Direct, Life and Health Insurance and Consumer Finance.

Insurance provided by the Multi Lines Insurance segment consists of preferred and standard risk automobile, homeowners, fire, commercial liability and workers compensation and other related lines. Multi Lines Insurance products are marketed to individuals and businesses with favorable risk characteristics and loss histories and are sold by independent agents.

The Specialty Lines Insurance segment primarily consists of automobile insurance sold to individuals and businesses in the non-standard and specialty market through independent agents. The non-standard automobile insurance market consists of individuals and companies that have difficulty obtaining standard or preferred risk insurance, usually because of their driving records.

Kemper Auto and Home provides preferred and standard risk personal automobile and homeowners insurance through independent agents.

Unitrin Direct markets personal automobile insurance through direct mail and the Internet through web insurance portals, click-thrus and its own website. Unitrin Direct, as a direct marketer, typically incurs higher up-front acquisition costs associated with marketing products and acquiring new policies but is expected to experience lower renewal costs than traditional insurance providers.

The Life and Health Insurance segment includes individual life, accident, health and hospitalization insurance. The Company’s Life and Health Insurance employee-agents also market property insurance products under common management.

The Consumer Finance segment makes consumer loans primarily for the purchase of pre-owned automobiles and offers savings products in the form of investment certificates.

As discussed in Note 2 to the Condensed Consolidated Financial Statements, during the third quarter of 2004 the Company expensed the $18.4 million performance bonus paid to KIC in connection with the KIC Settlement. For management reporting purposes, the Company does not allocate such expense to the Kemper Auto and Home segment. Accordingly, such expense is included in Other Expense, Net for management reporting purposes. It is also the Company’s management practice to allocate certain corporate expenses to its operating units. The Company considers the management of certain investments, including Northrop common and preferred stock, Baker Hughes common stock and UNOVA common stock, to be a corporate responsibility. Accordingly, the Company does not allocate dividend income from these investments to its operating segments. The Company does not allocate Net Realized Investment Gains to its operating segments. In the first quarter of 2004, the Company began allocating income taxes to its operating segments. Income taxes have also been allocated to the Company’s operating segments in 2003 to conform to the current presentation.

13

UNITRIN, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 13 - Business Segments (continued)

Segment Revenues for the nine and three months ended September 30, 2004 and 2003 were:

	Nine Months Ended				Three Months Ended
(Dollars in Millions)	Sept. 30, 2004		Sept. 30, 2003		Sept. 30, 2004		Sept. 30, 2003
Revenues:
Multi Lines Insurance:
Earned Premiums	$	352.6	$	408.4	$	117.3	$	132.0
Net Investment Income		27.5		24.8		9.6		8.9
Total Multi Lines Insurance		380.1		433.2		126.9		140.9
Specialty Lines Insurance:
Earned Premiums		368.0		386.4		122.8		131.1
Net Investment Income		12.8		11.8		4.6		3.7
Total Specialty Lines Insurance		380.8		398.2		127.4		134.8
Kemper Auto and Home:
Earned Premiums		503.5		432.6		174.2		167.0
Net Investment Income		18.9		10.9		7.1		4.3
Other Income		6.7		15.8		4.4		2.6
Total Kemper Auto and Home		529.1		459.3		185.7		173.9
Unitrin Direct:
Earned Premiums		137.0		109.3		49.2		38.9
Net Investment Income		4.8		2.0		1.8		1.2
Total Unitrin Direct		141.8		111.3		51.0		40.1
Life and Health Insurance:
Earned Premiums		501.4		496.4		167.2		165.3
Net Investment Income		108.8		100.0		37.8		33.3
Other Income		3.0		3.3		1.2		1.1
Total Life and Health Insurance		613.2		599.7		206.2		199.7
Consumer Finance		150.6		145.1		51.1		50.1
Total Segment Revenues		2,195.6		2,146.8		748.3		739.5
Unallocated Dividend Income		16.9		16.3		5.3		6.4
Net Realized Investment Gains		67.2		25.5		24.7		8.8
Other		1.4		3.7		0.4		1.2
Total Revenues	$	2,281.1	$	2,192.3	$	778.7	$	755.9

14

UNITRIN, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 13 - Business Segments (continued)

Segment Operating Profit for the nine and three months ended September 30, 2004 and 2003 was:

	Nine Months Ended						Three Months Ended
(Dollars in Millions)	Sept. 30, 2004			Sept. 30, 2003			Sept. 30, 2004			Sept. 30, 2003
Segment Operating Profit (Loss):
Multi Lines Insurance	$	40.0		$	10.4		$	17.6		$	7.9
Specialty Lines Insurance		32.3			28.1			11.6			10.0
Kemper Auto and Home		21.2			(33.0	)		5.0			(8.0	)
Unitrin Direct		(5.6	)		(16.7	)		(0.7	)		(2.4	)
Life and Health Insurance		61.8			48.8			24.7			20.1
Consumer Finance		34.5			34.8			14.0			12.3
Total Segment Operating Profit		184.2			72.4			72.2			39.9
Unallocated Dividend Income		16.9			16.3			5.3			6.4
Net Realized Investment Gains		67.2			25.5			24.7			8.8
Other Expense, Net		(38.4	)		(14.7	)		(24.5	)		(4.7	)
Income Before Income Taxes and Equity in Net Income (Loss) of Investee	$	229.9		$	99.5		$	77.7		$	50.4

Segment Net Income for the nine and three months ended September 30, 2004 and 2003 was:

	Nine Months Ended						Three Months Ended
(Dollars in Millions)	Sept. 30, 2004			Sept. 30, 2003			Sept. 30, 2004			Sept. 30, 2003
Segment Net Income (Loss):
Multi Lines Insurance	$	31.4		$	10.7		$	13.0		$	6.4
Specialty Lines Insurance		23.3			20.0			8.4			7.0
Kemper Auto and Home		17.0			(19.9	)		4.5			(4.5	)
Unitrin Direct		(2.3	)		(10.1	)		(0.1	)		(0.9	)
Life and Health Insurance		40.5			32.5			15.8			13.5
Consumer Finance		19.9			20.3			8.1			7.3
Total Segment Net Income		129.8			53.5			49.7			28.8
Net Income From:
Unallocated Dividend Income		14.8			13.9			4.6			5.5
Net Realized Investment Gains		43.6			16.7			16.0			5.8
Other Income (Expense), Net		(23.9	)		(3.6	)		(14.8	)		2.9
Income Before Equity in Net Income (Loss) of Investee		164.3			80.5			55.5			43.0
Equity in Net Income (Loss) of Investee		2.6			(1.3	)		1.0			0.1
Net Income	$	166.9		$	79.2		$	56.5		$	43.1

15

UNITRIN, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 14 - Related Party Transactions

One of Unitrin’s directors, Mr. Fayez Sarofim, is the Chairman of the Board, President and the majority shareholder of Fayez Sarofim & Co. (“FS&C”), a registered investment advisory firm. Certain of the Company’s insurance company subsidiaries and FS&C are parties to agreements under which FS&C provides investment management services. In addition, FS&C provides investment management services with respect to certain funds of the Company’s pension plan. The agreements governing these arrangements are terminable by either party at any time upon 30 days advance written notice.

Under these investment advisory arrangements, FS&C is entitled to a fee calculated and payable quarterly based upon the fair market value of the assets under management. At September 30, 2004, the Company’s subsidiaries and the Company’s pension plan had approximately $159.2 million and $70.5 million, respectively, in investments managed by FS&C. During the first nine months of 2004, the Company’s subsidiaries and the Company’s pension plan paid $0.5 million in the aggregate to FS&C. During the first nine months of 2003, the Company’s subsidiaries and the Company’s pension plan paid $0.4 million in the aggregate to FS&C.

With respect to the Company’s 401(k) Savings Plan, one of the alternative investment choices afforded to participating employees is the Dreyfus Appreciation Fund, an open-end, diversified managed investment fund. FS&C provides investment management services to the Dreyfus Appreciation Fund as a sub-investment advisor. According to published reports filed by FS&C with the SEC, the Dreyfus Appreciation Fund pays monthly fees to FS&C according to a graduated schedule computed at an annual rate based on the value of the Dreyfus Appreciation Fund’s average daily net assets. The Company does not compensate FS&C for services provided to the Dreyfus Appreciation Fund. As of September 30, 2004, employees participating in the Company’s 401(k) Savings Plan had allocated approximately $24.9 million for investment in the Dreyfus Appreciation Fund, representing approximately 12% of the total amount invested in the Company’s 401(k) Savings Plan.

The Company believes that the transactions described above have been entered into on terms no less favorable than could have been negotiated with non-affiliated third parties.

As described in Note 16, the Company also has certain relationships with mutual insurance holding companies and mutual insurance companies. Such companies are owned by the policyholders of such companies or their insurance subsidiaries.

Note 15 - Legal Proceedings

The Company and its subsidiaries are defendants in various lawsuits incidental to their businesses. The Company believes that there are meritorious defenses to these lawsuits and is defending them vigorously. Certain of the lawsuits are pending in jurisdictions that have a history of awarding damages, including punitive damages, that are disproportionate to the actual economic damages alleged to have been incurred. Additionally, some of these lawsuits seek class action status that, if granted, could expose the Company to potentially significant liability by virtue of the size of the purported classes. The Company believes that resolution of its pending litigation will not have a material adverse effect on the Company’s financial position. However, given the unpredictability of litigation, there can be no assurance that one or more of these lawsuits will not produce a damage award which could have a material adverse effect on the Company’s financial results for any given period.

16

UNITRIN, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 16 - Relationships with Mutual Holding Companies and Mutual Insurance Companies

Trinity and Milwaukee Insurance Company (“MIC”) are parties to a quota share reinsurance agreement whereby Trinity assumes 95% of the business written or assumed by MIC. MIC is owned by Mutual Insurers Holding Company (“MIHC”), which in turn is owned by MIC’s policyholders. Effective July 1, 2001, MIC and First Nonprofit Insurance Company (through its predecessor, First Nonprofit Mutual Insurance Company) (“FNP”) are parties to a quota share reinsurance agreement whereby MIC assumes 80% of the business written or assumed by FNP. Pursuant to an amendment to the MIC/FNP reinsurance agreement, which became effective January 15, 2003, FNP agrees to arrange for its parent company, First Nonprofit Mutual Holding Company (“FNMHC”), to nominate a simple majority to the FNMHC Board of Directors, as selected by MIC. On January 15, 2003, FNMHC elected five employees of the Company, as selected by MIC, to the FNMHC Board of Directors pursuant to the terms of the amendment. Such employees continue to serve as directors of FNMHC at September 30, 2004. FNP is owned by FNMHC, which in turn is owned by FNP’s policyholders. Five employees of the Company also serve as directors of MIHC’s nine member Board of Directors. Two employees of the Company also serve as directors of MIC, but together do not constitute a majority of MIC’s Board of Directors. The quota share agreements above can be terminated at anytime by each of the parties to the respective agreements, subject to the notice requirements in such agreements.

Trinity and Capitol County Mutual Fire Insurance Company (“Capitol”) are parties to a quota share reinsurance agreement whereby Trinity assumes 95% of the business written by Capitol. Capitol is a mutual insurance company and, accordingly, is owned by its policyholders. The Reliable Life Insurance Company (“Reliable”), a wholly-owned subsidiary of Unitrin, provides certain administrative services to Capitol and its subsidiary, Old Reliable Casualty Company (“ORCC”). In addition, agents employed by Reliable are also appointed by Capitol and ORCC to sell property insurance products. Union National Life Insurance Company, a wholly-owned subsidiary of Unitrin, also provides claims administration services to Capitol and ORCC.

17

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

Summary of Results

Net Income was $166.9 million ($2.44 per common share) and $56.5 million ($0.82 per common share) for the nine and three months ended September 30, 2004, respectively, compared to $79.2 million ($1.17 per common share) and $43.1 million ($0.64 per common share) for the same periods in 2003. As discussed throughout this Management’s Discussion and Analysis of Results of Operations and Financial Condition, Net Income increased for the nine and three months ended September 30, 2004 due primarily to higher segment operating profit and higher net realized investment gains, partially offset by the effects of the previously announced settlement with the Kemper Insurance Companies (“KIC”) (see KIC Settlement below).

Total catastrophe losses were $35.6 million and $20.6 million for the nine and three months ended September 30, 2004, respectively, compared to $45.1 million and $17.9 million for the same periods in 2003. Total catastrophe losses decreased for the nine months ended September 30, 2004, compared to the same period in 2003, despite catastrophe losses from Hurricanes Charley, Frances, Ivan and Jeanne, due primarily to lower catastrophe losses in the Multi Lines Insurance segment.

Earned Premiums for the nine months ended September 30, 2004 increased by $29.4 million, compared to the same period in 2003, due primarily to a $24.4 million increase in earned premiums in the Unitrin Property and Casualty Insurance Group. The Unitrin Property and Casualty Insurance Group consists of the Multi Lines Insurance, Specialty Lines Insurance, Kemper Auto and Home and Unitrin Direct segments.

Earned Premiums decreased $3.6 million for the three months ended September 30, 2004, compared to the same period in 2003, due primarily to $5.5 million decrease in earned premiums in the Unitrin Property and Casualty Insurance Group.

Consumer Finance Revenues increased by $5.5 million and $1.0 million for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003, due primarily to a higher level of loans outstanding.

Net Investment Income increased by $21.9 million for the nine months ended September 30, 2004, compared to the same period in 2003, due primarily to higher levels of investments. Net Investment Income increased by $7.6 million for the three months ended September 30, 2004, compared to the same period in 2003, due to higher levels of investments and also partially due to higher yields on investments. The Company reduced its short term investments during 2004 and reinvested those funds in higher yielding fixed maturities with longer durations.

Other Income decreased by $9.7 million for the nine months ended September 30, 2004, compared to the same period in 2003, due primarily to lower administration fees earned to administer run-off business excluded from the acquisition of the personal lines business of KIC, partially offset by certain adjustments in connection with the KIC Settlement.

Other Income increased by $1.9 million for the three months ended September 30, 2004, compared to the same period in 2003, due primarily to certain adjustments in connection with the KIC Settlement, partially offset by lower administration fees earned to administer run-off business excluded from the acquisition of the personal lines business of KIC.

Net Realized Investment Gains were $67.2 million and $24.7 million for the nine and three months ended September 30, 2004, respectively, compared to $25.5 million and $8.8 million for the same periods in 2003. Net Realized Investment Gains for the nine months ended September 30, 2004 includes pre-tax gains of $34.4 million from sales of a portion of the Company’s investment in Northrop Grumman Corporation (“Northrop”) common stock, pre-tax gains of $26.3 million from sales of a portion of the Company’s investment in Baker Hughes, Inc. (“Baker Hughes”) common stock and pre-tax gains of $3.6 million resulting from sales of a portion of the Company’s investment in Hartford Financial Services Group, Inc. (“Hartford”) common stock. Net Realized Investment Gains for the three months ended September 30, 2004 includes pre-tax gains of $2.8 million from sales of a portion of the Company’s investment in Northrop common stock and pre-tax gains of $21.9 million from sales of a portion of the Company’s investment in Baker Hughes common stock. The fair value of the Company’s remaining investments in Northrop common stock, Baker Hughes common stock and Hartford common stock was $459.6 million, $50.9 million and $18.7 million, respectively, at September 30, 2004. The Company cannot anticipate when or if similar investment gains may occur in the future.

18

Summary of Results (continued)

Net Realized Investment Gains for the nine months ended September 30, 2003, includes pre-tax gains of $12.0 million from sales of a portion of the Company’s investment in ITT Industries, Inc. (“ITT”) common stock, pre-tax gains of $6.6 million from sales of the Company’s investment in Insurance Services Office, Inc. (“ISO”) common stock and pre-tax gains of $4.4 million resulting from sales of a portion of the Company’s investment in Baker Hughes common stock. Net Realized Investment Gains for the three months ended September 30, 2003 includes pre-tax gains of $2.8 million from sales of the Company’s investment in Hartford common stock. The Company cannot anticipate when or if similar investment gains may occur in the future.

Unitrin Property and Casualty Insurance Group

The Unitrin Property and Casualty Insurance Group consists of the Multi Lines Insurance, Specialty Lines Insurance, Kemper Auto and Home and Unitrin Direct segments. Results for the Unitrin Property and Casualty Insurance Group for the nine and three months ended September 30, 2004 and 2003 are summarized below:

	Nine Months Ended						Three Months Ended
(Dollars in Millions)	Sept. 30, 2004			Sept. 30, 2003			Sept. 30, 2004			Sept. 30, 2003
Earned Premiums	$	1,361.1		$	1,336.7		$	463.5		$	469.0
Net Investment Income		64.0			49.5			23.1			18.1
Other Income		6.7			15.8			4.4			2.6
Total Revenues		1,431.8			1,402.0			491.0			489.7
Incurred Losses		963.2			1,024.5			331.1			352.3
Insurance Expenses		380.7			388.7			126.4			129.9
Operating Profit (Loss)		87.9			(11.2	)		33.5			7.5
Income Tax Benefit (Expense)		(18.5	)		11.9			(7.7	)		0.5
Net Income	$	69.4		$	0.7		$	25.8		$	8.0
Ratio Based on Earned Premiums
Incurred Loss Ratio (excluding Catastrophes)		68.7	%		73.5	%		68.2	%		71.6	%
Incurred Catastrophe Loss Ratio		2.1	%		3.1	%		3.2	%		3.5	%
Total Incurred Loss Ratio		70.8	%		76.6	%		71.4	%		75.1	%
Incurred Expense Ratio		28.0	%		29.1	%		27.3	%		27.7	%
Combined Ratio		98.8	%		105.7	%		98.7	%		102.8	%

The Company’s Life and Health Insurance segment’s employee-agents also market property insurance products. The results from these products are reported in the Life and Health Insurance segment. Accordingly, the results presented above for the Unitrin Property and Casualty Insurance Group exclude the property insurance products marketed by such employee-agents.

Earned Premiums in the Unitrin Property and Casualty Insurance Group increased by $24.4 million for the nine months ended September 30, 2004, compared to the same period in 2003, due primarily to a $70.9 million increase in earned premiums in the Kemper Auto and Home segment and a $27.7 million increase in earned premiums in the Unitrin Direct segment, partially offset by a $55.8 million decrease in earned premiums in the Multi Lines Insurance segment and a $18.4 million decrease in earned premiums in the Specialty Lines Insurance segment.

Earned Premiums in the Unitrin Property and Casualty Insurance Group decreased $5.5 million for the three months ended September 30, 2004, compared to the same period in 2003. Earned Premiums decreased by $14.7 million in the Multi Lines Insurance segment and decreased by $8.3 million in the Specialty Lines Insurance segment. Earned Premiums increased by $10.3 million in the Unitrin Direct segment and increased by $7.2 million in the Kemper Auto and Home segment.

19

Unitrin Property and Casualty Insurance Group (continued)

Operating Profit in the Unitrin Property and Casualty Insurance Group increased by $99.1 million and $26.0 million for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003. Operating Profit in the Multi Lines Insurance segment increased by $29.6 million and $9.7 million for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003. Operating Profit in the Specialty Lines Insurance segment increased by $4.2 million and $1.6 million for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003. Operating Profit in the Kemper Auto and Home segment increased by $54.2 million and $13.0 million for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003. Operating results in the Unitrin Direct segment improved by $11.1 million and $1.7 million for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003.

The Company intends to combine the personal lines insurance operations of its Multi Lines Insurance segment with the operations of its Kemper Auto and Home segment in 2005. The Company expects that the combination will help it achieve greater economies of scale, reduce expenses and provide more options for its independent agents. The Company is unable to predict the effect that the combination will have on written and earned premiums. The Company estimates that it will incur certain restructuring costs, including but not limited to severance and other employee related costs, office closing costs, and certain computer system costs, in connection with the combination. The Company estimates that it will recognize expense in the range between $14 million before-tax to $17 million before-tax for these costs over the next 27 months.

Catastrophe Losses

Total catastrophe losses were $35.6 million before-tax and $20.6 million before-tax for the nine and three months ended September 30, 2004, respectively, compared to $45.1 million before-tax and $17.9 million before-tax for the same periods in 2003. Total catastrophe losses decreased for the nine months ended September 30, 2004, compared to the same period in 2003, despite catastrophe losses from Hurricanes Charley, Frances, Ivan and Jeanne, due primarily to lower catastrophe losses in the Multi Lines Insurance segment.

During the third quarter of 2004, four hurricanes (Charley, Frances, Ivan and Jeanne) made landfall in several states along the Gulf Coast and the eastern United States. All four hurricanes made landfall in the state of Florida, the first time in over 100 years that four hurricanes have made landfall in the same state in the same hurricane season. The Company’s estimated catastrophe losses before-tax from these hurricanes, net of estimated recoveries from the Florida Hurricane Catastrophe Fund, were:

(Dollars in Millions)	Charley		Frances		Ivan		Jeanne		Total
Multi Lines Insurance	$	—	$	0.3	$	0.6	$	—	$	0.9
Specialty Lines Insurance		—		—		—		—		—
Kemper Auto and Home		2.9		4.0		4.0		1.5		12.4
Unitrin Direct		0.6		0.3		0.2		0.5		1.6
Unitrin Property and Casualty Insurance Group		3.5		4.6		4.8		2.0		14.9
Property Insurance Sold by Career Agents		1.1		1.1		1.6		1.5		5.3
Total Losses	$	4.6	$	5.7	$	6.4	$	3.5	$	20.2

The process of estimating and establishing reserves for catastrophe losses is inherently uncertain and the actual ultimate cost of a claim, net of actual reinsurance recoveries, may vary materially from the estimated amount reserved. Estimates of the number of and severity of claims ultimately reported are influenced by many variables, including but not limited to repair or reconstruction costs, that are difficult to quantify and will influence the final amount of the claim settlement. All these factors, coupled with the impact of the availability of labor and material on costs, require significant judgment in the reserve setting process. A change in any one or more of these factors is likely to result in an ultimate net claim cost different from the estimated reserve. The Company believes that such difference, if any, will not have a material adverse effect on the Company’s financial position. However, given the uncertainty of claim reporting and settlement process, there can be no assurance that a change in the Company’s estimate for these hurricanes will not have a material effect on the Company’s financial results for any given period.

20

KIC Settlement

In June 2002, the Company acquired the personal lines property and casualty insurance business of KIC. Pursuant to the agreements among the parties, KIC retained all liabilities for policies issued by Kemper Auto and Home (“KAH”) prior to the closing, while Trinity Universal Insurance Company (“Trinity”), a subsidiary of Unitrin, is entitled to premiums written for substantially all policies issued or renewed by the Kemper Auto and Home segment after the closing and is liable for losses and expenses incurred thereon. The purchase price was $42.3 million (the “Determinable Purchase Price Component”), plus 1% of premiums written over a three-year period beginning January 1, 2003 (the “Variable Purchase Price Component”). Due to the nature of the Variable Purchase Price Component, at the acquisition date the Company could not reasonably determine the contingent consideration that would be paid. Pursuant to the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”, the Variable Purchase Price Component is not reflected as a cost of the acquisition until such determination can reasonably be made. The Variable Purchase Price Component is allocated to the policies written. At June 30, 2004, the Company had recorded $9.9 million in Other Assets for the amount of the Variable Purchase Price Component that had been determined through that date. As further consideration under the agreements, KIC was eligible for performance bonuses if the business met certain loss ratio criteria over the same three years. Such performance bonuses are expensed as incurred. At June 30 2004, the Company estimated that KIC had not earned a performance bonus to date for 2004 and 2003.

In connection with the acquisition, the Company also acquired the stock of KIC’s direct distribution personal lines subsidiaries (“Kemper Direct”), which sell personal automobile insurance to consumers over the Internet. Pursuant to the provisions of the stock acquisition agreement between the Company and KIC, KIC agreed to indemnify the Company for 90% of any adverse loss and loss adjustment expense reserve development for policy losses incurred by Kemper Direct prior to the acquisition date, while KIC was entitled to 90% of any favorable development on such policy losses. At June 30, 2004, the Company had recorded a receivable of $0.9 million from KIC resulting from unfavorable development.

On August 20, 2004, the Company and KIC agreed to settle and extinguish certain liabilities and obligations arising under the acquisition including but not limited to the Variable Purchase Price Component and the performance bonus (the “KIC Settlement”). On August 31, 2004, the Company paid KIC $13.0 million to settle the Variable Purchase Price Component for all remaining periods, $18.4 million to settle the performance bonus, and $5.0 million for premium taxes and certain other accrued costs. At the same time, KIC paid the Company $3.6 million to settle its obligation to reimburse the Company for the cost of administering certain business of KIC which was excluded from the acquisition and $0.9 million to settle KIC’s obligation under the loss indemnification described above.

During the third quarter of 2004, the Company recorded a consolidated charge of $14.9 million before-tax in connection with the KIC Settlement due primarily to the performance bonus of $18.4 million before-tax, which is included in Insurance Expenses in the Condensed Consolidated Statements of Income, partially offset by certain service fee adjustments, which are included in Other Income in the Condensed Consolidated Statements of Income. The Variable Purchase Price Component has been capitalized and is recorded in Other Assets. For management reporting purposes, the Company has not allocated the performance bonus to the Kemper Auto and Home segment, and accordingly, such expense is included in Other Expense, Net in Note 13—Business Segments to the Condensed Consolidated Financial Statements. The net impact of the KIC Settlement included in the Kemper Auto and Home segment for both the nine and three months ended September 30, 2004 was a gain of $3.5 million before-tax.

21

Critical Accounting Policies

The Company’s subsidiaries conduct their businesses in three industries: property and casualty insurance, life and health insurance and consumer finance. Accordingly, the Company is subject to several industry-specific accounting principles under accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The process of estimation is inherently uncertain. Accordingly, actual results could ultimately differ materially from the estimated amounts reported in the Company’s financial statements. Different assumptions are likely to result in different estimates of reported amounts. The Company’s critical accounting policies most sensitive to estimates include the valuation of investments, the valuation of property and casualty insurance reserves, the valuation of life insurance reserves, the valuation of the reserve for loan losses, the assessment of recoverability of goodwill, and the valuation of postretirement benefit obligations. These critical accounting policies are more fully described in the Company’s Management’s Discussion and Analysis of Results of Operations and Financial Condition presented in its Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) for the year ended December 31, 2003.

Multi Lines Insurance

	Nine Months Ended						Three Months Ended
(Dollars in Millions)	Sept. 30, 2004			Sept. 30, 2003			Sept. 30, 2004			Sept. 30, 2003
Earned Premiums:
Personal Lines:
Personal Automobile	$	146.6		$	151.2		$	48.8		$	50.6
Homeowners		51.5			53.1			17.0			18.1
Other		6.8			7.8			2.2			2.6
Total Personal Lines		204.9			212.1			68.0			71.3
Commercial Lines:
Commercial Property and Liability		75.7			95.4			25.5			30.5
Commercial Automobile		54.3			72.9			18.1			22.4
Other		17.7			28.0			5.7			7.8
Total Commercial Lines		147.7			196.3			49.3			60.7
Total Earned Premiums	$	352.6		$	408.4		$	117.3		$	132.0
Underwriting Profit (Loss):
Personal Lines	$	18.0		$	(3.9	)	$	11.1		$	2.1
Commercial Lines		(5.5	)		(10.5	)		(3.1	)		(3.1	)
Total Underwriting Profit (Loss)		12.5			(14.4	)		8.0			(1.0	)
Net Investment Income		27.5			24.8			9.6			8.9
Operating Profit		40.0			10.4			17.6			7.9
Income Tax (Expense) Benefit		(8.6	)		0.3			(4.6	)		(1.5	)
Net Income	$	31.4		$	10.7		$	13.0		$	6.4
Ratio Based on Earned Premiums
Incurred Loss Ratio (excluding Catastrophes)		62.0	%		68.0	%		61.7	%		65.9	%
Incurred Catastrophe Loss Ratio		1.6	%		4.3	%		-0.6	%		3.2	%
Total Incurred Loss Ratio		63.6	%		72.3	%		61.1	%		69.1	%
Incurred Expense Ratio		32.9	%		31.2	%		32.1	%		31.5	%
Combined Ratio		96.5	%		103.5	%		93.2	%		100.6	%

22

Multi Lines Insurance (continued)

Earned Premiums in the Multi Lines Insurance segment decreased by $55.8 million and $14.7 million for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003. Personal lines earned premiums decreased by $7.2 million and $3.3 million for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003, due primarily to lower premium volume, partially offset by higher premium rates. Commercial lines earned premiums decreased by $48.6 million and $11.4 million for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003, due primarily to lower premium volume, partially offset by higher premium rates. The Company attributes the lower commercial lines volume largely to its efforts to re-underwrite that book of business which resulted in a significant reduction in policies in force. The Company substantially completed such re-underwriting activities in the first quarter of 2004. The Company is unable to predict what impact the Company’s intention to combine the personal lines insurance operations of its Multi Lines Insurance segment with the operations of its Kemper Auto and Home segment will have on written and earned premiums.

Net Investment Income in the Multi Lines Insurance segment increased by $2.7 million and $0.7 million for the nine and three months ended September 30, 2004, compared to the same periods in 2003, due primarily to higher levels of investments.

Operating Profit in the Multi Lines Insurance segment increased by $29.6 million and $9.7 million before-tax for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003, due primarily to improved premium rate adequacy in both personal lines and commercial lines and lower catastrophe losses, partially offset by higher commercial lines expenses as a percentage of earned premiums. Catastrophe losses in the Multi Lines Insurance segment were $5.7 million for the nine months ended September 30, 2004. For the three months ended September 30, 2004, the Multi Lines Insurance segment recorded a net benefit of $0.7 million from catastrophes due primarily to changes in the Company’s estimate for catastrophes which occurred on or before June 30, 2004, partially offset by losses for catastrophes which occurred in the third quarter of 2004. Catastrophe losses in the Multi Lines Insurance segment were $17.5 million and $4.2 million for the nine and three months ended September 30, 2003, respectively.

Net Income in the Multi Lines Insurance segment increased by $20.7 million and $6.6 million after-tax for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003, due primarily to the higher operating profit. The Multi Lines Insurance segment’s effective tax rate differs from the statutory tax rate due primarily to tax exempt investment income. Tax exempt investment income in the Multi Lines Insurance segment was $13.7 million and $4.9 million for the nine and three months ended September 30, 2004, respectively, compared to $10.7 million and $3.0 million for the same periods in 2003.

Specialty Lines Insurance

	Nine Months Ended				Three Months Ended
(Dollars in Millions)	Sept. 30, 2004		Sept. 30, 2003		Sept. 30, 2004		Sept. 30, 2003
Earned Premiums:
Personal Automobile	$	287.5	$	325.4	$	93.6	$	107.9
Commercial Automobile		80.2		60.3		29.2		23.0
Other		0.3		0.7		—		0.2
Total Earned Premiums	$	368.0	$	386.4	$	122.8	$	131.1

23

Specialty Lines Insurance (continued)

	Nine Months Ended						Three Months Ended
(Dollars in Millions)	Sept. 30, 2004			Sept. 30, 2003			Sept. 30, 2004			Sept. 30, 2003
Underwriting Profit (Loss):
Personal Automobile	$	15.7		$	11.7		$	5.6		$	5.5
Commercial Automobile		3.9			5.2			1.4			0.9
Other		(0.1	)		(0.6	)		—			(0.1	)
Total Underwriting Profit		19.5			16.3			7.0			6.3
Net Investment Income		12.8			11.8			4.6			3.7
Operating Profit		32.3			28.1			11.6			10.0
Income Tax Expense		9.0			8.1			3.2			3.0
Net Income	$	23.3		$	20.0		$	8.4		$	7.0
Ratio Based on Earned Premiums
Incurred Loss Ratio (excluding Catastrophes)		73.4	%		73.9	%		73.1	%		73.8	%
Incurred Catastrophe Loss Ratio		0.1	%		0.4	%		0.0	%		0.0	%
Total Incurred Loss Ratio		73.5	%		74.3	%		73.1	%		73.8	%
Incurred Expense Ratio		21.2	%		21.5	%		21.1	%		21.4	%
Combined Ratio		94.7	%		95.8	%		94.2	%		95.2	%

Earned Premiums in the Specialty Lines Insurance segment decreased by $18.4 million and $8.3 million for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003, due primarily to lower premium volume in personal automobile, partially offset by higher premium volume in commercial automobile and higher premium rates in both personal automobile and commercial automobile. The lower personal automobile premium volume was due primarily to management’s decision to eliminate certain programs in California and Texas. The higher commercial automobile premium volume is primarily due to increases in heavier weight class vehicles and higher policy limits in Texas and California.

Net Investment Income in the Specialty Lines Insurance segment increased by $1.0 million and $0.9 million for the nine and three months ended September 30, 2004, compared to the same periods in 2003, due primarily to higher levels of investments.

Operating Profit in the Specialty Lines Insurance segment increased by $4.2 million before-tax for the nine months ended September 30, 2004, compared to the same period in 2003, due primarily to lower losses as a percentage of earned premiums on personal automobile insurance, partially offset by higher losses as a percentage of earned premiums on commercial automobile insurance. Losses decreased as a percentage of earned premiums in personal automobile insurance due primarily to favorable loss reserve development. Losses increased as a percentage of earned premiums in commercial automobile insurance due primarily to increased loss severity related to the increase in heavier weight class vehicles and higher policy limits, partially offset by favorable loss reserve development. Catastrophe losses in the Specialty Lines Insurance segment were $0.3 million for the nine months ended September 30, 2004, compared to catastrophe losses of $1.4 million for the same period in 2003.

24

Specialty Lines Insurance (continued)

Operating Profit in the Specialty Lines Insurance segment increased by $1.6 million before-tax for the three months ended September 30, 2004, compared to the same period in 2003, due primarily to the higher investment income and higher underwriting profit. Underwriting profit on personal automobile insurance increased by $0.1 million due primarily to lower losses as a percentage of earned premiums, partially offset by the effects of lower premium volume. Losses decreased as a percentage of earned premiums in personal automobile insurance due primarily to favorable loss reserve development. Underwriting profit on commercial automobile insurance increased by $0.5 million due primarily to the effects of higher premium volume, partially offset by higher losses as a percentage of earned premiums. Losses increased as a percentage of earned premiums in commercial automobile insurance due primarily to increased loss severity related to the increase in heavier weight class vehicles insured and higher policy limits. Catastrophe losses in the Specialty Lines Insurance segment were not significant for the three months ended September 30, 2004 and 2003.

The Company intends to exit its motorcycle insurance business beginning in 2005. Earned premiums from motorcycle insurance were $12.4 million for the nine months ended September 30, 2004. The Company’s motorcycle insurance business had an operating loss of $3.1 million before-tax for the nine months ended September 30, 2004. The Company includes its motorcycle insurance line of business in its personal automobile insurance line.

Net Income in the Specialty Lines Insurance segment increased by $3.3 million and $1.4 million after-tax for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003, due primarily to the higher operating profit. The Specialty Lines Insurance segment’s effective tax rate differs from the statutory tax rate due primarily to tax exempt investment income. Tax exempt investment income in the Specialty Lines Insurance segment was $6.4 million and $2.3 million for the nine and three months ended September 30, 2004, respectively, compared to $4.8 million and $1.3 million for the same periods in 2003.

Kemper Auto and Home

	Nine Months Ended						Three Months Ended
(Dollars in Millions)	Sept. 30, 2004			Sept. 30, 2003			Sept. 30, 2004			Sept. 30, 2003
Premiums Written	$	516.5		$	512.1		$	180.0		$	180.5
Increase in Unearned Premiums		(13.0	)		(79.5	)		(5.8	)		(13.5	)
Earned Premiums		503.5			432.6			174.2			167.0
Net Investment Income		18.9			10.9			7.1			4.3
Other Income		6.7			15.8			4.4			2.6
Total Revenues		529.1			459.3			185.7			173.9
Incurred Losses		360.4			351.2			130.4			133.5
Insurance Expenses		147.5			141.1			50.3			48.4
Operating Profit (Loss)		21.2			(33.0	)		5.0			(8.0	)
Income Tax Benefit (Expense)		(4.2	)		13.1			(0.5	)		3.5
Net Income (Loss)	$	17.0		$	(19.9	)	$	4.5		$	(4.5	)
Ratio Based on Earned Premiums
Incurred Loss Ratio (excluding Catastrophes)		67.4	%		75.8	%		66.8	%		72.6	%
Incurred Catastrophe Loss Ratio		4.2	%		5.4	%		8.1	%		7.3	%
Total Incurred Loss Ratio		71.6	%		81.2	%		74.9	%		79.9	%
Incurred Expense Ratio		29.3	%		32.6	%		28.9	%		29.0	%
Combined Ratio		100.9	%		113.8	%		103.8	%		108.9	%

25

Kemper Auto and Home (continued)

Premiums Written, which reflect the total amount of premiums to be received over a policy’s term, in the Kemper Auto and Home segment increased by $4.4 million and decreased by $0.5 million for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003. Earned Premiums, which relate to the elapsed portion of each policy’s term, in the Kemper Auto and Home segment increased by $70.9 million for the nine months ended September 30, 2004, compared to the same period in 2003, due primarily to the completion of a full annual cycle of writing and issuing policies following the acquisition. Earned Premiums in the Kemper Auto and Home segment increased by $7.2 million for the three months ended September 30, 2004, compared to the same period in 2003, due primarily to lower costs for reinsurance and a change in the Company’s estimate of premium rate rollbacks mandated by the North Carolina Commissioner of Insurance. The Kemper Auto and Home segment is administering on behalf of KIC all policies issued prior to the closing and certain policies issued or renewed after the closing, but excluded from the acquisition. Other Income decreased by $9.1 million for the nine months ended September 30, 2004, compared to the same period in 2003, due to lower volume of administered policies and related claims, partially offset by certain adjustments in connection with the KIC Settlement. Other Income increased by $1.8 million for the three months ended September 30, 2004, compared to the same period in 2003, due to certain adjustments in connection with the KIC Settlement, partially offset by lower volume of administered policies and related claims. Net Investment Income increased by $8.0 million and $2.8 million for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003, due primarily to higher levels of investments.

The Kemper Auto and Home segment reported Operating Profit of $21.2 million before-tax and $5.0 million before-tax for the nine and three months ended September 30, 2004, respectively, compared to an Operating Loss of $33.0 million before-tax and $8.0 million before-tax for the same periods in 2003. Operating results for the nine months ended September 30, 2004 improved in the Kemper Auto and Home segment due primarily to lower incurred losses, excluding catastrophes, as a percentage of earned premiums and lower catastrophe losses. Operating results for the three months ended September 30, 2004 improved in the Kemper Auto and Home segment due primarily to lower incurred losses, excluding catastrophes, as a percentage of earned premiums and the impact of the KIC Settlement, partially offset by higher catastrophe losses. Incurred losses, excluding catastrophes, as a percentage of earned premiums in the Kemper Auto and Home segment decreased for both the nine and three months ended September 30, 2004, compared to the same periods in 2003, due primarily to improved premium rate adequacy and favorable loss reserve development. The Kemper Auto and Home segment incurred catastrophe losses of $12.4 million from Hurricanes Charley, Frances, Ivan and Jeanne in the third quarter of 2004. Including losses from these hurricanes, catastrophe losses in the Kemper Auto and Home segment, for the nine and three months ended September 30, 2004 were $21.1 million and $14.2 million, respectively, compared to catastrophe losses of $23.3 million and $12.3 million for the same periods in 2003.

The Kemper Auto and Home segment reported Net Income of $17.0 million after-tax and $4.5 million after-tax for the nine and three months ended September 30, 2004, respectively, compared to a Net Loss of $19.9 million after-tax and $4.5 million after-tax for the same periods in 2003. Net Income in the Kemper Auto and Home segment increased due primarily to the increase in pre-tax operating results. The effective income tax rate in the Kemper Auto and Home segment differs from the federal statutory rate due primarily to net investment income from tax exempt investments. Tax exempt investment income in the Kemper Auto and Home segment was $9.4 million and $3.6 million for the nine and three months ended September 30, 2004, respectively, compared to $4.7 million and $2.2 million for the same periods in 2003.

At the acquisition date, Unitrin’s property and casualty insurance subsidiaries were not licensed in all the states where the KAH business is written nor were certain computer and data processing modifications completed to allow for the migration of the KAH business to the Company’s property and casualty insurance subsidiaries. Accordingly, to facilitate the transition of such business to Unitrin’s property and casualty insurance subsidiaries, KIC and Trinity entered into a quota share reinsurance agreement whereby Trinity reinsured, on a 100% indemnity basis, substantially all of the KAH business written or renewed by KIC after the acquisition date. KIC’s financial condition deteriorated rapidly after the acquisition, and accordingly, Unitrin accelerated its transition of the business directly to its property and casualty insurance subsidiaries. Unitrin’s property and casualty insurance subsidiaries have obtained all necessary licenses and have completed all necessary computer and data processing modifications. The transition of the business directly to Unitrin’s property and casualty insurance companies is substantially complete. The amount of business yet to be transitioned directly to Unitrin’s property and casualty insurance companies is insignificant.

26

Unitrin Direct

Unitrin Direct, the Company’s direct marketing automobile insurance unit, markets personal automobile insurance directly to customers primarily through direct mail and the Internet using web insurance portals, click-thrus and its own website, “unitrindirect.com”. Unitrin Direct began actively marketing personal automobile insurance in 2001 and continues to build economies of scale as shown by its growth in written premium in the table below:

	Nine Months Ended				Three Months Ended
(Dollars in Millions)	Sept. 30, 2004		Sept. 30, 2003		Sept. 30, 2004		Sept. 30, 2003
Premiums Written
New Business	$	72.4	$	49.1	$	26.0	$	15.0
Renewal Business		85.7		70.6		32.2		29.4
Total Premiums Written	$	158.1	$	119.7	$	58.2	$	44.4

Premiums Written, which report the total amount of premiums to be received over the policy term, in the Unitrin Direct segment increased by $38.4 million and $13.8 million for the nine and three months ended September 30, 2004, compared to the same periods in 2003, due primarily to higher volume of insurance.

Premiums are recognized as revenues in the Company’s financial statements not when written, but rather as earned over the life of the policy. Earned Premiums relate to the elapsed portion of each policy’s term. The difference between Premiums Written and Earned Premiums relating to the remaining portion of each policy’s term is recorded as a deferred revenue liability referred to as Unearned Premiums in the Company’s Condensed Consolidated Balance Sheet. Results of the Unitrin Direct segment recognized in the Company’s financial statements for the nine and three months ended September 30, 2004 and 2003 were:

	Nine Months Ended						Three Months Ended
(Dollars in Millions)	Sept. 30, 2004			Sept. 30, 2003			Sept. 30, 2004			Sept. 30, 2003
Premiums Written	$	158.1		$	119.7		$	58.2		$	44.4
Increase in Unearned Premiums		(21.1	)		(10.4	)		(9.0	)		(5.5	)
Earned Premiums		137.0			109.3			49.2			38.9
Net Investment Income		4.8			2.0			1.8			1.2
Total Revenues		141.8			111.3			51.0			40.1
Incurred Losses		108.4			91.3			39.2			30.6
Insurance Expenses		39.0			36.7			12.5			11.9
Operating Loss		(5.6	)		(16.7	)		(0.7	)		(2.4	)
Income Tax Benefit		3.3			6.6			0.6			1.5
Net Loss	$	(2.3	)	$	(10.1	)	$	(0.1	)	$	(0.9	)
Ratio Based on Earned Premiums
Incurred Loss Ratio (excluding Catastrophes)		77.8	%		83.5	%		76.4	%		78.7	%
Incurred Catastrophe Loss Ratio		1.3	%		0.0	%		3.3	%		0.0	%
Total Incurred Loss Ratio		79.1	%		83.5	%		79.7	%		78.7	%
Incurred Expense Ratio		28.4	%		33.6	%		25.3	%		30.7	%
Combined Ratio		107.5	%		117.1	%		105.0	%		109.4	%

Earned Premiums in the Unitrin Direct segment increased by $27.7 million and $10.3 million for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003, due to higher volume of insurance and higher premium rates. Net Investment Income in the Unitrin Direct segment increased by $2.8 million and $0.6 million for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003, due primarily to higher levels of investments.

27

Unitrin Direct (continued)

For the nine and three months ended September 30, 2004, the Unitrin Direct segment reported an Operating Loss of $5.6 million before-tax and an Operating Loss of $0.7 million before-tax, respectively, compared to an Operating Loss of $16.7 million before-tax and an Operating Loss of $2.4 million before-tax, respectively, for the same periods in 2003. The Unitrin Direct segment’s Operating Loss for both the nine and three months ended September 30, 2004, compared to the same periods in 2003, decreased due primarily to lower non-catastrophe incurred losses as a percentage of earned premiums and lower insurance expenses as a percentage of earned premiums, partially offset by higher incurred losses from catastrophes. Non-catastrophe incurred losses as a percentage of earned premiums reflect increased premium rate adequacy. Insurance expenses as a percentage of earned premiums decreased due primarily to improved economies of scale. Losses from catastrophes, including Hurricanes Charley, Frances, Ivan and Jeanne, in the Unitrin Direct segment were $1.8 million and $1.6 million for the nine and three months ended September 30, 2004, respectively. For the nine and three months ended September 30, 2003, the Unitrin Direct segment did not record any losses from catastrophes. The Company anticipates that the Unitrin Direct segment will reach profitability on a discrete quarter basis in the fourth quarter of 2004, but that it will not reach profitability for a full year until 2005.

For the nine months ended September 30, 2004, the Unitrin Direct segment reported a Net Loss of $2.3 million after-tax, compared to a Net Loss of $10.1 million after-tax for the same period in 2003. For the three months ended September 30, 2004, the Unitrin Direct segment recorded a Net Loss of $0.1 million after-tax, compared to a Net Loss of $0.9 million after-tax for the same period in 2003. The Unitrin Direct segment’s Net Loss decreased for both periods in 2004, compared to 2003, due primarily to the corresponding decreases in the Unitrin Direct segment’s pre-tax Operating Loss. The effective income tax rate in the Unitrin Direct segment differs from the federal statutory rate due primarily to net investment income from tax exempt investments. Tax exempt investment income in the Unitrin Direct segment was $2.4 million for the nine months ended September 30, 2004, compared to $2.0 million for the same period in 2003.

Life and Health Insurance

	Nine Months Ended				Three Months Ended
(Dollars in Millions)	Sept. 30, 2004		Sept. 30, 2003		Sept. 30, 2004		Sept. 30, 2003
Earned Premiums:
Life	$	301.9	$	302.7	$	100.4	$	100.3
Accident and Health		121.1		118.8		40.4		39.8
Property		78.4		74.9		26.4		25.2
Total Earned Premiums		501.4		496.4		167.2		165.3
Net Investment Income		108.8		100.0		37.8		33.3
Other Income		3.0		3.3		1.2		1.1
Total Revenues	$	613.2	$	599.7	$	206.2	$	199.7
Operating Profit	$	61.8	$	48.8	$	24.7	$	20.1
Income Tax Expense		21.3		16.3		8.9		6.6
Net Income	$	40.5	$	32.5	$	15.8	$	13.5

Earned Premiums in the Life and Health Insurance segment increased by $5.0 million and $1.9 million for the nine and three months ended September 30, 2004, compared to the same periods in 2003, due primarily to higher accident and health insurance premium rates and higher volume of property insurance sold by the Life and Health Insurance segment’s career agents, partially offset by lower volume of accident and health insurance. Net Investment Income in the Life and Health Insurance segment increased by $8.8 million for the nine months ended September 30, 2004, compared to the same period in 2003, due primarily to higher levels of investments and higher yields on investments. Net Investment Income in the Life and Health Insurance segment increased by $4.5 million for the three months ended September 30, 2004, compared to the same period in 2003, due primarily to higher yields on investments and higher levels of investments. The Life and Health Insurance segment reduced its short term investments during 2004 and reinvested those funds in higher yielding fixed maturities with longer durations.

28

Life and Health Insurance (continued)

Operating Profit in the Life and Health Insurance segment increased by $13.0 million before-tax for the nine months ended September 30, 2004, compared to the same period in 2003, due primarily to lower life insurance underwriting expenses, the higher net investment income, improved results from accident and health insurance products and improved results, excluding catastrophe losses, on property insurance sold by the Life and Health Insurance segment’s career agents, partially offset by higher life insurance benefits and higher catastrophe losses. Life insurance underwriting expenses decreased due primarily to lower salaries and fringe benefits, partially the result of the Company’s efforts to consolidate back office operations, and a change in the Company’s estimate of the cost to resolve certain legal matters. Life insurance benefits increased due primarily to higher mortality and a change in estimate of reserves resulting from the conversion of certain business to a new computer system. Catastrophe losses, including losses of $5.3 million from Hurricanes Charley, Frances, Ivan and Jeanne, on property insurance sold by the Life and Health Insurance segment’s career agents were $6.7 million for the nine months ended September 30, 2004, compared to $2.7 million for the same period in 2003. Net Income in the Life and Health Insurance segment increased by $8.0 million for the nine months ended September 30, 2004, compared to the same period in 2003, due primarily to the higher operating profit.

Operating Profit in the Life and Health Insurance segment increased by $4.6 million before-tax for the three months ended September 30, 2004, compared to the same period in 2003, due primarily to lower life insurance underwriting expenses, the higher net investment income and improved results from accident and health insurance products, partially offset by higher life insurance benefits and higher catastrophe losses on property insurance sold by the Life and Health Insurance segment’s career agents. Life insurance underwriting expenses decreased due primarily to lower salaries and fringe benefits, partially the result of the Company’s efforts to consolidate back office operations, and lower costs to resolve legal matters. Life insurance benefits increased due primarily to higher mortality. Catastrophe losses, including losses of $5.3 million from Hurricanes Charley, Frances, Ivan and Jeanne, on property insurance sold by the Life and Health Insurance segment’s career agents were $5.5 million for the three months ended September 30, 2004, compared to $1.3 million for the same period in 2003. Net Income in the Life and Health Insurance segment increased by $2.3 million after-tax for the three months ended September 30, 2004, compared to the same period in 2003, due primarily to the higher operating profit.

29

Consumer Finance

	Nine Months Ended						Three Months Ended
(Dollars in Millions)	Sept. 30, 2004			Sept. 30, 2003			Sept. 30, 2004		Sept. 30, 2003
Interest, Loan Fees and Earned Discount	$	143.4		$	136.8		$	48.8	$	47.3
Net Investment Income		3.0			4.4			0.9		1.4
Other		4.2			3.9			1.4		1.4
Total Revenues		150.6			145.1			51.1		50.1
Provision for Loan Losses		34.7			36.0			9.8		12.7
Interest Expense on Investment Certificates and Savings Accounts		24.2			25.8			8.2		8.6
General and Administrative Expenses		57.2			48.5			19.1		16.5
Operating Profit		34.5			34.8			14.0		12.3
Income Tax Expense		14.6			14.5			5.9		5.0
Net Income	$	19.9		$	20.3		$	8.1	$	7.3
Consumer Finance Loan Originations	$	479.8		$	466.7		$	168.2	$	149.1
	Sept. 30, 2004			Dec. 31, 2003
Percentage of Consumer Finance Receivables Greater than Sixty Days Past Due		3.2	%		3.4	%
Ratio of Reserve for Loan Losses to Gross Consumer Finance Receivables		5.7	%		5.4	%
Weighted-Average Interest Yield on Investment Certificates and Savings Accounts		3.5	%		3.5	%

Interest, Loan Fees and Earned Discount in the Consumer Finance segment increased by $6.6 million and $1.5 million for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003, due primarily to higher levels of loans outstanding. Net Investment Income in the Consumer Finance segment decreased by $1.4 million for the nine months ended September 30, 2004, compared to the same period in 2003, due to lower levels of investments and lower yields on investments. Net Investment Income in the Consumer Finance segment decreased by $0.5 million for the three months ended September 30, 2004, compared to the same period in 2003, due primarily to lower levels of investments.

Operating Profit in the Consumer Finance segment decreased by $0.3 million before-tax for the nine months ended September 30, 2004 and increased by $1.7 million before-tax for the three months ended September 30, 2004, respectively, compared to the same periods in 2003. Provision for Loan Losses decreased by $1.3 million and $2.9 million for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003, due primarily to a lower estimated rate of ultimate loan losses. Interest Expense on Investment Certificates and Savings Accounts decreased by $1.6 million for the nine months ended September 30, 2004, compared to the same period in 2003, due primarily to lower interest rates on Investment Certificates and Savings Accounts, partially offset by higher levels of deposits. Interest Expense on Investment Certificates and Savings Accounts decreased by $0.4 million for the three months ended September 30, 2004, compared to the same period in 2003, due primarily to lower interest rates on Investment Certificates and Savings Accounts and lower levels of deposits. General and Administrative Expenses, as a percentage of Interest, Loan Fees and Earned Discount, increased from 35.5% for the nine months ended September 30, 2003, to 39.9% for the nine months ended September 30, 2004, due primarily to an increase in the size of the collection department and higher collection incentive pay. The Company’s increased collection effort contributed to the decrease in the percentage of receivables greater than 60 days past due from 3.4% at December 31, 2003 to 3.2% at September 30, 2004. Net Income in the Consumer Finance segment decreased by $0.4 million after-tax for the nine months ended September 30, 2004 due primarily to lower operating profit. Net Income in the Consumer Finance segment increased by $0.8 million after-tax for the three months ended September 30, 2004 due primarily to the higher operating profit.

30

Equity in Net Income (Loss) of Investee

Equity in Net Income (Loss) of Investee was income of $2.6 million and $1.0 million for the nine and three months ended September 30, 2004, respectively. Equity in Net Income (Loss) of Investee was a loss of $1.3 million and income of $0.1 million for the nine and three months ended September 30, 2003, respectively. Unitrin accounts for its investment in its investee, UNOVA, Inc. (“UNOVA”), under the equity method of accounting using the most recent and sufficiently timely publicly-available financial reports and other publicly-available information, which generally results in a three month delay in inclusion of UNOVA’s results in Unitrin’s consolidated financial statements. Prior to the periods presented in the Condensed Consolidated Financial Statements, Unitrin determined that a decline in the fair value of its investment in UNOVA was other than temporary under applicable accounting standards. Accordingly, Unitrin reduced the carrying value of its investment in UNOVA to its then current estimated realizable value and allocated the reduction to Unitrin’s proportionate share of UNOVA’s non-current assets. Accordingly, Unitrin’s reported equity in the net income of UNOVA differs from Unitrin’s proportionate share of UNOVA’s reported results to the extent that such results include depreciation, amortization or other charges related to such non-current assets. The fair value of Unitrin’s investment in UNOVA subsequently recovered such that the fair value exceeded the carrying value of Unitrin’s investment in UNOVA by $108.1 million and $225.8 million at September 30, 2004 and December 31, 2003, respectively. In accordance with applicable accounting standards, such excess is not included in the Condensed Consolidated Financial Statements.

Corporate Investments

The Company considers the management of certain investments, including Northrop common and preferred stock, Baker Hughes common stock, and UNOVA common stock to be a corporate responsibility. Accordingly, the Company does not allocate dividend income from these investments to its operating segments. Dividend income from these investments for the nine and three months ended September 30, 2004 and 2003 was:

	Nine Months Ended				Three Months Ended
(Dollars in Millions)	Sept. 30, 2004		Sept. 30, 2003		Sept. 30, 2004		Sept. 30, 2003
Northrop Preferred Stock	$	9.3	$	6.2	$	3.1	$	3.1
Northrop Common Stock		6.9		9.2		2.0		3.1
Baker Hughes Common Stock		0.7		0.9		0.2		0.2
Total Unallocated Dividend Income	$	16.9	$	16.3	$	5.3	$	6.4

Dividends on Northrop Preferred Stock increased for the nine months ended September 30, 2004, compared to the same period in 2003, due to the timing of the ex-dividend date.

The changes in fair values of Corporate Investments for the nine months ended September 30, 2004 are summarized below:

(Dollars in Millions)	Fair Value Dec. 31, 2003		Holding Gain (Loss) Arising During Period			Dispositions			Fair Value Sept. 30, 2004
Northrop Preferred Stock	$	220.9	$	11.6		$	—		$	232.5
Northrop Common Stock		633.9		60.5			(234.8	)		459.6
Baker Hughes Common Stock		82.2		23.7			(55.0	)		50.9
UNOVA Common Stock		290.5		(112.7	)		—			177.8
Total Fair Value of Corporate Investments	$	1,227.5	$	(16.9	)	$	(289.8	)	$	920.8

31

Net Realized Investment Gains (Losses)

Net Realized Investment Gains (Losses) for the nine and three months ended September 30, 2004 and 2003 were:

	Nine Months Ended						Three Months Ended
(Dollars in Millions)	Sept. 30, 2004			Sept. 30, 2003			Sept. 30, 2004			Sept. 30, 2003
Fixed Maturities:
Gains on Dispositions	$	1.4		$	10.3		$	0.3		$	2.7
Losses on Dispositions		(0.4	)		(0.7	)		(0.2	)		(0.6	)
Losses from Write-downs		(0.1	)		(2.5	)		(0.1	)		(0.8	)
Northrop Common Stock:
Gains on Dispositions		34.4			—			2.8			—
Other Equity Securities:
Gains on Dispositions		36.4			34.5			24.7			7.5
Losses on Dispositions		(0.7	)		(2.4	)		(0.3	)		—
Losses from Write-downs		(4.5	)		(11.8	)		(2.6	)		—
Other Investments:
Gains on Dispositions		1.0			0.1			0.1			—
Losses on Dispositions		(0.3	)		(0.2	)		—			—
Losses from Write-downs		—			(1.8	)		—			—
Net Realized Investment Gains	$	67.2		$	25.5		$	24.7		$	8.8

Net Realized Investment Gains were $67.2 million and $24.7 million for the nine and three months ended September 30, 2004, respectively, compared to $25.5 million and $8.8 million for the same periods in 2003. Net Realized Investment Gains for the nine months ended September 30, 2004 includes pre-tax gains of $34.4 million from sales of a portion of the Company’s investment in Northrop common stock, pre-tax gains of $26.3 million from sales of a portion of the Company’s investment in Baker Hughes common stock and pre-tax gains of $3.6 million resulting from sales of a portion of the Company’s investment in Hartford common stock. Net Realized Investment Gains for the three months ended September 30, 2004 includes pre-tax gains of $2.8 million from sales of a portion of the Company’s investment in Northrop common stock and pre-tax gains of $21.9 million from sales of a portion of the Company’s investment in Baker Hughes common stock. The fair value of the Company’s remaining investments in Northrop common stock, Baker Hughes common stock and Hartford common stock was $459.6 million, $50.9 million and $18.7 million, respectively, at September 30, 2004. The Company cannot anticipate when or if similar investment gains may occur in the future.

Net Realized Investment Gains for the nine months ended September 30, 2003 includes pre-tax gains of $12.0 million from sales of a portion of the Company’s investment in ITT common stock, pre-tax gains of $6.6 million from sales of the Company’s investment in ISO common stock and pre-tax gains of $4.4 million resulting from sales of a portion of the Company’s investment in Baker Hughes common stock. Net Realized Investment Gains for the three months ended September 30, 2003 includes pre-tax gains of $2.8 million from sales of the Company’s investment in Hartford common stock. Net Realized Investment Gains for the nine months ended September 30, 2003, includes a pre-tax loss of $1.8 million to write down investment real estate. The Company cannot anticipate when or if similar investment gains or losses may occur in the future.

32

Net Realized Investment Gains (Losses) (continued)

The Company continues to regularly review its investment portfolio for factors that may indicate that a decline in the fair value of an investment is other than temporary. Some factors considered in evaluating whether or not a decline in fair value is other than temporary include: 1) the Company’s ability and intent to retain the investment for a period of time sufficient to allow for a recovery in value; 2) the duration and extent to which the fair value has been less than cost; and 3) the financial condition and prospects of the issuer. Net Realized Investment Gains for the nine and three months ended September 30, 2004 includes pre-tax losses of $4.6 million and $2.7 million, respectively, resulting from other than temporary declines in the fair value of investments. Net Realized Investment Gains for the nine and three months ended September 30, 2003 includes pre-tax losses of $14.3 million and $0.8 million, respectively, resulting from other than temporary declines in the fair value of investments. Net Realized Investment Gains for the nine months ended September 30, 2003 includes a pre-tax loss of $1.8 million to write down investment real estate. The Company cannot anticipate when or if similar investment losses may occur in the future.

Other Items

Interest and Other Expenses increased by $12.5 million and $4.4 million for the nine and three months ended September 30, 2004, respectively, compared to the same periods in 2003, due primarily to higher levels of debt outstanding and higher corporate expenses.

Liquidity and Capital Resources

At September 30, 2004, the Company had approximately 3.5 million shares remaining under its existing common stock repurchase authorization. The Company does not anticipate repurchasing significant amounts of its common stock during 2004.

The Company has a $360 million unsecured revolving credit agreement, expiring on August 30, 2005, with a group of banks. Proceeds from advances under the agreement may be used for general corporate purposes. There were no borrowings outstanding under the revolving credit agreement at September 30, 2004 and December 31, 2003.

On July 1, 2002, the Company issued its 5.75% senior notes due July 1, 2007 with an aggregate principal amount of $300 million (the “5.75% Senior Notes”). The 5.75% Senior Notes are unsecured and may be redeemed in whole at anytime or in part from time to time at the Company’s option at specified redemption prices. Interest expense from the 5.75% Senior Notes was $13.4 million and $4.5 million for the nine and three months ended September 30, 2004, respectively. Interest expense from the 5.75% Senior Notes was $13.4 million and $4.5 million for the nine and three months ended September 30, 2003, respectively.

On October 30, 2003, the Company issued its 4.875% senior notes due November 1, 2010 with an aggregate principal amount of $200 million (the “4.875% Senior Notes”). The 4.875% Senior Notes are unsecured and may be redeemed in whole at anytime or in part from time to time at the Company’s option at specified redemption prices. Interest expense from the 4.875% Senior Notes was $7.5 million and $2.5 million for the nine and three months ended September 30, 2004, respectively.

During the first nine months of 2004, two of Unitrin’s subsidiaries (Trinity and Fireside Securities Corporation) paid $25.0 million and $12.7 million, respectively, in dividends to Unitrin. During 2003, Unitrin made capital contributions totaling $192.8 million to its property and casualty insurance subsidiaries. The Company believes that its property and casualty insurance subsidiaries are sufficiently capitalized at September 30, 2004 to fund future premium growth and to pay dividends to Unitrin out of future operating earnings.

33

Liquidity and Capital Resources (continued)

The Company has no significant commitments for capital expenditures. The Company’s subsidiaries maintain levels of cash and liquid assets sufficient to meet ongoing obligations to policyholders and claimants, as well as ordinary operating expenses. The Company’s reserves are set at levels expected to meet contractual liabilities. The Company maintains adequate levels of liquidity and surplus capacity to manage the risks inherent with any differences between the duration of its liabilities and invested assets. As further discussed in Note 7 to the Condensed Consolidated Financial Statements, some of Unitrin’s subsidiaries hold collateral totaling $104.2 million, at September 30, 2004, from unrelated parties pursuant to securities lending agreements whereby unrelated parties borrow securities from the subsidiaries’ accounts. The subsidiaries are required to return such collateral upon return of the loaned security. Accordingly, the amount of such collateral would not be available to meet ongoing obligations to policyholders and claimants, as well as ordinary operating expenses. Unitrin and its subsidiaries have not formed special purpose entities or similar structured financing vehicles to access capital and/or manage risk.

The Company’s management believes that it has sufficient resources to maintain the payment of dividends to its shareholders at the present level. Sources for future shareholder dividend payments and the payment of interest on Unitrin’s senior notes include the receipt of dividends from Unitrin’s operating subsidiaries, the receipt of dividends from its investments in Northrop, borrowings under the revolving credit agreement, and monetization of a portion of the Unitrin parent company’s Northrop holdings. At September 30, 2004, the Unitrin parent company directly held investments in Northrop preferred and common stock with a market value totaling $257.8 million.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Pursuant to the rules and regulations of the SEC, the Company is required to provide the following disclosures about Market Risk.

Quantitative Information About Market Risk

The Company’s Condensed Consolidated Balance Sheets include five types of financial instruments subject to material risk disclosures required by the SEC: 1) Investments in Fixed Maturities, 2) Investments in Equity Securities, 3) Consumer Finance Receivables, 4) Investment Certificates and Savings Accounts and 5) Notes Payable. Investments in Fixed Maturities, Consumer Finance Receivables, Investment Certificates and Savings Accounts and Notes Payable are subject to material interest rate risk. The Company’s investments in Equity Securities include common and preferred stocks, which are subject to material equity price risk and interest rate risk, respectively.

For purposes of this disclosure, market risk sensitive financial instruments are divided into two categories: financial instruments acquired for trading purposes and financial instruments acquired for purposes other than trading. The Company’s market risk sensitive instruments are classified as held for purposes other than trading. The Company has no significant holdings of derivatives.

The Company measures its sensitivity to market risk by evaluating the change in its financial assets and liabilities relative to fluctuations in interest rates and equity prices. The evaluation is made using instantaneous changes in interest rates and equity prices on a static balance sheet to determine the effect such changes would have on the Company’s market value at risk and the resulting pre-tax effect on Shareholders’ Equity. The changes chosen reflect the Company’s view of adverse changes that are reasonably possible over a one-year period. The selection of the changes chosen should not be construed as the Company’s prediction of future market events, but rather as an illustration of the impact of such events.

34

Quantitative Information About Market Risk (continued)

For the interest rate sensitivity analysis presented below, the Company assumed an adverse and instantaneous increase of 100 basis points in the yield curve at September 30, 2004 and December 31, 2003, respectively, for Investments in Fixed Maturities. Such 100 basis point increase in the yield curve may not necessarily result in a corresponding 100 basis point increase in the interest rate for all investments in fixed maturities. For example, a 100 basis point increase in the yield curve for risk-free, taxable investments in fixed maturities may not result in a 100 basis point increase for tax-exempt investments in fixed maturities. For Investments in Fixed Maturities the Company also anticipated changes in cash flows due to changes in the likelihood that investments would be called or pre-paid prior to their contractual maturity. All other variables were held constant. For preferred stock equity securities and Consumer Finance Receivables, the Company assumed an adverse and instantaneous increase of 100 basis points in market interest rates from their levels at September 30, 2004 and December 31, 2003, respectively. All other variables were held constant. For Investment Certificates and Savings Accounts and Notes Payable, the Company assumed an adverse and instantaneous decrease of 100 basis points in market interest rates from their levels at September 30, 2004 and December 31, 2003, respectively. All other variables were held constant. The Company measured equity price sensitivity assuming an adverse and instantaneous 10% decrease in the Standard and Poor’s Stock Index (the “S&P 500”) from its levels at September 30, 2004 and December 31, 2003, with all other variables held constant. The Company’s investments in common stock equity securities were correlated with the S&P 500 using the portfolio’s weighted-average beta of 0.40 and 0.33 at September 30, 2004 and December 31, 2003, respectively. The portfolio’s weighted-average beta was calculated using each security’s beta for the five-year periods ended September 30, 2004 and December 31, 2003, respectively, and weighted on the fair value of such securities at September 30, 2004 and December 31, 2003, respectively. Beta measures a stock’s relative volatility in relation to the rest of the stock market, with the S&P 500 having a beta coefficient of 1.00.

The estimated adverse effects on the market value of the Company’s financial instruments using these assumptions were:

			Pro Forma Increase (Decrease)
(Dollars in Millions)	Fair Value		Interest Rate Risk			Equity Price Risk			Total Market Risk
September 30, 2004
Assets
Investments in Fixed Maturities	$	4,257.2	$	(328.0	)	$	—		$	(328.0	)
Investments in Equity Securities		1,111.4		(4.7	)		(40.6	)		(45.3	)
Consumer Finance Receivables		960.7		(12.8	)		—			(12.8	)
Liabilities
Investment Certificates and Savings Accounts	$	916.0	$	19.7		$	—		$	19.7
Notes Payable		516.9		18.7			—			18.7
December 31, 2003
Assets
Investments in Fixed Maturities	$	3,634.7	$	(254.7	)	$	—		$	(254.7	)
Investments in Equity Securities		1,287.6		(5.9	)		(39.6	)		(45.5	)
Consumer Finance Receivables		906.7		(12.0	)		—			(12.0	)
Liabilities
Investment Certificates and Savings Accounts	$	918.9	$	18.1		$	—		$	18.1
Notes Payable		519.4		22.3			—			22.3

35

Quantitative Information About Market Risk (continued)

The market risk sensitivity analysis assumes that the composition of the Company’s interest rate sensitive assets and liabilities, including but not limited to credit quality, and equity price sensitive assets existing at the beginning of the period remains constant over the period being measured. It also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the time to maturity. Interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Also, any future correlation, either in the near term or the long term, between the Company’s common stock equity securities portfolio and the S&P 500 may differ from the historical correlation as represented by the weighted-average historical beta of the common stock equity securities portfolio. Accordingly, the market risk sensitivity analysis may not be indicative of, is not intended to provide, and does not provide, a precise forecast of the effect of changes of market rates on the Company’s income or shareholders’ equity. Further, the computations do not contemplate any actions the Company may undertake in response to changes in interest rates or equity prices.

To the extent that any adverse 100 basis point change occurs in increments over a period of time instead of instantaneously, the adverse impact on fair values would be partially mitigated because some of the underlying financial instruments would have matured. For example, proceeds from any maturing assets could be reinvested and any new liabilities would be incurred at the then current interest rates.

Qualitative Information About Market Risk

Market risk is a broad term related to economic losses due to adverse changes in the fair value of a financial instrument and is inherent to all financial instruments. SEC disclosure rules focus on only one element of market risk—price risk. Price risk relates to changes in the level of prices due to changes in interest rates, equity prices, foreign exchange rates or other factors that relate to market volatility of the rate, index, or price underlying the financial instrument. The Company’s primary market risk exposures are to changes in interest rates and certain exposures to changes in equity prices. The Company manages its interest rate exposures with respect to Investments in Fixed Maturities by investing primarily in investment-grade securities of moderate duration. The interest rate risks with respect to the fair value of Consumer Finance Receivables should be partially offset by the impact of interest rate movements on Investment Certificates and Savings Accounts which are issued to fund its receivables.

At September 30, 2004 and December 31, 2003, respectively, $692.1 million and $854.8 million of the Company’s Investments in Equity Securities, which exclude the Company’s Investment in Investee, was concentrated in the common and preferred stock of Northrop. Northrop stated in its 2003 Annual Report on Form 10-K that it “provides technologically advanced innovative products, services, and solutions in defense and commercial electronics, nuclear and non-nuclear shipbuilding, information technology, mission systems, systems integration, and space technology.” Additionally, Northrop stated that it “is subject to the usual vagaries of the market-place, it is also affected by the unique characteristics of the defense industry and by certain elements peculiar to its own business mix.” At September 30, 2004 and December 31, 2003, respectively, the Company’s Investments in Equity Securities included $50.9 million and $82.2 million of Baker Hughes common stock. Baker Hughes stated in its 2003 Annual Report on Form 10-K that it “is engaged in the oil field services industry,” and in addition, it “is a major supplier of wellbore-related products and technology services and systems to the oil and natural gas industry.” Accordingly, the Company’s Investments in Equity Securities is sensitive to the nature of Northrop and Baker Hughes’ industry segments.

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Caution Regarding Forward-Looking Statements

Management’s Discussion and Analysis of Results of Operations and Financial Condition, Quantitative and Qualitative Disclosures About Market Risk and the accompanying Condensed Consolidated Financial Statements (including the notes thereto) may contain or incorporate by reference information that includes or is based upon forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give expectations or forecasts of future events. The reader can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “believe(s),” “goal(s),” “target(s),” “estimate(s),” “anticipate(s),” “forecast(s),” “project(s),” “plan(s),” “intend(s),” “expect(s),” “might,” “may” and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results.

Any or all forward-looking statements may turn out to be wrong, and, accordingly, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report on Form 10-Q. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining the Company’s actual future results. These statements are based on current expectations and the current economic environment. They involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance; actual results could differ materially from those expressed or implied in the forward-looking statements. Among factors that could cause actual results to differ materially are:

• Changes in general economic conditions, including performance of financial markets, interest rates, and unemployment rates and the inflationary impact on claims;

• Heightened competition, including with respect to pricing, entry of new competitors and the development of new products by new and existing competitors;

• The number and severity of insurance claims (including those associated with catastrophe losses) and their impact on the adequacy of loss reserves;

• The inflationary impact of the availability of labor and materials on repair and reconstruction costs;

• Changes in the pricing or availability of reinsurance;

• Changes in the financial condition of reinsurers and amounts recoverable therefrom;

• Changes in industry trends;

• Regulatory approval of insurance rates, policy forms, license applications and similar matters;

• Governmental actions (including new laws or regulations or court decisions interpreting existing laws and regulations or policy provisions) and adverse judgments in litigation to which the Company or its subsidiaries are parties;

• Regulatory, accounting or tax changes that may affect the cost of, or demand for, the Company’s products or services;

• Changes in ratings by credit rating agencies and/or A. M. Best Co., Inc.;

• Realization of economies of scale;

• Absolute and relative performance of the Company’s products or services;

• Ability to maintain uninterrupted operation of facilities and business operations; and

• Other risks and uncertainties described from time to time in the Company’s filings with the SEC.

No assurances can be given that the results contemplated in any forward-looking statements will be achieved or will be achieved in any particular timetable. The Company assumes no obligation to publicly correct or update any forward-looking statements as a result of events or developments subsequent to the date of this Quarterly Report on Form 10-Q. The reader is advised, however, to consult any further disclosures the Company makes on related subjects in reports to the SEC.

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Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information relating to the Company (including its consolidated subsidiaries) required to be disclosed by the Company in reports that it files or submits under the Exchange Act.

(b) Changes in internal controls.

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Information concerning pending legal proceedings is incorporated herein by reference to Note 15 to the Condensed Consolidated Financial Statements (Unaudited) in Part I of this Form 10-Q.

Item 6. Exhibits

2.1	Asset Purchase Agreement, dated as of April 19, 2002, by and among Trinity Universal Insurance Company, Unitrin Services Company and Lumbermens Mutual Casualty Company and certain of its subsidiaries and affiliates (Incorporated herein by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.)
2.2	Buy-Out Agreement, dated as of August 20, 2004, by and among Lumbermens Mutual Casualty Company, American Motorists Insurance Company, American Manufacturers Mutual Insurance Company, American Protection Insurance Company, Kemper Lloyds Insurance Company, Unitrin, Inc., Unitrin Services Company, Trinity Universal Insurance Company and certain other subsidiaries and affiliates of Unitrin, Inc. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 23, 2004.)
3.1	Certificate of Incorporation (Incorporated herein by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-3 filed May 9, 2002, Registration No. 333-87866.)
3.2	Amended and Restated Bylaws, dated as of August 19, 2004.
4.1	Rights Agreement, dated as of August 4, 2004, between Unitrin, Inc. and Wachovia Bank, National Association, including the Form of Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock, the Form of Rights Certificate and the Summary of Rights to Purchase Preferred Stock (Incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated August 6, 2004.)
4.2	Senior Indenture dated as of June 26, 2002, by and between Unitrin, Inc. and BNY Midwest Trust Company as Trustee (Incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated July 1, 2002.)

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4.3	Form of Subordinated Indenture (Incorporated herein by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3 filed May 9, 2002, Registration No. 333-87866.)
4.4	Officer’s Certificate, including form of Senior Note with respect to the Company’s 5.75% Senior Notes due July 1, 2007 (Incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed July 1, 2002.)
4.5	Officer’s Certificate, including form of Senior Note with respect to the Company’s 4.875% Senior Notes due November 1, 2010 (Incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed October 30, 2003.)
10.1	Unitrin, Inc. 1990 Stock Option Plan, as amended and restated (Incorporated herein by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.)
10.2	Unitrin, Inc. 1997 Stock Option Plan, as amended and restated (Incorporated herein by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.)
10.3	Unitrin, Inc. 1995 Non-Employee Director Stock Option Plan, as amended and restated (Incorporated herein by reference to Appendix B to the Company’s Proxy Statement, dated March 29, 2004, in connection with the Company’s 2004 Annual Meeting of Shareholders.)
10.4	Unitrin, Inc. 2002 Stock Option Plan (Incorporated herein by reference to Exhibit A of the Company’s Proxy Statement, dated March 25, 2002, in connection with the Company’s 2002 Annual Meeting of Shareholders.)
10.5	Form of Stock Option Agreement under the Unitrin, Inc. 1995 Non-Employee Director Stock Option Plan.
10.6	Form of Stock Option Agreement (including stock appreciation rights) under the Unitrin, Inc. 2002 Stock Option Plan.
10.7	Unitrin, Inc. Pension Equalization Plan (Incorporated herein by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1994), as amended by First and Second Amendments to the Unitrin, Inc. Pension Equalization Plan (Incorporated herein by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.)
10.8	Unitrin is a party to individual severance agreements (the form of which is incorporated herein by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001), with the following executive officers: Richard C. Vie (Chairman and Chief Executive Officer) Donald G. Southwell (President and Chief Operating Officer) David F. Bengston (Vice President) John M. Boschelli (Treasurer) Eric J. Draut (Executive Vice President and Chief Financial Officer) Edward J. Konar (Vice President) Scott Renwick (Senior Vice President, General Counsel and Secretary) Richard Roeske (Vice President and Chief Accounting Officer) Each of the foregoing agreements is identical except that the severance compensation multiple is 3.0 for Mr. Vie and 2.0 for the other executive officers.
10.9	Unitrin, Inc. Severance Plan (Incorporated herein by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.)

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10.10	Unitrin, Inc. Incentive Bonus Plan, dated February 3, 2004 (Incorporated herein by reference to Appendix A to the Company’s Proxy Statement, dated March 29, 2004, in connection with the Company’s 2004 Annual Meeting of Shareholders.)
10.11	Unitrin, Inc. Non-Qualified Deferred Compensation Plan (Incorporated herein by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.)
10.12	Credit Agreement, dated August 30, 2002, among Unitrin, Inc., the Lenders party thereto, Bank One, N.A., as administrative agent and Wachovia Bank, N.A., as syndication agent (Incorporated herein by reference to Exhibit 10.1 to Unitrin’s Current Report on Form 8-K filed September 4, 2002.)
10.13	Registration Rights Agreement, dated as of January 23, 2001, by and among, Northrop Grumman Corporation, NNG, Inc., a direct wholly owned subsidiary of Northrop Grumman Corporation, and Unitrin, Inc. (Incorporated by reference to Exhibit 2.1 to Unitrin’s Schedule 13D with respect to Northrop Grumman Corporation dated April 13, 2001.)
10.14	Second Amended and Restated Distribution Agreement, dated as of August 17, 2001, between Unitrin, Inc. and Curtiss-Wright Corporation (Incorporated herein by reference to Exhibit 99.1 to the Company’s Amendment No. 6 to its Schedule 13D with respect to Curtiss-Wright Corporation dated August 17, 2001.)
31.1	Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14(a).
31.2	Certification of Chief Financial Officer Pursuant to SEC Rule 13a-14(a).
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K.)
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K.)

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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.

	Unitrin, Inc.
Date: October 27, 2004	/s/ Richard C. Vie
	Richard C. Vie
	Chairman of the Board and
	Chief Executive Officer
Date: October 27, 2004	/s/ Eric J. Draut
	Eric J. Draut
	Executive Vice President and
	Chief Financial Officer
Date: October 27, 2004	/s/ Richard Roeske
	Richard Roeske
	Vice President and Chief Accounting Officer (Principal Accounting Officer)

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EX-3.2

Exhibit 3.2

UNITRIN, INC.

AMENDED AND RESTATED BYLAWS

August 19, 2004

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UNITRIN, INC.

AMENDED AND RESTATED BYLAWS

ARTICLE I.

OFFICES

Section 1. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware.

Section 2. The corporation may also have offices at such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require.

ARTICLE II.

MEETINGS OF STOCKHOLDERS

Section 1. Any meeting of stockholders for any purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof.

Section 2. The annual meeting of stockholders shall be held on such date as may be fixed by resolution of the board of directors at least ten days prior to the date so fixed, for the purpose of electing directors and for the transaction of such other business as may properly come before the meeting. Any action required or permitted to be taken by the stockholders of the corporation must be effected at a duly constituted annual or special meeting of stockholders.

Section 3. Written notice of the annual meeting shall be given to each stockholder entitled to vote thereat not less than ten nor more than sixty days before the date of the meeting, except as otherwise provided herein or as required from time to time by the Delaware General Corporation Law or the corporation’s certificate of incorporation. All informalities or irregularities in any notice of meeting, or in the areas of credentials, proxies, quorums, voting, and similar matters, will be deemed waived if no objection is made at the meeting.

Section 4. Special meetings of stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the corporation’s certificate of incorporation, may be called only by the Chairman of the Board or by the board of directors pursuant to a resolution adopted by a majority of directors then in office.

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Section 5. Written notice of a special meeting of stockholders, stating the time, place and object thereof, shall be given to each stockholder entitled to vote thereat, not less than ten nor more than sixty days before the date fixed for the meeting, except as otherwise provided herein or as required from time to time by the Delaware General Corporation Law or the corporation’s certificate of incorporation. All informalities or irregularities in any notice of meeting, or in the areas of credentials, proxies, quorums, voting, and similar matters, will be deemed waived if no objection is made at the meeting.

Section 6. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.

Section 7. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held, and the list shall be produced and kept at the time and place of the meeting during the whole time thereof, and subject to the inspection of any stockholder who may be present.

Section 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. The Chairman of the meeting or a majority of the shares so represented may adjourn the meeting from time to time, whether or not there is a quorum. No notice of the time and place of the adjourned meeting need be given except as required by law. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.

Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the certificate of incorporation, a different vote is required in which case such express provision shall govern and control the decision of such question.

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Section 10. Each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period.

Section 11. Prior to any meeting of stockholders, the board of directors shall designate one or more inspectors of elections or votes to be taken at the annual meeting or any other meeting of the stockholders, or any adjournment thereof. The inspector or inspectors may be, in the discretion of the board of directors, officers, employees or agents of the corporation, or independent individuals, corporations, partnerships, or other forms of organization, or any combination thereof.

Section 12. Each stockholders’ meeting will be called to order and thereafter chaired by the Chairman of the Board if there then is one; or if not, or if the Chairman of the Board is absent or so requests, then by the Chief Executive Officer or the President. If all of the Chairman of the Board, the Chief Executive Officer and the President are unavailable, then the meeting will be called to order and chaired by such other officer of the corporation or such stockholder as may be appointed by the board of directors. The Secretary (or in his absence an Assistant Secretary) of the corporation will act as Secretary of each stockholders’ meeting. If neither the Secretary nor an Assistant Secretary is in attendance, the Chairman of the meeting may appoint any person (whether a stockholder or not) to act as Secretary thereat. After calling the meeting to order, the Chairman thereof may require the registration of all stockholders attending to vote in person, and the filing of all proxies with the election inspector or inspectors, if one or more has been appointed (or, if not, with the Secretary of the meeting). After the announced time for such filing of proxies has ended, no further proxies or changes, substitutions or revocations of proxies will be accepted. The Chairman of the meeting will, among other things, have absolute authority to determine the order of business to be conducted at such meeting and to establish rules for, and appoint personnel to assist in, preserving the orderly conduct of the business of the meeting (including any informal, or question and answer, portions thereof). Any informational or other informal session of stockholders conducted under the auspices of the corporation after the conclusion of, or otherwise in conjunction with, any formal business meeting of the stockholders will be chaired by the same person who chairs the formal meeting, and the foregoing authority on his or her part will extend to the conduct of such informal session.

Section 13. The board of directors may submit any contract or act for approval or ratification at any duly constituted meeting of the stockholders, the notice of which either includes mention of the proposed submittal or is waived as provided by law. If any contract or act so submitted is approved or ratified by a majority of the votes cast thereon at such meeting, the same will be valid and as binding upon the corporation as it would be if approved and ratified by each and every stockholder of the corporation.

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Section 14. (a) Nominations of persons for selection to the board of directors of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the corporation’s notice of meeting, (ii) by or at the direction of the board of directors or (iii) by any stockholder of the corporation who was a stockholder of record at the time of giving of the notice provided for in this Article II, Section 14, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Article II, Section 14.

(b) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a) of this Article II, Section 14, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder’s notice shall be delivered to the Secretary at the principal executive offices of the corporation not less than sixty days nor more than ninety days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than thirty days or delayed by more than sixty days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of the sixtieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Such stockholder’s notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any financial or other interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (1) the name and address of such stockholder, as they appear on the corporation’s books, and of such beneficial owner and (2) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner.

(c) Notwithstanding anything in the second sentence of paragraph (b) of this Article II, Section 14 to the contrary, in the event that the number of directors to be elected to the board of directors of the corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased board of directors made by the corporation at least seventy days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice required by this Article II, Section 14 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the corporation.

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(d) Only such persons who are nominated in accordance with the procedures set forth in these Bylaws shall be eligible to serve as directors and only such business shall be conducted at an annual meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in these Bylaws. The presiding officer of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws, to declare that such defective proposed business or nomination shall be disregarded.

(e) For purposes of these Bylaws, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

(f) Notwithstanding the foregoing provisions of this Article II, Section 14, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Article II, Section 14. Nothing in this Bylaw shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.

ARTICLE III.

DIRECTORS

Section 1. The number of directors which shall constitute the whole board shall be not less than three nor more than twelve. Within the limits above specified, the number of directors shall be determined by resolution of the board of directors or by the stockholders at the annual meeting. The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 3 of this Article, and each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders.

Section 2. The board of directors shall designate one of its members Chairman of the Board to serve until his resignation or removal. The Chairman of the Board shall preside at all meetings of the stockholders and the board of directors and shall have such other duties and powers as are specified in the corporation’s certificate of incorporation and these Bylaws or as may be prescribed by the board of directors from time to time. The Chairman of the Board may be removed only by the board of directors in accordance with a resolution adopted by a majority of the directors then in office. The board of directors may

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designate one of its members as Vice Chairman of the Board to serve until his resignation or removal. The Vice Chairman shall have such duties and powers as may be specified in these Bylaws or otherwise prescribed by the board of directors from time to time.

Section 3. Subject to the rights of the holders of any class or series of Preferred Stock and the requirements of law, unless the board of directors otherwise determines, vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled only by a majority of the directors then in office, though less than a quorum, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced.

Section 4. The business of the corporation shall be managed by its board of directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these Bylaws directed or required to be exercised or done by the stockholders.

MEETINGS OF THE BOARD OF DIRECTORS

Section 5. The board of directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware.

Section 6. Regular meetings of the board of directors may be fixed by resolution of the board of directors.

Section 7. Special meetings of the board may be called by the Chairman of the Board, the Chief Executive Officer or the President on one day’s notice to each director, either personally or by mail or by telegram; special meetings shall be called by the Chairman of the Board, the Chief Executive Officer, or the President or Secretary in like manner and on like notice on the written request of two directors.

Section 8. At all meetings of the board a majority of the directors then in office shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors except as may be otherwise specifically provided by statute, by the certificate of incorporation or these Bylaws. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.

Section 9. Unless otherwise restricted by the certificate of incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if prior to such action a written consent thereto is signed by all members of the board or of such committee as the case may be, and such written consent is filed with the minutes of proceedings of the board or committee.

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Section 10. Unless otherwise provided by the certificate of incorporation or these Bylaws, members of the board of directors of the corporation, or any committee designated by the board of directors, may participate in a meeting of the board of directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section shall constitute presence in person at such meeting.

COMMITTEES OF DIRECTORS

Section 11. The board of directors may, by resolution passed by a majority of the directors then in office, designate one or more committees, each committee to consist of two or more of the directors of the corporation, which, to the extent provided in the resolution, shall have and may exercise the powers of the board of directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors.

Section 12. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required.

COMPENSATION OF DIRECTORS

Section 13. Subject to the requirements of applicable law and the listing requirements of the New York Stock Exchange or such other securities market or exchange on which the corporation’s common stock may from time to time be listed or qualified for trading (collectively, the “Requirements”), the directors may be compensated for their service as directors and as members of committees of the board of directors and for chairing the board or any such committee. Such compensation may take the form of board and committee retainer fees, attendance fees, fees for chairing the board or committees of the board, stock awards, stock options, stock appreciation rights and any other lawful form of compensation or consideration that is consistent with the Requirements. In addition, the directors shall be entitled to be reimbursed for their actual expenses incurred in attending all meetings of the board of directors or any committee of the board. Subject to the Requirements, no compensation paid or provided to directors under this Section shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor.

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ARTICLE IV.

NOTICES

Section 1. Notice to directors and stockholders shall be in writing and delivered personally or mailed to the directors or stockholders at their addresses appearing on the books of the corporation. Notice by mail shall be deemed to be given at the time when the same shall be mailed. Notice to directors may also be given by telegram.

Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the certificate of incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.

ARTICLE V.

OFFICERS

Section 1. The officers of the corporation shall be elected by the board of directors and shall be a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary and a Treasurer. The board of directors may also appoint one or more assistant secretaries and assistant treasurers. Any two or more offices may be held by the same person.

Section 2. The board of directors may elect or appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board of directors.

Section 3. The compensation of all officers of the corporation shall be fixed by the board of directors or a duly authorized committee thereof.

Section 4. The officers of the corporation shall hold office until their successors are elected or appointed. Except as otherwise provided in these Bylaws or in the certificate of incorporation, any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the board of directors. Any vacancy occurring in any office of the corporation shall be filled by the board of directors.

CHIEF EXECUTIVE OFFICER

Section 5. The Chief Executive Officer shall be the chief executive officer of the corporation, shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the board of directors are carried into effect. The Chief Executive Officer may execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required by law to be otherwise signed and executed, and provided that the signing and execution thereof may be delegated by the board of directors to some other officer or agent of the corporation.

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THE PRESIDENT

Section 6. The President shall be the chief operating officer and, after the Chief Executive Officer, shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the board of directors are carried into effect. The President may execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required by law to be otherwise signed and executed, and provided that the signing and execution thereof may be delegated by the board of directors to some other officer or agent of the corporation. During the absence or disability of the Chief Executive Officer, or if there is no Chief Executive Officer, the President shall perform the duties and have the powers incident to the office of the Chief Executive Officer. In the event of an uncertainty or dispute as to whether the Chief Executive Officer is absent or disabled for purposes of this section, the board of directors shall make the final determination.

THE VICE PRESIDENTS

Section 7. The Vice Presidents shall perform such duties and have such powers as may be determined by resolution of the board of directors or, in the absence of such determination, by the Chief Executive Officer or President. During the absence or disability of the President, the Vice Presidents in the order determined by the board of directors shall perform the duties and have the powers incident to the office of the President.

THE SECRETARY AND ASSISTANT SECRETARIES

Section 8. The Secretary shall attend all meetings of the board of directors and all meetings of the stockholders and record all the proceedings of such meetings in a book to be kept for that purpose, and shall perform like duties for the committees of the board of directors when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders, board of directors and committees thereof, and shall perform such other duties and have such other powers as may be determined by resolution of the board of directors or, in the absence of such determination, by the Chief Executive Officer or President. The Secretary shall keep in safe custody the seal of the corporation, may affix the same to any instrument requiring it and may attest thereto.

Section 9. The assistant secretary, or if there be more than one, the assistant secretaries in the order as may be determined by resolution of the board of directors or, in the absence of such determination, the Chief Executive Officer or President, shall, during the absence or disability of the Secretary, perform the duties and have the powers incident to the office of the Secretary. Any assistant secretary may affix the corporate seal and attest

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thereto and may attest the execution of documents on behalf of the corporation, and shall perform such other duties and have such other powers as may be determined by the Chief Executive Officer or President.

THE TREASURER AND ASSISTANT TREASURERS

Section 10. The Treasurer shall perform such duties and have such powers as may be determined by resolution of the board of directors or, in the absence of such determination, by the Chief Executive Officer or President.

Section 11. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order as may be determined by resolution of the board of directors, or, in the absence of such determination, by the Chief Executive Officer or President, shall, in the absence or disability of the Treasurer, perform the duties and have the powers incident to the office of the Treasurer and shall perform such other duties and have such other powers as may be determined by the Chief Executive Officer or President.

ARTICLE VI.

CERTIFICATES OF STOCK

Section 1. Every holder of stock in the corporation shall be entitled to have a certificate signed in the name of the corporation by the Chief Executive Officer, the President or a Vice President and the Treasurer or an assistant treasurer, or the Secretary or an assistant secretary of the corporation, certifying the number of shares owned by him in the corporation.

Section 2. Any or all the signatures on the certificate, including the signatures of the corporate officers, the transfer agent and/or the registrar, may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue.

LOST CERTIFICATES

Section 3. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed.

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TRANSFERS OF STOCK

Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.

CLOSING OF TRANSFER BOOKS

Section 5. For the purpose of determining the stockholders who shall exclusively, notwithstanding any subsequent stock transfers, be entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or disbursement or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the board of directors may either fix, in advance, a record date, which shall not be more than sixty days nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action, or close the stock transfer books for a period which shall not exceed sixty days nor be less than ten days before the date of such meeting, nor for a period exceeding sixty days prior to any other action.

REGISTERED STOCKHOLDERS

Section 6. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

ARTICLE VII.

GENERAL PROVISIONS

DIVIDENDS

Section 1. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation.

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Section 2. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created.

CHECKS

Section 3. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate.

FISCAL YEAR

Section 4. The fiscal year of the corporation shall be fixed by resolution of the board of directors.

SEAL

Section 5. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words “Corporate Seal, Delaware”. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

ARTICLE VIII.

DIRECTORS’ LIABILITY AND INDEMNIFICATION

Section 1. Directors’ Liability. No director of the corporation shall be personally liable to the corporation or its stockholders for monetary damages for any breach of fiduciary duty by such a director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which such director derived an improper personal benefit. No amendment to or repeal of this Article shall apply to or have any effect on the liability or alleged liability of any director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. If the Delaware General Corporation Law is amended hereafter further to eliminate or limit the personal liability of directors, the liability of a director of this corporation shall be limited or eliminated to the fullest extent permitted by the Delaware General Corporation Law, as amended.

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Section 2. Right to Indemnification. Each person who was or is made a party to or is threatened to be made a party to or is involuntarily involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “Proceeding”), by reason of the fact that he or she is or was a director or officer of the corporation, or is or was serving (during his or her tenure as director and/or officer) at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, whether the basis of such Proceeding is an alleged action or inaction in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the Delaware General Corporation Law (or other applicable law), as the same exists or may hereafter be amended, against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection with such Proceeding. Such director or officer shall have the right to be paid by the corporation for expenses incurred in defending any such Proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law (or other applicable law) requires, the payment of such expenses in advance of the final disposition of any such Proceeding shall be made only upon receipt by the corporation of an undertaking by or on behalf of such director or officer to repay all amounts so advanced if it should be determined ultimately that he or she is not entitled to be indemnified under this Article or otherwise.

Section 3. Right of Claimant to Bring Suit. If a claim under Section 2 of this Article is not paid in full by the corporation within ninety (90) days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim, together with interest thereon, and, if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim, including reasonable attorneys’ fees incurred in connection therewith. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any Proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law (or other applicable law) for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (or of its full board of directors, its directors who are not parties to the Proceeding with respect to which indemnification is claimed, its stockholders, or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law (or other applicable law), nor an

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actual determination by any such person or persons that such claimant has not met such applicable standard of conduct, shall be a defense to such action or create a presumption that the claimant has not met the applicable standard of conduct.

Section 4. Non-Exclusivity of Rights. The rights conferred by this Article shall not be exclusive of any other right which any director, officer, representative, employee or other agent may have or hereafter acquire under the Delaware General Corporation Law or any other statute, or any provision contained in the certificate of incorporation or these Bylaws, or any agreement, or pursuant to a vote of stockholders or disinterested directors, or otherwise.

Section 5. Insurance and Trust Fund. In furtherance and not in limitation of the powers conferred by statute:

(1) the corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of law; and

(2) the corporation may create a trust fund, grant a security interest and/or use other means (including, without limitation, letters of credit, surety bonds and/or other similar arrangements), as well as enter into contracts providing indemnification to the fullest extent permitted by law and including as part thereof provisions with respect to any or all of the foregoing, to ensure the payment of such amount as may become necessary to effect indemnification as provided therein, or elsewhere.

Section 6. Indemnification of Employees and Agents of the Corporation. The corporation may, to the extent authorized from time to time by the board of directors, grant rights to indemnification, including the right to be paid by the corporation the expenses incurred in defending any Proceeding in advance of its final disposition, to any employee or agent of the corporation to the fullest extent permitted by law.

Section 7. Amendment. This Article VIII is also contained in Articles NINE and TEN of the corporation’s certificate of incorporation, and accordingly, may be altered, amended or repealed only to the extent and at the time said Articles NINE and TEN are altered, amended or repealed. Any repeal or modification of this Article VIII shall not change the rights of an officer or director to indemnification with respect to any act or omission occurring prior to such repeal or modification.

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ARTICLE IX.

AMENDMENTS

Section 1. The board of directors may adopt, amend or repeal these Bylaws. Any adoption, amendment or repeal of these Bylaws by the board of directors shall require the approval of a majority of the directors then in office. The stockholders shall also have power to adopt, amend or repeal these Bylaws. In addition to any vote of the holders of any class or series of stock of this corporation required by law or by the certificate of incorporation, the affirmative vote of the holders of at least a majority of the voting power of all of the then-outstanding shares of voting stock voting together as a single class, shall be required to adopt, amend or repeal any provision of these Bylaws.

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TABLE OF CONTENTS

		PAGE
ARTICLE I.	OFFICES	2
ARTICLE II.	MEETINGS OF STOCKHOLDERS	2
ARTICLE III.	DIRECTORS	6
	MEETINGS OF THE BOARD OF DIRECTORS	7
	COMMITTEES OF DIRECTORS	8
	COMPENSATION OF DIRECTORS	8
ARTICLE IV.	NOTICES	9
ARTICLE V.	OFFICERS	9
	CHIEF EXECUTIVE OFFICER	9
	THE PRESIDENT	10
	THE VICE PRESIDENTS	10
	THE SECRETARY AND ASSISTANT SECRETARIES	10
	THE TREASURER AND ASSISTANT TREASURERS	11
ARTICLE VI.	CERTIFICATES OF STOCK	11
	LOST CERTIFICATES	11
	TRANSFERS OF STOCK	12
	CLOSING OF TRANSFER BOOKS	12
	REGISTERED STOCKHOLDERS	12
ARTICLE VII.	GENERAL PROVISIONS	12
	DIVIDENDS	12
	CHECKS	13
	FISCAL YEAR	13
	SEAL	13
ARTICLE VIII.	DIRECTOR’S LIABILITY AND INDEMNIFICATION	13
	DIRECTOR’S LIABILITY	13
	RIGHT TO INDEMNIFICATION	14
	RIGHT OF CLAIMANT TO BRING SUIT	14
	NON-EXCLUSIVITY OF RIGHTS	15
	INSURANCE AND TRUST FUND	15
	INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION	15
	AMENDMENT	15
ARTICLE IX.	AMENDMENTS	16

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EX-10.5

Exhibit 10.5

Unitrin, Inc. 1995 Non-Employee Director Stock Option Plan

NON-QUALIFIED STOCK OPTION AGREEMENT

This NON-QUALIFIED STOCK OPTION AGREEMENT (the “Agreement”) is made as of this          day of                     , between UNITRIN, INC., a Delaware corporation (the “Company”), and                             , the (“Option Holder”).

RECITALS

A. The Board of Directors and Shareholders of the Company have adopted the 1995 Non-Employee Director Stock Option Plan.

B. The Plan provides, among other things, for the automatic grant of stock options to non-employee directors of the Company in the amounts and at the times set forth in the Plan.

C. The option granted hereby is not intended to qualify as an “incentive stock option” under §422A of the Internal Revenue Code of 1986, as amended.

D. Terms used herein and not otherwise defined shall have the meanings given to such terms in the Plan.

NOW, THEREFORE, the parties hereto agree as follows:

1. Grant of Option. The Company grants to the Option Holder the right and option to purchase on the terms and conditions hereinafter set forth, all or any part of an aggregate of four thousand (4,000) shares of the Common Stock of the Company (the “Option”) at the purchase price of $             per share, exercisable from time to time in accordance with the provisions of this Agreement during a period expiring on the tenth anniversary of the date of this Agreement or such later date as may result from the application of §6 (the “Expiration Date”). This Option is also subject to early termination in accordance with §5.

2. Vesting. The Option Holder may not purchase any shares by exercise of this Option between the date of this Agreement and the first anniversary date hereof. The shares subject to this Option shall become exercisable in full by the Option Holder commencing on the first anniversary date of this Agreement. Subject to earlier termination under §5 or the terms of the Plan and no later than the Expiration Date, the Option Holder may purchase all or any part of the shares subject to this Option which are currently exercisable in the manner and under the terms specified in §3 hereof. The number of shares subject to the Option which the Option Holder may purchase shall be reduced by the number of shares previously purchased by the Option Holder pursuant to the Agreement.

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3. Manner of Exercise. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased solely: (i) in cash or by certified, cashier’s or (as funds clear) personal check payable to the order of the Company; (ii) by constructive or actual delivery (as defined in the Plan) of shares of Common Stock of the Company already owned by, and in the possession of, the Option Holder with a fair market value as of the close of business on the date of exercise equal to or greater than the purchase price; (iii) by wire transfer to an account specified by the Company, or (iv) by delivery of a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay such full purchase price (in which case the exercise will be effective upon receipt of such proceeds by the Company). The Company reserves the right to accept shares of stock of the Company in payment of the purchase price of an option only if such shares have been held by the Option Holder for a specified minimum period of time during which such shares were not exchanged to effectuate another option exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than: (i) one hundred (100) shares; or (ii) the total number of shares then eligible for exercise, if less than one hundred (100) shares.

This Option may be exercised: (i) during the lifetime of the Option Holder only by the Option Holder or in the event a guardian or legal representative is appointed during the Option Holder’s lifetime to handle the affairs of the Option Holder, such guardian or legal representative; and (ii) after the Option Holder’s death by his or her transferees by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Option Holder, or such spouse’s successors in interest. If the spouse of the Option Holder shall have acquired a community property interest in this Option, the Option Holder, or the Option Holder’s permitted successors in interest, may exercise the Option on behalf of the spouse of the Option Holder or such spouse’s successors in interest.

4. Fair Market Value of Common Stock. The fair market value of a share of Common Stock shall be determined for purposes of this Agreement by reference to the closing price of a share of Common Stock on the New York Stock Exchange, as reported by The Wall Street Journal for the Grant Date or date of exercise, as applicable, or if such date is not a business day, for the business day immediately preceding such date, (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof).

5. Cessation of Services, Death or Permanent Disability. All rights of the Option Holder in this Option shall terminate three (3) months after the date of the termination of Option Holder’s service as a director of the Company for any reason other than: (i) the death of Option Holder; (ii) cessation of services as a director because Option Holder, although nominated by the Board of Directors, is not elected by the shareholders to the Board of Directors; or (iii) retirement of Option Holder because of total and permanent disability as defined in §22(e)(3) of the Internal Revenue Code of 1986, as amended (each of which events is hereafter collectively referred to as a “Termination Event”). If Option Holder ceases to be a director of the Company because of a Termination Event, then this Option shall vest immediately

2

to the extent not already vested and shall expire twelve (12) months (and not three months) after the date of such Termination Event. In the event of Option Holder’s death, any vested, unexercised portion of this Option may be exercised by the person or persons to whom the Option Holder’s rights under the Option shall pass by any reason of the death of the Option Holder, whether by will or by the applicable laws of descent and distribution. However, in no event may the Option be exercised to any extent by anyone after the Expiration Date.

6. Extension of Expiration in Certain Cases. From time to time, the Company may declare “blackout” periods during which directors and covered employees are prohibited from engaging in certain transactions in Company securities. In the event that the scheduled Expiration Date of this Option shall fall within a blackout period that has been declared by the Company and that applies to the Option Holder, then the Expiration Date shall automatically, and without further notice to Option Holder, be extended until such time as fifteen (15) consecutive business days have elapsed after the scheduled Expiration Date without interruption by any blackout period that applied to the Option Holder.

7. Shares to be Issued in Compliance with Federal Securities Laws and Other Rules. No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended (whether by registration or satisfaction of exemption conditions), all applicable listing requirements of the New York Stock Exchange (or such other exchange(s) or market(s) on which shares of the same class are then listed) and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. By signing this Agreement, the Option Holder represents and warrants that none of the shares to be acquired upon exercise of this Option will be acquired with a view towards any sale, transfer or distribution of said shares in violation of the Securities Act of 1933, as amended (the “Act”), and the rules and regulations promulgated thereunder, or any applicable “blue sky” laws, and that Option Holder hereby agrees to indemnify the Company in the event of any violation by Option Holder of such Act, rules, regulations or laws.

8. Withholding of Taxes. Upon the exercise of this Option, the Company shall require the Option Holder or the Option Holder’s permitted successor in interest to pay the Company the amount of taxes, if any, which the Company may be required to withhold with respect to such shares.

9. Transferability. This Option and all other rights and privileges granted hereby shall not be transferred, assigned, pledged or otherwise encumbered in any way, whether by operation of the law or otherwise except: by will or the laws of descent and distribution. Without limiting the generality of the preceding sentence, no rights or privileges granted hereby may be assigned or otherwise transferred to the spouse or former spouse of the Option Holder pursuant to any divorce proceedings, settlement or judgment. Upon any attempt so to transfer, assign, pledge, encumber or otherwise dispose of this Option or any other rights or privileges granted hereby contrary to the provisions hereof, this Option and all other rights and privileges contained herein shall immediately become null and void and of no further force or effect.

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10. Adjustment for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into, or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split or reverse stock split, or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. No fractional shares of stock shall be issued under the Plan on any such adjustment.

11. Participation by Option Holder in Other Company Plans. Nothing herein contained shall affect the right of the Option Holder to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other welfare plan or program of the Company or of any subsidiary of the Company in which non-employee directors of the Company are otherwise eligible to participate.

12. No Rights as a Stockholder Until Issuance of Shares. Neither the Option Holder nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until such shares shall have been issued and delivered to (i) Option Holder in the form of certificates, (ii) a brokerage or other account for the benefit of Option Holder either in certificate form or via “DWAC” or similar electronic means, or (iii) a book entry or direct registration account in the name of Option Holder.

13. No Right to Continue as a Director. Nothing herein contained shall be construed as an agreement by the Company, expressed or implied, that Option Holder has a right to continue as a director of the Company for any period of time or at any particular rate of compensation.

14. Agreement Subject to Stock Option Plan. The Option hereby granted is subject to, and the Company and the Option Holder agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Option Holder’s rights under this Option without the prior written consent of the Option Holder. In the event that the terms or conditions of this Agreement conflict with the terms or conditions of the Plan, the Plan shall govern.

15. Restorative Stock Options. To the extent the Option Holder is granted a restorative stock option under the Plan pursuant to the exercise of this Option, as evidenced by an optionee Statement issued to the Option Holder, the undersigned Option Holder and his or her spouse agree to be bound by all the terms and conditions of this Option Agreement and the Plan with respect to such restorative option.

16. Execution. This Option has been granted, executed and delivered as of the day and year first above written at Chicago, Illinois, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the state of Illinois without application of its conflicts of laws and principles.

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UNITRIN, INC.	OPTION HOLDER
By:
By his or her signature below, the spouse of the Option Holder agrees to be bound by all of the terms and conditions of the foregoing Option Agreement.
	Print Name

5

EX-10.6

Exhibit 10.6

Unitrin, Inc. 2002 Stock Option Plan

NON-QUALIFIED STOCK OPTION AND SAR AGREEMENT

This NON-QUALIFIED STOCK OPTION AND SAR AGREEMENT (“Agreement”) is made as of this          day of                     , 2     (“Grant Date”) between UNITRIN, INC., a Delaware corporation (the “Company”), and «name» (the “Option Holder”).

RECITALS

A. The Board of Directors of the Company has adopted the Unitrin, Inc. 2002 Stock Option Plan, including any and all amendments to date (the “Plan”).

B. Pursuant to the Plan, the Plan shall be administered by a committee appointed by and comprised of members of the Company’s Board of Directors (“Committee”).

C. The Plan provides for the granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary or affiliate of the Company, as the Committee may from time to time determine, of options to purchase shares of Common Stock of the Company and tandem stock appreciation rights (“SAR(s)”).

D. Pursuant to the Plan, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant a non-qualified stock option (and tandem SAR) to the Option Holder covering «shares» («number») shares of the Company’s Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Non-Qualified Stock Option and SAR Agreement between the Company and the Option Holder.

E. Neither the option nor the SAR granted hereby is intended to qualify as an “incentive stock option” under Section 422A of the Internal Revenue Code of 1986, as amended.

NOW, THEREFORE, the parties hereto agree as follows:

1. Grant.

(a) The Company grants to the Option Holder the right and option (the “Option”) to purchase on the terms and conditions hereinafter set forth, all or any part (subject to the limitations of Section 3) of an aggregate of «shares» («number») shares of the Common Stock of the Company at the purchase price of $             per share. The Option shall be exercisable from time to time in accordance with the provisions of this Agreement during a period expiring on the tenth anniversary of the Grant Date or such later date as may result from the application of Section 6 (such anniversary or later date is referred to as the “Expiration Date”). The Option is also subject to early termination pursuant to Section 3(e) and Section 5.

(b) The Option is coupled with a SAR that is exercisable to the extent, and only to the extent, that the Option is exercisable under the vesting provisions of Section 2. The term of the SAR shall expire on the Expiration Date and shall be subject to early termination pursuant to Section 3(e) and Section 5. The SAR shall entitle the Option Holder to surrender the Option (or any portion thereof, subject to Section 3(a)) to the Company unexercised and receive in exchange for the surrender of the Option (or the surrendered portion thereof) that number of shares of the Company’s common stock having an aggregate value equal to: (A) the excess of the fair market value of one share of such stock (as determined in accordance with Section 4) over the purchase price per share specified in Section 1(a) above (or, if applicable, such price as adjusted pursuant to Section 9 or Section 14 hereof), multiplied by (B) the number of such shares subject to the Option (or portion thereof) which is so surrendered.

2. Vesting. The Option Holder may not purchase any shares by exercise of this Option or the SAR prior to the six-month anniversary of the Grant Date (the “Initial Vesting Date”). The shares subject to this Option and the SAR shall become exercisable in four (4), equal annual installments, the first of which shall vest on the Initial Vesting Date, and the remainder of which shall vest on the first, second and third anniversaries of the Initial Vesting Date, respectively. Subject to early termination under Section 5 or the terms of the Plan and no later than the Expiration Date, the Option Holder may purchase all or any part (subject to the limitations of Section 3) of the shares subject to this Option which are currently exercisable, or such lesser number of shares as may be available through the exercise of the SAR. The total number of shares subject to the Option and the number of shares subject to the Option which are currently exercisable by the Option Holder each shall be reduced by the number of shares previously acquired by the Option Holder pursuant to this Agreement.

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3. Manner of Exercise.

(a) Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company by the Option Holder or his or her Representative (as such term is defined in the Plan). Such notice shall specify the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased using the following methods, individually or in combination: (i) by check payable to the order of the Company in an amount equal to the purchase price, (ii) by Constructive or Actual Delivery of Mature Shares (as defined in the Plan) with a fair market value as of the close of business on the date of exercise equal to or greater than the purchase price, (iii) by electronic transfer of funds to an account of the Company, or (iv) by other means acceptable to the Committee. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than fifty (50) shares unless the total number of shares covered by this Option is less than 50 on the date of exercise or unless this Option is scheduled to expire within six months of the date of exercise.

(b) Each exercise of the SAR shall be by means of a written notice of exercise delivered to the Company, specifying whether the Option Holder is surrendering all or a portion of the Option and, if only a portion of the Option is being surrendered, how many shares are included in such portion. Upon satisfaction of the Option Holder’s obligation to pay the Company the amount of all taxes that the Company is required to withhold in connection with such exercise as specified in Section 3(d) below, the Company shall issue to the Option Holder a number of shares of the Company’s common stock computed in accordance with Section 1(b) and the Option and the SAR (or the surrendered portions thereof) shall be deemed extinguished. The SAR may only be settled in shares of the Company’s common stock and not by payment of cash to the Option Holder. Any fractional share that would otherwise result from an exercise of the SAR shall be rounded down to the nearest whole share.

(c) This Option and SAR may be exercised only by the Option Holder or his or her Representative, and not otherwise, regardless of any community property interest therein of the spouse of the Option Holder, or such spouse’s successors in interest. If the spouse of the Option Holder shall have acquired a community property interest in this Option and the SAR, the Option Holder, or the Option Holder’s Representative, may exercise the Option and the SAR on behalf of the spouse of the Option Holder or such spouse’s successors in interest.

(d) Upon the exercise of this Option or the SAR, the Company shall require the Option Holder or the Option Holder’s Representative to pay the Company the amount of any taxes which the Company may be required to withhold with respect to such exercise. Subject to the limitations set forth in the next three sentences, the Option Holder or

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his/her Representative may elect to satisfy all or any portion of such tax withholding obligations either by: (i) any of the methods described in Sections 3(a)(i) through 3(a)(iv) above, or (ii) directing the Company to withhold shares that would otherwise have been issued pursuant to the exercise of this Option or SAR. Neither the Option Holder nor his/her Representative shall have the right to utilize Constructive or Actual Delivery of Mature Shares or to have shares withheld, in either case, in excess of the minimum number required to satisfy applicable tax withholding requirements based on minimum statutory withholding rates for federal and state tax purposes, including payroll taxes. Shares used in either of the foregoing ways to satisfy tax withholding obligations will be valued at their fair market value on the date of exercise. In the case of an exercise of the SAR, the Company retains the right to require the Option Holder to pay any and all withholding taxes arising out of such exercise solely in cash.

(e) Except as provided in Section 14 below with respect to the coupling of a SAR to a Restorative Option, in the event the Option (or any portion thereof) is exercised, then the SAR (or the corresponding portion) shall terminate. In the event that the SAR (or any portion thereof) is exercised, then the Option (or the corresponding portion) shall likewise terminate.

4. Fair Market Value of Common Stock. The fair market value of a share of Common Stock shall be determined for purposes of this Agreement by reference to the closing price of a share of Common Stock on the New York Stock Exchange, as reported by The Wall Street Journal for the Grant Date or date of exercise, as applicable, or if such date is not a business day, for the business day immediately preceding such date, (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof).

5. Cessation of Services. The provisions of Sections 11(a), 11(b), 11(c) and 11(d) of the Plan are hereby incorporated into and made a part of this Agreement.

6. Extension of Expiration in Certain Cases. From time to time, the Company may declare “blackout” periods with respect to designated employees of the Company and/or its subsidiaries or affiliates during which such employees are prohibited from engaging in certain transactions in Company securities. In the event that the scheduled Expiration Date of this Option and SAR shall fall within a blackout period that has been declared by the Company and that applies to the Option Holder, then the Expiration Date shall automatically, and without further notice to Option Holder, be extended until such time as fifteen (15) consecutive business days have elapsed after the scheduled Expiration Date without interruption by any blackout period that applied to the Option Holder.

7. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option or SAR shall be

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issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended (whether by registration or satisfaction of exemption conditions), all applicable listing requirements of the New York Stock Exchange or such other exchange(s) or markets on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made.

8. No Assignment. This Option and SAR and all rights and privileges granted hereby (including the right of exercise) shall not be transferred, assigned, pledged or hypothecated in any way, whether by operation of the law or otherwise, except by will or the laws of descent and distribution. Without limiting the generality of the preceding sentence, no rights or privileges granted hereby may be assigned or otherwise transferred to the spouse or former spouse of the Option Holder pursuant to any divorce proceedings, settlement or judgment. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this Option or SAR or any other rights or privileges granted hereby contrary to the provisions hereof, this Option and SAR and all other rights and privileges contained herein shall immediately become null and void and of no further force or effect.

9. Certain Adjustments The provisions of Sections 13(a), 13(b) and 13(c) of the Plan relating to certain adjustments in the case of stock splits, reorganizations, equity restructurings, change of control events and similar matters described therein are hereby incorporated in and made a part of this Agreement.

Any such adjustments shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment.

10. Participation by Option Holder in Other Company Plans. Nothing herein contained shall affect the right of the Option Holder to participate in and receive benefits under and in accordance with the then current provisions of any retirement plan or employee welfare benefit plan or program of the Company or of any subsidiary or affiliate of the Company, subject in each case, to the terms and conditions of any such plan or program.

11. No Rights as a Stockholder Until Issuance of Shares. Neither the Option Holder nor his/her Representative shall be entitled to any of the rights or privileges of a stockholder of the Company in respect of any shares issuable upon any exercise of this Option or SAR unless and until such shares shall have been issued and delivered to: (i) Option Holder in the form of certificates, (ii) a brokerage or other account for the benefit of Option Holder either in certificate form or via “DWAC” or similar electronic means, or (iii) a book entry or direct registration account in the name of Option Holder.

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12. Not an Employment or Service Contract. Nothing herein contained shall be construed as an agreement by the Company or any of its subsidiaries or affiliates, expressed or implied, to employ Option Holder or contract for Option Holder’s services, to restrict the right of the Company or any of its subsidiaries or affiliates to discharge Option Holder or cease contracting for Option Holder’s services or to modify, extend or otherwise affect in any manner whatsoever, the terms of any employment agreement or contract for services which may exist between the Option Holder and the Company or any of its subsidiaries or affiliates.

13. Agreement Subject to Stock Option Plan. The Option and SAR hereby granted are subject to, and the Company and the Option Holder agree to be bound by, all of the terms and conditions of the Plan, as the same may be amended from time to time hereafter in accordance with the terms thereof, but no such amendment shall adversely affect the Option Holder’s rights under this Agreement without the prior written consent of the Option Holder. To the extent that the terms or conditions of this Agreement conflict with the terms or conditions of the Plan, the Plan shall govern.

14. Restorative Stock Options. To the extent the Option Holder may hereafter become entitled to a Restorative Option (as defined in the Plan) pursuant to the exercise of this Option, the undersigned Option Holder and his or her spouse agree to be bound by all the terms and conditions of this Agreement and the Plan with respect to such Restorative Option. Each Restorative Option that may result from the exercise of this Option shall be deemed to be coupled with a SAR identical in terms with the original SAR provided for in Section 1(b) of this Agreement, except that (i) the exercise price per share of such SAR shall be equal to the fair market value of one share of the Company’s common stock on the date of the exercise giving rise to such Restorative Option, and (ii) such SAR shall fully vest six months after its inception. No Restorative Option shall be granted with respect to any Constructive or Actual Delivery of Mature Shares (as defined in the Plan), or any shares withheld, in either case to pay any applicable withholding taxes that arise out of an exercise of the SAR.

15. Execution. This Option and SAR have been granted, executed and delivered as of the day and year first above written at Chicago, Illinois, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the state of Illinois without application of its conflicts of laws principles.

16. Miscellaneous. This Agreement, together with the Plan, is the entire agreement of the parties with respect to the Option and SAR granted hereby and may not be amended except in a writing signed by both Unitrin, Inc. and the Option Holder or his/her Representative.

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UNITRIN, INC.		OPTION HOLDER
By:
	«Authorized Officer»	«name»
By his or her signature below, the spouse of the Option Holder agrees to be bound by all of the terms and conditions of the foregoing Non-Qualified Stock Option and SAR Agreement.
		Print Name

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EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Richard C. Vie, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Unitrin, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 27, 2004

/s/ Richard C. Vie

Richard C. Vie

Chairman of the Board and

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Eric J. Draut, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Unitrin, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 27, 2004

/s/ Eric J. Draut

Eric J. Draut

Executive Vice President and

Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification of CEO Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Unitrin, Inc. (the “Company”) for the quarterly period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Richard C. Vie, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Richard C. Vie
Name:	Richard C. Vie
Title:	Chairman of the Board and Chief Executive Officer
Date:	October 27, 2004

EX-32.2

Exhibit 32.2

Certification of CFO Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Unitrin, Inc. (the “Company”) for the quarterly period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Eric J. Draut, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Eric J. Draut
Name:	Eric J. Draut
Title:	Executive Vice President and Chief Financial Officer
Date:	October 27, 2004