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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549







FORM 10-Q



|       |                                                                                                                                            
|------ | -------------------------------------------------------------------------------------------------------------------------------------------
|[ X]   | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended  September 30, 2005
|OR    
|[    ] | Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from:  ____to______          



Commission File Number:  001-05270



AMERICAN INDEPENDENCE CORP.

(Exact name of registrant as specified in its charter)



|                                                               |                                     
|-------------------------------------------------------------- | ------------------------------------
|Delaware                                                       | 11-1817252                          
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
|                                                               |                                     
|485 Madison Avenue, New York, NY 10022                         | 10022                               
|(Address of principal executive offices)                       | (Zip Code)                          



Registrant's telephone number, including area code:  (212) 355-4141



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 [  ]



Indicate by check mark whether the registrant is a  shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes [   ] No [X]



Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.





|                              |                                   
|----------------------------- | ----------------------------------
|Class                         | Outstanding at  November  9,  2005
|Common stock, $0.01 par value | 8,451,223 shares                  















|                                                                                                                         |     
|------------------------------------------------------------------------------------------------------------------------ | ----
|                                                                                                                        
|American Independence Corp. and Subsidiaries
Index                                                                       |     
|                                                                                                                         | Page
|                                                                                                                         |     
|PART I  FINANCIAL INFORMATION                                                                                           |     
|                                                                                                                         |     
|Item 1.
Financial Statements                                                                                             |     
|                                                                                                                         |     
|Consolidated Balance Sheets as of  September 30, 2005 (unaudited) and December 31, 2004                                  | 3   
|                                                                                                                         |     
|Consolidated Statements of Operations for the three months and nine months ended September 30, 2005 and 2004 (unaudited) | 4   
|                                                                                                                         |     
|Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (unaudited)                  | 5   
|                                                                                                                         |     
|Notes to Consolidated Financial Statements (unaudited)                                                                   | 6   
|                                                                                                                         |     
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations                            | 13  
|                                                                                                                         |     
|Item 3.
Quantitative and Qualitative Disclosures About Market Risk                                                       | 22  
|                                                                                                                         |     
|Item 4.   Controls and Procedures                                                                                        | 22  
|                                                                                                                         |     
|PART II  OTHER INFORMATION                                                                                              |     
|                                                                                                                         |     
|Item 1.
Legal Proceedings                                                                                                | 23  
|                                                                                                                         |     
|Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                                                      | 23  
|                                                                                                                         |     
|Item 3.
Defaults Upon Senior Securities                                                                                  | 23  
|                                                                                                                         |     
|Item 4
Submission of Matters to a Vote of Security Holders                                                               | 23  
|                                                                                                                         |     
|Item 5.
Other Information.                                                                                               | 23  
|                                                                                                                         |     
|Item 6.
Exhibits                                                                                                         | 23  
|                                                                                                                         |     
|Signatures                                                                                                               | 24  
|                                                                                                                         |     
|                                                                                                                         |     
|                                                                                                                         |     
|                                                                                                                         |     
|Copies of the Companys SEC filings can be found on its website at www.americanindependencecorp.com.                     |     
|                                                                                                                         |     





2





PART I  FINANCIAL INFORMATION

Item 1.

Financial Statements



American Independence Corp. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)



|                                     |                                                                                                           |                                                  |               |           |              |      |           |    | 
|------------------------------------ | --------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------------- | --------- | ------------ | ---- | --------- | -- | 
|                                     |                                                                                                           |                                                  | September 30, |           |             
|                                     |                                                                                                           |                                                  | 2005          |           | December 31,
|ASSETS:                              |                                                                                                           |                                                  | (Unaudited)   |           |              | 2004
|                                     | Investments:                                                                                              |                                                  |               |           |              |      |          
|                                     | Short-term investments, at amortized cost, which approximates fair value                                  |                                                  | $             | 5,207     |              | $    | 8,296    
|                                     | Fixed maturities, at fair value                                                                           |                                                  |               | 40,350    |              |      | 34,006   
|                                     | Equity securities, at fair value                                                                          |                                                  |               | 929       |              |      | 1,042    
|                                     | Other investments                                                                                         |                                                  |               | 1,139     |              |      | 1,125    
|                                     |                                                                                                           |                                                  |               |           |              |     
|                                     | Total investments                                                                                         |                                                  |               | 47,625    |              |      | 44,469   
|                                     |                                                                                                           |                                                  |               |           |              |     
|                                     | Cash and cash equivalents                                                                                 |                                                  |               | 8,440     |              |      | 3,236    
|                                     | Restricted cash ($13,243 and $13,146, respectively, restricted by related parties)                        |                                                  |               | 16,151    |              |      | 16,602   
|                                     | Accrued investment income                                                                                 |                                                  |               | 508       |              |      | 438      
|                                     | Premiums receivable                                                                                       |                                                  |               | 2,352     |              |      | 2,307    
|                                     | Deferred tax                                                                                              |                                                  |               | 11,659    |              |      | 13,491   
|                                     | Reinsurance recoverable ($9,599 and $11,103, respectively, due from related parties)                      |                                                  |               | 10,890    |              |      | 13,496   
|                                     | Goodwill                                                                                                  |                                                  |               | 24,154    |              |      | 24,154   
|                                     | Intangible assets                                                                                         |                                                  |               | 928       |              |      | 1,535    
|                                     | Accrued fee income ($336 and $327, respectively, due from related parties)                                |                                                  |               | 2,563     |              |      | 3,328    
|                                     | Other assets ($292 and $0, respectively, due from related parties)                                        |                                                  |               | 2,026     |              |      | 1,339    
|                                     |                                                                                                           |                                                  |               |           |              |     
|                                     | Total assets                                                                                              |                                                  | $             | 127,296   |              | $    | 124,395  
|                                     |                                                                                                           |                                                  |               |           |              |     
|LIABIITIES AND STOCKHOLDERS EQUITY: |                                                                                                           |                                                  |               |           |              |     
|                                     | LIABILITIES:                                                                                              |                                                  |               |           |              |      |          
|                                     | Insurance reserves ($16,706 and $18,566, respectively, due to related parties)                            |                                                  | $             | 19,238    |              | $    | 22,240   
|                                     | Premium and claim funds payable ($13,243 and $13,146, respectively, due to related parties)               |                                                  |               | 16,151    |              |      | 15,802   
|                                     | Amount due to brokers                                                                                     |                                                  |               | 1,506     |              |      | 206      
|                                     | Accounts payable, accruals and other liabilities ($2,885 and $1,783 respectively, due to related parties) |                                                  |               | 5,534     |              |      | 4,254    
|                                     | Income taxes payable                                                                                      |                                                  |               | 230       |              |      | 164      
|                                     | Restructuring accrual                                                                                     |                                                  |               | -         |              |      | 300      
|                                     | Net liabilities associated with discontinued operations                                                   |                                                  |               | 856       |              |      | 936      
|                                     |                                                                                                           |                                                  |               |           |              |     
|                                     | Total liabilities                                                                                         |                                                  |               | 43,515    |              |      | 43,902   
|                                     |                                                                                                           |                                                  |               |           |              |     
|                                     | Minority interest                                                                                         |                                                  |               | 4,026     |              |      | 4,026    
|                                     |                                                                                                           |                                                  |               |           |              |     
|STOCKHOLDERS EQUITY:                |                                                                                                           |                                                  |               |           |              |     
|                                     | Preferred stock, $0.10 par value, 1,000 shares designated no                                              |                                                  |               |           |              |      |          
|                                     |                                                                                                           | shares issued and outstanding                    |               |           | -            |      |           | - 
|                                     | Common stock, $0.01 par value, 15,000,000 shares authorized;                                              |                                                  |               |           |              |      |          
|                                     |                                                                                                           | 9,180,695 shares issued; 8,451,223 and 8,438,889 |               |           |              |      |           |   
|                                     |                                                                                                           | shares outstanding, respectively                 |               |           | 92           |      |           | 92
|                                     | Additional paid-in capital                                                                                |                                                  |               | 479,158   |              |      | 479,017  
|                                     | Accumulated other comprehensive loss                                                                      |                                                  |               | (773)     |              |      | (285)    
|                                     | Treasury stock, at cost, 729,472 shares and 741,806 shares, respectively                                  |                                                  |               | (8,730)   |              |      | (8,877)  
|                                     | Accumulated deficit                                                                                       |                                                  |               | (389,992) |              |      | (393,480)
|                                     | Total Stockholders Equity                                                                                |                                                  |               | 79,755    |              |      | 76,467   
|                                     | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                |                                                  | $             | 127,296   |              | $    | 124,395  





See accompanying notes to consolidated financial statements.









3









American Independence Corp. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

|                                                    |                                                                                                                       |                                  |                                 |        |        |        |        |        |       
|--------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | -------------------------------- | ------------------------------- | ------ | ------ | ------ | ------ | ------ | ------
|                                                    |                                                                                                                       | Three Months Ended September 30, | Nine Months Ended September 30,
|                                                    |                                                                                                                       | 2005                             |                                 | 2004   |        | 2005   |        | 2004  
|REVENUES:                                           |                                                                                                                       |                                  |                                 |        |        |        |        |       
|                                                    | Premiums earned ($14,417, $14,108,  $41,398 and $36,263 respectively, from related parties)                           | $                                | 16,959                          | $      | 16,581 | $      | 49,309 | $      | 43,753
|                                                    | MGU fee income ($2,696, $3,185, $8,091 and $9,566,  respectively, from related parties)                               |                                  | 3,546                           |        | 4,275  |        | 10,890 |        | 13,164
|                                                    | Net investment income                                                                                                 |                                  | 624                             |        | 597    |        | 1,754  |        | 1,702 
|                                                    | Net realized gains                                                                                                    |                                  | 36                              |        | 89     |        | 250    |        | 345   
|                                                    | Other income                                                                                                          |                                  | 14                              |        | 37     |        | 106    |        | 47    
|                                                    |                                                                                                                       |                                  |                                 |        |        |        |        |       
|                                                    |                                                                                                                       | 21,179                           |                                 | 21,579 |        | 62,309 |        | 59,011
|EXPENSES:                                           |                                                                                                                       |                                  |                                 |        |        |        |        |       
|                                                    | Insurance benefits, claims and reserves ($10,024, $8,948, $27,680 and $23,116 respectively, from related parties)     |                                  | 11,584                          |        | 10,731 |        | 31,760 |        | 28,074
|                                                    | Selling, general and administrative expenses ($3,957, $4,175, $13,798 and $11,507, respectively from related parties) |                                  | 7,315                           |        | 7,484  |        | 23,423 |        | 21,336
|                                                    | Amortization and depreciation                                                                                         |                                  | 275                             |        | 431    |        | 825    |        | 1,234 
|                                                    | Non-cash compensation expense                                                                                         |                                  | 63                              |        | 86     |        | 165    |        | 353   
|                                                    | Minority interest                                                                                                     |                                  | 132                             |        | 184    |        | 440    |        | 517   
|                                                    |                                                                                                                       |                                  |                                 |        |        |        |        |        |       
|                                                    |                                                                                                                       | 19,369                           |                                 | 18,916 |        | 56,613 |        | 51,514
|                                                    |                                                                                                                       |                                  |                                 |        |        |        |        |       
|Income from continuing operations before income tax |                                                                                                                       | 1,810                            |                                 | 2,663  |        | 5,696  |        | 7,497 
|Provision for income taxes                          |                                                                                                                       | 678                              |                                 | 1,001  |        | 2,149  |        | 2,912 
|                                                    |                                                                                                                       |                                  |                                 |        |        |        |        |       
|Income from continuing operations, net of tax       |                                                                                                                       | 1,132                            |                                 | 1,662  |        | 3,547  |        | 4,585 
|                                                    |                                                                                                                       |                                  |                                 |        |        |        |        |        |       
|(Loss) gain on discontinued operations, net of tax  |                                                                                                                       | (59)                             |                                 | -      |        | (59)   |        | 10    
|                                                    |                                                                                                                       |                                  |                                 |        |        |        |        |       
|Net income                                          | $                                                                                                                     | 1,073                            | $                               | 1,662  | $      | 3,488  | $      | 4,595 
|                                                    |                                                                                                                       |                                  |                                 |        |        |        |        |       
|Basic income per common share:                      |                                                                                                                       |                                  |                                 |        |        |        |        |       
|                                                    | Income from continuing operations                                                                                     | $                                | .14                             | $      | .20    | $      | .42    | $      | .54   
|                                                    | Loss on discontinued operations                                                                                       |                                  | (.01)                           |        | -      |        | (.01)  |        | -     
|                                                    | Net income applicable to common shares                                                                                | $                                | .13                             | $      | .20    | $      | .41    | $      | .54   
|                                                    |                                                                                                                       |                                  |                                 |        |        |        |       
|Shares used to compute basic income per share       |                                                                                                                       | 8,451                            |                                 | 8,436  |        | 8,447  |        | 8,432 
|                                                    |                                                                                                                       |                                  |                                 |        |        |        |       
|Diluted income per common share:                    |                                                                                                                       |                                  |                                 |        |        |        |       
|                                                    | Income from continuing operations                                                                                     | $                                | .14                             | $      | .19    | $      | .42    | $      | .54   
|                                                    | Loss on discontinued operations                                                                                       | (.01)                            |                                 | -      |        | (.01)  |        | -     
|                                                    | Net income applicable to common shares                                                                                | $                                | .13                             | $      | .19    | $      | .41    | $      | .54   
|                                                    |                                                                                                                       |                                  |                                 |        |        |        |       
|Shares used to compute diluted income per share     |                                                                                                                       | 8,530                            |                                 | 8,540  |        | 8,529  |        | 8,533 







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



4





American Independence Corp. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

|                                                                   |                                                 |                                       |          |         |          |       |  | 
|------------------------------------------------------------------ | ----------------------------------------------- | ------------------------------------- | -------- | ------- | -------- | ----- |  | 
|                                                                   |                                                 | Nine Months Ended
September 30,      
|                                                                   |                                                 | 2005                                  |          | 2004   
|                                                                   |                                                 |                                       |          |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                              |                                                 |                                       |          |        
|                                                                   | Net Income                                      | $                                     | 3,488    | $       | 4,595   
|                                                                   | Adjustments to net income:                      |                                       |          |         |         
|                                                                   | Net realized gains                              |                                       | (250)    |         | (345)   
|                                                                   | Loss (gain) on discontinued operations          |                                       | 59       |         | (10)    
|                                                                   | Amortization and depreciation                   |                                       | 825      |         | 1,234   
|                                                                   | Non-cash stock compensation expense             |                                       | 165      |         | 353     
|                                                                   | Equity gain                                     |                                       | (14)     |         | (15)    
|                                                                   | Deferred tax expense                            |                                       | 1,897    |         | 2,407   
|                                                                   |                                                 |                                       |          |         |         
|                                                                   | Change in other assets and liabilities:         |                                       |          |         |         
|                                                                   | Net sales of trading securities                 |                                       | 229      |         | 64      
|                                                                   | Change in insurance reserves                    |                                       | (3,002)  |         | 3,165   
|                                                                   | Change in  reinsurance recoverable              |                                       | 2,606    |         | (1,910) 
|                                                                   | Change in accrued fee income                    |                                       | 765      |         | 313     
|                                                                   | Change in premiums receivable                   |                                       | (45)     |         | (570)   
|                                                                   | Change in deferred tax                          |                                       | (34)     |         | (64)    
|                                                                   | Change in income tax liability, net             |                                       | (120)    |         | 265     
|                                                                   | Change in other assets and other liabilities    |                                       | 1,041    |         | (1,805) 
|                                                                   |                                                 |                                       |          |        
|Net cash provided by operating activities of continuing operations |                                                 | 7,610                                 |          | 7,677  
|Net cash used in operating activities of discontinued operations   |                                                 | (170)                                 |          | (158)  
|                                                                   |                                                 |                                       |          |        
|                                                                   |                                                 | 7,440                                 |          | 7,519  
|                                                                   |                                                 |                                       |          |        
|CASH FLOWS FROM INVESTMENT ACTIVITIES:                             |                                                 |                                       |          |        
|                                                                   | Net sales (purchases) of short-term investments |                                       | 3,247    |         | (710)   
|                                                                   | Change in due to and from brokers               |                                       | 1,300    |         | 2,169   
|                                                                   | Purchases of fixed maturities                   |                                       | (36,025) |         | (69,215)
|                                                                   | Sales and maturities of fixed maturities        |                                       | 29,116   |         | 64,305  
|                                                                   | Purchases of equity securities                  |                                       | (623)    |         | (1,229) 
|                                                                   | Sales of equity securities                      |                                       | 720      |         | 784     
|                                                                   | Purchases of fixed assets                       |                                       | (94)     |         | (183)   
|                                                                   | Business acquisitions, net                      |                                       | -        |         | (2,210) 
|                                                                   |                                                 |                                       |          |        
|Net cash used by investing activities of continuing operations     |                                                 | (2,359)                               |          | (6,289)
|                                                                   |                                                 |                                       |          |         |         
|                                                                   |                                                 |                                       |          |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                              |                                                 |                                       |          |        
|Proceeds from exercise of stock options                            |                                                 | 123                                   |          | 186    
|Net cash provided by financing activities of continuing operations |                                                 | 123                                   |          | 186    
|                                                                   |                                                 |                                       |          |         |         
|                                                                   |                                                 |                                       |          |         |         
|                                                                   |                                                 | Increase in cash and cash equivalents |          | 5,204   |          | 1,416
|                                                                   |                                                 |                                       |          |         |         
|Cash and cash equivalents, beginning of period                     |                                                 | 3,236                                 |          | 2,360  
|                                                                   |                                                 |                                       |          |        
|Cash and cash equivalents, end of period                           | $                                               | 8,440                                 | $        | 3,776  
|                                                                   |                                                 |                                       |          |        
|SUPPLEMENTAL CASH FLOW INFORMATION:                                |                                                 |                                       |          |        
|Cash paid during period for:                                       |                                                 |                                       |          |        
|                                                                   | Income taxes                                    | $                                     | 210      | $       | 191     







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





5





American Independence Corp. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)



1.    Significant Accounting Policies and Practices



(A)

Business and Organization



Since the acquisition of Independence American Holding Corp. ("IAHC") on November 14, 2002, American Independence Corp. (AMIC or the Company) has been a holding company engaged in the insurance and reinsurance business through its wholly-owned insurance company, Independence American Insurance Company (Independence American) and its managing general underwriter subsidiaries: IndependenceCare Holdings L.L.C. and its subsidiaries (collectively referred to as IndependenceCare); Risk Assessment Strategies, Inc. (RAS), Marlton Risk Group LLC (Marlton), and its 23% investment in Majestic Underwriters LLC (Majestic).  IndependenceCare, RAS and Marlton are collectively referred to as the MGU Subsidiaries.



Since November 2002, AMIC has been affiliated withIndependence Holding Company (IHC), an insurance holding company, which held 48% of AMICs outstanding common stock at September 30, 2005.  The senior management of IHC provides direction to the Company through service agreements between the Company and IHC and IHC subsidiaries.  IHC has also entered into long-term reinsurance treaties to cede Medical Stop-Loss to the Company.  Additionally, the Company began reinsuring IHCs New York statutory disability business in 2004 and IHCs employer-sponsored group major medical and Short-Term Medical (STM) business in 2005.



(B)

Principles of Consolidation and Preparation of Financial Statements



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



In the opinion of management, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been included. The consolidated results of operations for the three months and nine months ended September 30, 2005 are not necessarily indicative of the results to be anticipated for the entire year.



(C)

Reclassifications



Certain amounts in prior years' consolidated financial statements and notes thereto have been reclassified to conform to the 2005 presentation.



2.  Income Per Common Share



Included in the diluted earnings per share calculation for 2005 and 2004 are 79,000 and 104,000 shares for the three months ended September 30, 2005 and 2004, respectively, and 82,000 and 101,000 shares for the nine months ended September 30, 2005 and 2004, respectively, from the assumed exercise of options using the treasury stock method.  Net income does not change as a result of the assumed dilution of options.



3.   MGU Fee Income



MGUs are compensated in two ways.  They earn fee income based on the volume of business produced and collect profit-sharing commissions if such business exceeds certain profitability benchmarks.  The Company records regular fee income as policy premium payments are earned.  Profit-sharing commissions are accounted for beginning in the period in which the Company believes they are reasonably estimated.  Profit-sharing commissions are a function of an MGU attaining certain profitability thresholds and could greatly vary from quarter to quarter.





6





MGU fee income consisted of the following:



|                                          |   |                    |                |                   |   |        |   |       
|----------------------------------------- | - | ------------------ | -------------- | ----------------- | - | ------ | - | ------
|                                          |   | Three Months Ended |                | Nine Months Ended
|                                          |   | September 30,      |                | September 30,    
|                                          |   | 2005               |                | 2004              |   | 2005   |   | 2004  
|                                          |   |                    | (In thousands) |                   |  
|                                          |   |                    |                |                   |   |        |   |       
|MGU fee income-regular                    | $ | 3,120              | $              | 3,797             | $ | 9,348  | $ | 11,128
|                                          |   |                    |                |                   |   |        |   |       
|MGU fee income-profit-sharing commissions |   | 426                |                | 478               |   | 1,542  |   | 2,036 
|                                          |   |                    |                |                   |   |        |   |       
|                                          | $ | 3,546              | $              | 4,275             | $ | 10,890 | $ | 13,164





4.  Investments



The following table summarizes, for all securities in an unrealized loss position at September 30, 2005, the aggregate fair value and gross unrealized loss by length of time those securities have continuously been in an unrealized loss position (in thousands):



|                                         |                     |        |                     |   |            |     |                   |       |            |     |                   |        |     |     |  |  | 
|---------------------------------------- | ------------------- | ------ | ------------------- | - | ---------- | --- | ----------------- | ----- | ---------- | --- | ----------------- | ------ | --- | --- |  |  | 
|                                         | Less than 12 Months |        | 12 Months or Longer |   | Total     
|                                         | Fair
Value          |        | Unrealized Losses   |   | Fair Value |     | Unrealized Losses |       | Fair
Value |     | Unrealized Losses
|                                        
|FIXED MATURITIES:                        |                     |        |                     |   |            |     |                   |       |            |     |                  
|                                         |                     |        |                     |   |            |     |                   |       |            |     |                  
|Corporate securities                     | $                   | 14,575 |                     | $ | 243        | $   | 2,741             | $     | 190        | $   | 17,316            | $      | 433
|CMO and ABS (1)                          | 2,969               |        | 28                  |   | 2,044      |     | 78                |       | 5,013      |     | 106              
|U.S. Government and agencies obligations | 6,573               |        | 104                 |   | 879        |     | 30                |       | 7,452      |     | 134              
|GSE (2)                                  | 5,247               |        | 64                  |   | -          |     | -                 |       | 5,247      |     | 64               
|Agency MBS (3)                           |                     |        | 157                 |   |            | 1   |                   | 1,549 |            | 23  |                   | 1,706  |     | 24 
|Total, fixed maturities                  |                     | 29,521 |                     |   | 440        |     | 7,213             |       | 321        |     | 36,734            |        | 761
|EQUITY SECURITIES:                       |                     |        |                     |   |            |     |                   |       |            |     |                  
|Preferred Stock                          |                     | 770    |                     |   | 30         |     | -                 |       | -          |     | 770               |        | 30 
|                                         |                     |        |                     |   |            |     |                   |       |            |     |                   |        |    
|                                         | Total               | $      | 30,291              |   | $          | 470 | $                 | 7,213 | $          | 321 | $                 | 37,504 | $   | 791



(1)

Collateralized mortgage obligations (CMOs) and asset-backed securities (ABS).

(2)

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

(3)

Mortgage-backed securities (MBS).



The following table summarizes, for all securities in an unrealized loss position at December 31, 2004, the aggregate fair value and gross unrealized loss by length of time those securities have continuously been in an unrealized loss position (in thousands):



|                                         |                         |       |                     |     |            |   |                   |   |            |       |                   |     |    
|---------------------------------------- | ----------------------- | ----- | ------------------- | --- | ---------- | - | ----------------- | - | ---------- | ----- | ----------------- | --- | ---
|                                         | Less than 12 Months     |       | 12 Months or Longer |     | Total     
|                                         | Fair
Value              |       | Unrealized Losses   |     | Fair Value |   | Unrealized Losses |   | Fair
Value |       | Unrealized Losses
|                                        
|FIXED MATURITIES:                        |                         |       |                     |     |            |   |                   |   |            |       |                  
|                                         |                         |       |                     |     |            |   |                   |   |            |       |                  
|Corporate securities                     | $                       | 9,198 | $                   | 286 | $          | - | $                 | - | $          | 9,198 | $                 | 286
|CMO and ABS                              | 3,797                   |       | 121                 |     | 1,765      |   | 43                |   | 5,562      |       | 164              
|U.S. Government and agencies obligations | 5,800                   |       | 36                  |     | -          |   | -                 |   | 5,800      |       | 36               
|GSE                                      | 983                     |       | 6                   |     | -          |   | -                 |   | 983        |       | 6                
|Agency MBS                               | 1,878                   |       | 8                   |     | -          |   | -                 |   | 1,878      |       | 8                
|                                         | Total, fixed maturities | $     | 21,656              | $   | 457        | $ | 1,765             | $ | 43         | $     | 23,421            | $   | 500







Substantially all of the unrealized losses at September 30, 2005 and December 31, 2004 relate to investment grade securities and are attributable to changes in market interest rates subsequent to purchase.  The Company reviews its



7





investments regularly and monitors its investments for impairments.  A total of 55 securities were in a continuous unrealized loss position for less than 12 months and 19 securities for 12 months or longer as of  September 30, 2005.  A total of 46 securities were in a continuous unrealized loss position for less than 12 months and four securities 12 months or longer as of December 31, 2004.  The unrealized losses were evaluated in accordance with the Company's policy and were determined to be temporary in nature at September 30, 2005.  For all fixed maturities, there are no securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the investment.



5.  Acquisitions



Majestic

Effective July 1, 2004, a wholly-owned subsidiary of the Company acquired a 23% interest in Majestic, a Medical Stop-Loss managing general underwriter for a purchase price of $1,610,000.  Concurrently, wholly-owned subsidiaries of IHC acquired a 52% interest in Majestic.  The senior management of Majestic owns the remaining 25% interest.  This acquisition resulted in a $522,000 reduction of valuation allowance related to the deferred tax assets, with the effect being an increase to deferred tax asset and a corresponding decrease in other investments.  Under certain circumstances set forth in the Limited Liability Agreement of Majestic, the Company has the right and/or obligation to purchase some or all of the minority interest in Majestic.



The Companys investment in Majestic is carried on the equity method of accounting with the Companys share of income or loss credited or charged, as appropriate, to the Consolidated Statement of Operations with a corresponding increase or decrease to the Companys investment account. The Company also reduces its investment account for its proportionate share of the amortization expense for the intangible assets recorded in the acquisition.



ICH-MidAtlantic



On April 16, 2004, the Company expanded its business through the acquisition of substantially all of the assets of a Medical Stop-Loss managing general underwriter for a purchase price of $600,000.  The assets were acquired by IndependenceCare Underwriting ServicesMidAtlantic LLC (ICH-MidAtlantic), which is based in Baltimore, Maryland and which retained the head of marketing of the former MGU.  This acquisition resulted in goodwill in the amount of $486,000 and intangible assets in the amount of $114,000.

6.  Goodwill and Other Intangibles



The Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, effective July 1, 2002. Under SFAS No. 142, goodwill and intangible assets with indefinite lives, which consist of licenses, are not amortized but are reviewed for impairment, on a reporting unit basis, at least annually, or more frequently if indicators arise. The Company defines its reporting units on a segment basis.

The Companys intangible assets, consisting of broker/ third party relationships, are amortized over five years.



7.  Related Party Transactions



AMIC and its subsidiaries incurred expense of $136,000 for each of the three months ended September 30, 2005 and 2004, and $442,000 and $404,000 for the nine months ended September 30, 2005 and 2004, respectively, from its service agreements with IHC and its subsidiaries.  These payments reimburse IHC and its subsidiaries, at agreed upon rates including an overhead factor, for management services provided to AMIC and its subsidiaries, including accounting, legal, compliance, underwriting, and claims.



Independence American assumes premiums from related parties, and records related insurance income, expenses, assets and liabilities.  Additionally, the MGU Subsidiaries market, underwrite and provide administrative services (including premium collection, medical management and claims adjudication) for  a substantial portion of the Medical Stop-Loss business written by the insurance subsidiaries of IHC and records related income, assets and liabilities in connection with that business.  Such related party information is disclosed on the Consolidated Balance Sheets and Consolidated Statements of Operations.  The Company also contracts for several types of insurance coverage (e.g. directors and officers and professional liability coverage) jointly with IHC.   The cost of this coverage is split proportionally between the Company and IHC according to the type of risk and AMICs portion is recorded in Selling, General and Administrative Expenses.







8









8.  Discontinued Operations



Prior to becoming an insurance holding company as a result of the acquisition of Independence American Holdings Corp. (IAHC) on November 14, 2002, the Company was a holding company principally engaged in providing Internet services through the discontinued operations.  The operating results of discontinued operations have been segregated from continuing operations and are reported as a loss from discontinued operations on the consolidated statements of operations.  Although it is difficult to predict the final results, the loss on disposition from discontinued operations includes managements estimates of costs to wind down the business and costs to settle its outstanding liabilities.  The actual results could differ materially from these estimates. The estimated loss on disposition reserve for all discontinued operations is reflected in net liabilities associated with discontinued operations in the accompanying consolidated balance sheets.



(Loss) gain from discontinued operations is as follows, net of tax (in thousands):



|                                             |   |                    |   |                   |   |      |   |     
|-------------------------------------------- | - | ------------------ | - | ----------------- | - | ---- | - | ----
|                                             |   | Three Months Ended |   | Nine Months Ended
|                                             |   | September 30,      |   | September 30,    
|                                             |   | 2005               |   | 2004              |   | 2005 |   | 2004
|                                             |   |                    |   |                   |   |      |   |     
|Intellicom                                   | $ | (96)               | $ | -                 | $ | (96) | $ | 10  
|Aerzone                                      |   | 18                 |   | -                 |   | 18   |   | -   
|MTC                                          |   | 19                 |   | -                 |   | 19   |   | -   
|Net (loss) gain from discontinued operations | $ | (59)               | $ | -                 | $ | (59) | $ | 10  





Net liabilities associated with discontinued operations at September 30, 2005 and December 31, 2004 are as follows (in thousands):



|                                             |            |               |     |   |              |    
|-------------------------------------------- | ---------- | ------------- | --- | - | ------------ | ---
|                                             |            | September 30, |     |   | December 31,
|                                             |            | 2005          |     |   | 2004        
|                                             |            |               |     |   |             
|Current liabilities:                         |            |               |     |   |             
|Estimated closure costs                      | $          | 856           |     | $ | 879         
|Other accrued expenses                       |            | -             |     |   | 57          
|                                             |            |               |     |   |             
|Total liabilities                            | $          | 856           |     | $ | 936         
|                                             |            |               |     |   |             
|                                             | Intellicom | $             | 856 |   | $            | 879
|                                             | Aerzone    |               | -   |   |              | 27 
|                                             | MTC        |               | -   |   |              | 30 
|Net liabilities associated with discontinued |            |               |     |   |             
|operations                                   | $          | 856           |     | $ | 936         
|                                             |            |               |     |   |             





9.  Stock-Based Compensation and Change in Accounting Principle



On November 14, 2002, the Company adopted certain provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123).  SFAS 123 established a fair-value-based method of accounting for stock-based compensation plans.  Pursuant to the transition provisions of SFAS 123, the Company will apply the fair value method of accounting to all option grants issued on or after October 1, 2002.  The fair value method will not be applied to stock option awards granted prior to October 1, 2002.  Such awards will continue to be accounted for under the intrinsic value method pursuant to APB 25, except to the extent those prior years awards are modified subsequent to October 1, 2002.  At September 30, 2005, all such shares accounted for under APB 25 were fully vested or expired.  The Company recorded an expense of approximately $165,000 and $287,000 for the nine months ended September 30, 2005 and 2004, respectively, related to options issued under the fair value based method.  The Company recorded an expense of approximately $63,000 and $86,000 for the three months ended September 30, 2005 and 2004, respectively.  Also, for the nine months ended September 30, 2004, the Company recorded an expense of $66,000 for the re-issuance of options to a director.



9







Had the Company applied the fair value based method of accounting for stock-based compensation awards issued prior to October 1, 2002, net income and net income per share for the three months and nine months ended September 30, 2005 and 2004 would have been as follows (in thousands, except per share data):





|                                                                  |                                   |       |                   |       |      |       |       |       |      
|----------------------------------------------------------------- | --------------------------------- | ----- | ----------------- | ----- | ---- | ----- | ----- | ----- | -----
|                                                                  | Three Months Ended                |       | Nine Months Ended
|                                                                  | September 30,                     |       | September 30,    
|                                                                  |                                   | 2005  |                   | 2004  |      | 2005  |       | 2004 
|                                                                  |                                   |       |                   |       |      |       |       |      
|Net income as reported                                            | $                                 | 1,073 | $                 | 1,662 | $    | 3,488 | $     | 4,595
|Add stock-based compensation expense included in reported income  |                                   | 63    |                   | 86    |      | 165   |       | 353  
|Deduct stock-based compensation expense determined under the fair |                                   |       |                   |       |      |       |       |      
|                                                                  | value based method for all awards |       | (63)              |       | (86) |       | (165) |       | (270)
|Pro forma net income                                              | $                                 | 1,073 | $                 | 1,662 | $    | 3,488 | $     | 4,678
|                                                                  |                                   |       |                   |       |      |       |       |      
|Basic income per common share:                                    |                                   |       |                   |       |      |       |       |      
|                                                                  | As reported                       |       | .13               |       | .20  |       | .41   |       | .54  
|                                                                  | Pro forma                         |       | .13               |       | .20  |       | .41   |       | .55  
|                                                                  |                                   |       |                   |       |      |       |       |      
|Diluted income per common share:                                  |                                   |       |                   |       |      |       |       |      
|                                                                  | As reported                       |       | .13               |       | .19  |       | .41   |       | .54  
|                                                                  | Pro forma                         |       | .13               |       | .19  |       | .41   |       | .55  
|                                                                  |                                   |       |                   |       |      |       |       |      





10.   Restructuring Reserve



On December 28, 2000, the Companys Board of Directors approved a plan to reduce its corporate headquarters staff in conjunction with discontinuing certain businesses.  During the quarter ended September 30, 2005, the Company reversed the remaining reserve of $67,000 relating to the restructuring.  This reserve primarily related to the lease obligations of the former corporate headquarters in San Francisco, California, which expired on July 31, 2005; the Company also had an $800,000 security deposit with respect to this liability which was returned to the Company in August 2005.



11.   Commitments and Contingencies



Legal Proceedings



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



12.  Comprehensive Income



The components of comprehensive income include (i) net income or loss reported in the Consolidated Statements of Operations; and (ii) after-tax net unrealized gains and losses on securities available for sale which are reported directly in stockholders' equity. Comprehensive income for the three and nine months ended September 30, 2005 and 2004 is as follows (in thousands):





|                          |                    |       |                   |       |   |       |   |      
|------------------------- | ------------------ | ----- | ----------------- | ----- | - | ----- | - | -----
|                          | Three Months Ended |       | Nine Months Ended
|                          | September 30,      |       | September 30,    
|                          |                    | 2005  |                   | 2004  |   | 2005  |   | 2004 
|                          |                    |       |                   |       |   |       |   |      
|Net income                | $                  | 1,073 | $                 | 1,662 | $ | 3,488 | $ | 4,595
|Unrealized gains (losses) |                    | (611) |                   | 421   |   | (488) |   | (186)
|                          |                    |       |                   |       |   |       |   |      
|Comprehensive income      | $                  | 462   | $                 | 2,083 | $ | 3,000 | $ | 4,409





10





13.   Segment Information

Management presents its segment information to show its insurance company, Independence American, operation separately from its MGU subsidiaries and Corporate, which is how management currently views its operations.  Segment information is as follows (in thousands):



|                                         |                    |                    |  |   |                   |  |   |         |  |   |         | 
|---------------------------------------- | ------------------ | ------------------ |  | - | ----------------- |  | - | ------- |  | - | ------- | 
|                                         |                    | Three Months Ended |  |   | Nine Months Ended
|                                         |                    | September 30,      |  |   | September 30,    
|                                         |                    | 2005               |  |   | 2004              |  |   | 2005    |  |   | 2004   
|                                         |                    |                    |  |   |                   |  |   |         |  |   |        
|Revenues:                                |                    |                    |  |   |                   |  |   |         |  |   |        
|Independence American                    | $                  | 17,562             |  | $ | 17,126            |  | $ | 50,881  |  | $ | 45,361 
|MGU Subsidiaries                         |                    | 3,617              |  |   | 4,334             |  |   | 11,161  |  |   | 13,249 
|Corporate                                |                    | (36)               |  |   | 30                |  |   | 17      |  |   | 56     
|Net realized gains                       |                    | 36                 |  |   | 89                |  |   | 250     |  |   | 345    
|                                         |                    |                    |  |   |                   |  |   |         |  |   |        
|                                         | $                  | 21,179             |  | $ | 21,579            |  | $ | 62,309  |  | $ | 59,011 
|                                         |                    |                    |  |   |                   |  |   |         |  |   |        
|Income (loss) from continuing operations |                    |                    |  |   |                   |  |   |         |  |   |        
|                                         | before income tax: |                    |  |   |                   |  |   |         |  |   |         | 
|Independence American                    | $                  | 1,024              |  | $ | 1,555             |  | $ | 3,390   |  | $ | 3,716  
|MGU Subsidiaries                         |                    | 963                |  |   | 1,583             |  |   | 3,244   |  |   | 5,093  
|Corporate                                |                    | (213)              |  |   | (564)             |  |   | (1,188) |  |   | (1,657)
|Net realized gains                       |                    | 36                 |  |   | 89                |  |   | 250     |  |   | 345    
|                                         |                    |                    |  |   |                   |  |   |         |  |   |        
|                                         | $                  | 1,810              |  | $ | 2,663             |  | $ | 5,696   |  | $ | 7,497  



14.  Recent Accounting Pronouncements





In May 2005, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle.  SFAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement when the pronouncement does not include specific transition provisions.  SFAS No. 154 requires retrospective application of changes in accounting principle to prior periods financial statements unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. APB No. 20 previously required that most voluntary changes in accounting principle be recognized by including the cumulative effect of the change in net income for the period of the change in accounting principle.  SFAS No. 154 carries forward without change the guidance contained in APB No. 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate.  SFAS No. 154 also carries forward the guidance in APB No. 20 requiring justification of a change in accounting principle on the basis of preferability.  SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with early adoption permitted.  The Companys adoption of SFAS No. 154 is not expected to affect its financial condition or results of operations.



In December 2004, the FASB issued SFAS No. 123 (revised 2004) ("SFAS No. 123R"), "Share-Based Payment" which revised SFAS No. 123, "Accounting for Stock-Based Compensation. This statement supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123R addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of operations. The revised statement is effective as of the first fiscal year beginning after June 15, 2005. The Company already applies the fair value based method of accounting for all stock based compensation issued after October 1, 2002.   At September 30, 2005 all such shares accounted for under APB 25 were fully vested or expired.  Therefore, there will be no impact upon adoption of SFAS No. 123R.





11





FASB Staff Position No. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (the FSP), was issued on November 3, 2005 and addresses the determination of when an investment is considered impaired; whether the impairment is other than temporary; and how to measure an impairment loss. The FSP also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment on a debt security, and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP replaces the impairment guidance in EITF Issue No. 03-1 with references to existing authoritative literature concerning other-than-temporary determinations (principally SFAS No. 115 and SEC Staff Accounting Bulletin 59). Under the FSP, impairment losses must be recognized in earnings equal to the entire difference between the securitys cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. The FSP also requires that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale.  The FSP is effective for reporting periods beginning after December 15, 2005. The Company does not expect that the application of the FSP will have a material impact on its financial condition, results of operations or financial statement disclosures.





12





Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations



This Form 10-Q contains forward-looking statements that involve risks and uncertainties.  The actual consolidated results of American Independence Corp.(AMIC) and Subsidiaries (collectively referred to as the "Company") could differ significantly from those set forth herein.  Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Factors Affecting the Companys Operating Results" as set forth in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as those discussed elsewhere in this quarterly report.  Statements contained herein that are not historical facts are forward-looking statements that are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995.  Words such as "believes", "anticipates", "expects", "intends", estimates, "likelihood", unlikelihood, assessment, and foreseeable and other similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.  A number of important factors could cause the Company's actual results for the year ending December 31, 2005, and beyond to differ materially from past results and those expressed or implied in any forward-looking statements made by the Company, or on its behalf.  The Company undertakes no obligation to release publicly the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.



The following discussion of the financial condition and results of operations of the Company should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company and the related Notes thereto appearing in our annual report on Form 10-K for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission and our Consolidated Financial Statements and related Notes thereto appearing elsewhere in this quarterly report.

Overview

The Company is an insurance holding company engaged in the insurance and reinsurance business through its wholly-owned insurance company, Independence American Insurance Company (Independence American) and its managing general underwriter subsidiaries (the MGUs) that currently specialize in Medical Stop-Loss.   Since November 2002, AMIC has been affiliated with Independence Holding Company (IHC), which currently owns 48% of AMIC's stock, and the senior management of which provides direction to the Company through a service agreement between the Company and IHC.  The Board has given IHC approval to purchase additional shares such that IHCs ownership is no more than 49% of the Companys outstanding common stock.  IHC has also entered into long-term reinsurance treaties to cede Medical Stop-Loss to the Company.  In addition, the Company began reinsuring IHCs New York State statutory disability (DBL) business in 2004 and IHCs employer-sponsored group major medical and short-term medical business in 2005.



While management considers a wide range of factors in its strategic planning, the overriding consideration is underwriting profitability.  Managements assessment of trends in healthcare and in the Medical Stop-Loss market play a significant role in determining whether to expand Independence Americans reinsurance participation percentage or the number of programs it reinsures.  Since Independence American reinsures a portion of all of the business produced by the MGUs, and since the MGUs are also eligible to earn profit sharing commissions based on the profitability of the business they write, the MGUs also emphasize underwriting profitability.  In addition, management focuses on controlling operating costs.  By sharing employees with IHC and sharing resources among the MGUs and Independence American, AMIC strives to maximize its earnings.



As disclosed in the Companys Form 10-K, Madison National Life Insurance Company, Inc. (Madison Life), a subsidiary of IHC, and Independence American entered into a reinsurance agreement to protect Independence American against certain losses from Medical Stop-Loss business occurring during the period from January 1, 2005 to December 31, 2005. Subsequent to the filing of the Companys Form 10-K in March 2005, the parties mutually agreed to terminate the agreement as of its effective date of January 1, 2005. The parties made this determination after considering the development of our block of Medical Stop-Loss business to date.



The following are highlights of the Companys operations:



Independence American Insurance Company



·

A.M. Best rating increased to B++ (Very Good) in June 2005



·

Premiums increased 13% to $49.3 million in the nine months ended September 30, 2005 from $43.8 million for the nine months ended September 30, 2004.



13







·

During the quarter ended September 30, 2005, Independence American added Wisconsin to the states it is licensed to write insurance, bringing the total to 36 states and the District of Columbia.



·

Average percentage of Medical Stop-Loss business ceded from IHC to Independence American increased to 23% for the nine months ended September 30, 2005 from 19% the nine months ended September 30, 2004.



·

Began reinsuring 20% of IHCs New York statutory disability (DBL) business in the third quarter of 2004.



·

Began reinsuring 10% of IHCs small group major medical and short-term medical business in 2005.



·

Approved to issue short-term medical policies in 26 states, employer Medical Stop-Loss in 24 states and provider excess loss in 14 states.





MGU Division (IndependenceCare, RAS, Marlton)



·

The MGUs generated revenues of $11.2 million in the nine months ended September 30, 2005, as compared to $13.2 million in the nine months ended September 30, 2004, as a result of lower premium volume production and a reduction in profit sharing commissions due to higher loss ratios on business produced in prior treaty years.





Independence American Insurance Company





Independence American, which is domiciled in Delaware and licensed to write property and/or casualty insurance in 36 states and the District of Columbia, was upgraded to a B++ (Very Good) rating from A.M. Best Company ("A.M. Best") during the second quarter of 2005.  An A.M. Best rating is assigned after an extensive quantitative and qualitative evaluation of a companys financial condition and operating performance, and is also based upon factors relevant to policyholders, agents, and intermediaries, and is not directed toward protection of investors.  A.M. Best ratings are not recommendations to buy, sell or hold securities of the Company.  Independence American's statutory capital and surplus as of September 30, 2005 was $38,015,000.



Managing General Underwriters





IndependenceCare markets and underwrites employer Medical Stop-Loss, Provider Excess Loss, Group Life Insurance and HMO Reinsurance products for Standard Security Life Insurance Company of New York (Standard Life), a subsidiary of IHC, Madison Life, Independence American and another carrier.  IndependenceCare currently has four operating subsidiaries, IndependenceCare Underwriting Services - Minneapolis L.L.C., IndependenceCare Underwriting Services - Tennessee L.L.C., IndependenceCare Underwriting Services - Southwest L.L.C. and IndependenceCare Underwriting Services - MidAtlantic LLC.  IndependenceCare's 33 employees are responsible for marketing, underwriting, billing and collecting premiums and medically managing, administering and adjudicating claims.  RAS markets and underwrites employer Medical Stop-Loss and group life for Standard Life and another carrier. RAS, which is based in South Windsor, Connecticut, has 13 marketing, underwriting and claims personnel.  Marlton Risk Group LLC (Marlton) is an 80% owned MGU for employer Medical Stop-Loss and group life for Standard Life, Madison Life and two other carriers.  Marlton, which is based in Voorhees, New Jersey, has 31 marketing, underwriting, medical management and claims employees.  Marltons senior management owns the remaining 20%.



On July 13, 2004, the Company acquired a 23% interest in Majestic Underwriters LLC (Majestic), an employer Medical Stop-Loss MGU.  IHC owns 52% of Majestic and Majestics senior management owns the remaining 25%.  The purchase price for AMICs interest in Majestic was $1,610,000.  Majestic, which is headquartered in Troy, Michigan, has 28 marketing, underwriting, medical management and claims employees.



Discontinued Operations



Prior to becoming an insurance holding company as a result of the acquisition of Independence American Holdings Corp. on November 14, 2002, the Company was a holding company principally engaged in providing Internet services through several discontinued operations.  Discontinued operations include managements estimates of costs to wind down the business and costs to settle its outstanding liabilities.





14











Critical Accounting Policies



The preparation of consolidated financials statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of the revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company believes the following critical accounting policies are significantly affected by judgments, assumptions and estimates used in preparation of its consolidated financial statements. For a detailed discussion on the application of these and other accounting policies, see Note 2 to the Consolidated Financial Statements of the Company included in Item 8 of the annual report on Form 10-K for the fiscal year ended December 31, 2004.  Management has identified the accounting policies described below as those that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's consolidated financial statements and management's discussion and analysis.

Insurance Reserves



The Company maintains loss reserves to cover its estimated liability for unpaid losses and loss adjustment expenses, including legal and other fees, for reported and unreported claims incurred as of the end of each accounting period.  These loss reserves are based on actuarial assumptions and are maintained at levels that are estimated in accordance with GAAP.



All of the Companys policies are short-duration and are accounted for based on actuarial estimates of the amount of loss inherent in that periods claims or open claims from prior periods, including losses incurred for claims that have not been reported (IBNR). Short-duration contract loss estimates rely on actuarial observations of ultimate loss experience for similar historical events.



The two primary assumptions underlying the calculation of loss reserves for Medical Stop-Loss business are the projected net loss ratio and claim development patterns.  Reserves for Medical Stop-Loss are first set at expected levels consistent with underlying pricing assumptions  i.e. projected net loss ratio. Loss reserve estimates are more sensitive to changes in the projected net loss ratio than they are to claim development patterns. Major factors that affect the assumptions in reserving for Medical Stop-Loss relate to: (i) frequency and severity of claims; (ii) changes in medical trend resulting from the influences of underlying cost inflation, changes in utilization and demand for medical services, the impact of new medical technology and changes in medical treatment protocols; and (iii) the adherence by the MGUs that produce and administer this business to the Companys underwriting guidelines. Claim development patterns are reviewed quarterly as reserve estimates are developed and are based on recent claim development history. The Company must determine whether changes in development represent true indications of the emerging experience or are simply due to random claim fluctuations.   Predicting ultimate claims and estimating reserves in Medical Stop-Loss is more complex than first dollar medical and disability business due to the excess of loss nature of these products with very high deductibles applying to specific claims on any individual claimant and in the aggregate for a given group.  The level of these deductibles makes it more difficult to predict the amount and payment pattern of such claims.  Fluctuations in results for specific coverage are primarily due to the severity and frequency of individual claims, whereas fluctuations in aggregate coverage are largely attributable to frequency of underlying claims rather than severity. Liabilities for first dollar medical reserves and disability coverages are computed using completion factors and expected loss ratios derived from actual historical premium and claim data.



Management believes that the Company's methods of estimating the liabilities for insurance reserves provided appropriate levels of reserves at September 30, 2005 and December 31, 2004.  Changes in the Company's reserve estimates are recorded through a charge or credit to its earnings.

Premium and MGU Fee Income Revenue Recognition



Premiums from short-duration medical insurance contracts are intended to cover expected claim costs resulting from insured events that occur during a fixed period of short duration.  The Company has the ability to cancel the annual contract or to revise the premium rates at the beginning of each annual contract period to cover future insured events.  Insurance premiums from annual health contracts are collected monthly and are recognized as revenue evenly as insurance protection is provided.

Premiums related to short-term disability contracts are recognized on a pro rata basis over the applicable



15





contract term.

MGUs are compensated in two ways.  They earn fee income based on the volume of business produced and collect profit-sharing commissions if such business exceeds certain profitability benchmarks.  The Company records regular fee income as policy premium payments are earned.  Profit-sharing commissions are accounted for beginning in the period in which the Company believes they are reasonably estimable. Profit-sharing commissions are a function of an MGU attaining certain profitability thresholds and could greatly vary from quarter to quarter.



Reinsurance



Independence American is primarily a reinsurer, and currently derives most of its business from pro rata quota share reinsurance treaties with Standard Life and Madison Life which are wholly-owned subsidiaries of Independence Holding Company (IHC).  IHC owns 48% of the Companys common stock.  These treaties were entered into in 2002 and terminate on December 31, 2014, unless terminated sooner by Independence American.  Standard Life and Madison Life must cede at least 15% of their Medical Stop-Loss business to Independence American under these treaties.  Additionally, Standard Life, Madison Life and Independence American have received regulatory approval to cede up to 30% to Independence American under most of IHCs Medical Stop-Loss programs. For the nine months ended September 30, 2005 and September 30, 2004, Standard Life and Madison Life ceded an average of 22.7% and 18.9%, respectively, of their Medical Stop-Loss business to Independence American.  Commencing in July 2004, Independence American began reinsuring 20% of Standard Lifes short-term statutory disability benefit product (DBL) business.  In 2005, Standard Life and Madison Life began ceding 10% of employer-sponsored group major medical, and 10% of its individual short-term medical products (STM) to Independence American.

IHC provides the Company with pro rata quota share reinsuance on Independence Americans direct written business which accounted for approximately 3% of the Companys total direct and assumed business premiums.  Commencing in January 2004, Independence American began ceding 30% of its provider excess insurance to Madison Life.  In January 2005, Independence American increased the amount ceded to Madison Life to 55%. This treaty was entered into on January 1, 2004 and will remain in force for an indefinite period, unless terminated by either party as of any December 31. The Company is not aware of any regulatory or other restrictions on the ability of IHC to fund its obligations under agreements in which IHC reinsures such provider excess business.  Any such restrictions would at this point have a minimal impact on the Company.

Income Taxes

In assessing the realizability of deferred tax assets, management considerswhether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible.  Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.  Management believes that although sufficient uncertainty exists regarding the future realization of deferred tax assets, the valuation allowance has been adjusted to account for the expected utilization of net operating losses against future taxable income.

The Company has net operating loss carryforwards for federal income tax purposes available to reduce future income subject to income taxes.  The net operating loss carryforwards expire between 2018 and 2023.



U.S. federal and California tax laws impose substantial restrictions on the utilization of net operating loss and credit carryforwards in the event of an "ownership change" for tax purposes, as defined in Section 382 of the Internal Revenue Code. For tax purposes, an ownership change occurred during 1999 and, as a result, utilization of the net operating losses arising prior to 1999 will be subject to an annual limitation in future years.



Investments



The Company accounts for its investments in debt and equity securities under Statement of Financial Accounting Standards No. 115 ("SFAS 115"), Accounting for Certain Investments in Debt and Equity Securities. The Company has classified all of its investments as available-for-sale or trading securities. These investments are carried at fair value based on quoted market prices with unrealized gains and losses reported in either accumulated other comprehensive income (loss) in the accompanying Consolidated Balance Sheets for available-for-sale securities or as unrealized gains or losses in the accompanying Consolidated Statements of Operations for trading securities. Net realized gains and losses on investments are computed using the specific identification method and are reported in the accompanying Consolidated Statements of Operations. Declines in value judged to be other-than-temporary are determined based on the specific identification method and are reported in the accompanying Consolidated Statements



16





of Operations as net realized losses. The factors considered by management in determining when a decline is other than temporary include but are not limited to:  the length of time and extent to which the fair value has been less than cost; the financial condition and near-term prospects of the issuer; adverse changes in ratings announced by one or more rating agencies; whether the issuer of a debt security has remained current on principal and interest payments; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions; and the Company's intent and ability to hold the security for a period of time sufficient to allow for a recovery in fair value.  For securities within the scope of Emerging Issues Task Force Issue 99-20, such as purchased interest-only securities, an impairment loss is recognized when there has been a decrease in expected cash flows combined with a decline in the security's fair value below cost.

Goodwill and Other Intangibles

The Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, effective July 1, 2002. Under SFAS No. 142, goodwill and intangible assets with indefinite lives, which consist of licenses, are not amortized but are tested for impairment, on a reporting unit basis, at the end of the third quarter of each fiscal year, or more frequently if indicators arise. The Company defines its reporting units on a segment basis.

The Companys intangible assets consisting of broker/third party relationships are amortized over five years.

Discontinued Operations

The Company accounts for discontinued operations in accordance with Accounting Principles Board Opinion No. 30 ("APB 30"), Reporting the Results of Operations  Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Under APB 30, the Company accrued estimates of expected liabilities related to discontinued operations through its eventual discharge. The estimated remaining liabilities related to discontinued operations include contract terminations, litigation and loss from operations subsequent to September 30, 2002. The Company reviews the estimated closure costs liability on a quarterly basis to determine changes in the costs of the discontinued operations activities.



Results of Operations for the Three Months Ended September 30, 2005, Compared to the Three Months Ended September 30, 2004



Premiums Earned.  Premiums earned increased $378,000 to $16,959,000 for the three months ended September 30, 2005, compared to $16,581,000 for the three months ended September 30, 2004, an increase of 2%.  The Company currently assumes three lines of business from IHC. Independence American assumed 23.8% ($12,135,000) and 20.5% ($13,058,000) of IHCs Medical Stop-Loss business for the three months ended September 30, 2005 and 2004, respectively.  Medical Stop-Loss premiums decreased despite the higher percentage ceded, due to decreased production by IHC resulting from stricter underwriting guidelines.  Total premiums relating to Medical Stop-Loss were $14,658,000 and $15,531,000 for the three months ended September 30, 2005 and 2004, respectively.  Independence American began assuming 20% of IHCs DBL business effective July 1, 2004.  Premiums relating to DBL were $1,049,000 and $1,050,000 for 2005 and 2004, respectively.  Independence American began assuming 10% of IHCs small group medical business effective January 1, 2005.  Premiums relating to small group major medical were $1,188,000 and $0 for 2005 and 2004, respectively.  Independence American began writing and assuming STM business in 2005.  Premiums relating to STM were $65,000 (of which $45,000 was assumed from IHC) and $0 for 2005 and 2004, respectively.



MGU Fee Income.  MGU fee income decreased $729,000 to $3,546,000 for the three months ended September 30, 2005, compared to $4,275,000 for the three months ended September 30, 2004.  MGU fee income-regular decreased $677,000 to $3,120,000 as the MGUs have decreased their block of business in an effort to improve margins. MGU fee income-profit-sharing commission decreased $52,000 to $426,000 for the three months ended September 30, 2005, compared to $478,000 for the three months ended September 30, 2004 due to higher loss ratios experienced on the MGUs block of business in more recent treaty years.



Net Investment Income.  Net investment income increased $27,000 to $624,000 for the three months ended September 30, 2005, compared to $597,000 for the three months ended September 30, 2004, mainly due to lower yields partially offset by higher invested assets.  The return on investments of the Company was 4.5% in the three months ended September 30, 2005 and 5.3% for the comparable period in 2004.



Net Realized Gains.  Net realized gains decreased $53,000 to $36,000 for the three months ended September 30, 2005, compared to $89,000 for the same period of 2004.  The Company's decision as to whether to sell securities is based on



17





cash flow needs, investment opportunities, and economic market conditions, thus creating fluctuations in realized gains or losses from period to period.  Offsetting net realized gains for the three months ended September 30, 2004, is a realized loss of $9,000 from unrealized losses on securities that the Company deemed to be other than temporary in nature.  For the three months ended September 30, 2005, there was no realized loss from unrealized losses on securities that the Company deemed to be other than temporary in nature.



Insurance Benefits, Claims and Reserves.  Insurance, benefits claims and reserves increased $853,000 to $11,584,000 for the three months ended September 30, 2005, compared to $10,731,000 for the three months ended September 30, 2004, an increase of 8%.  The increase is primarily due to an increase in loss ratios on the Companys medical stop-loss business in 2005 as compared to 2004, due to unfavorable loss development on the 2004 treaty year recognized during the third quarter of 2005 and an increase in premiums earned.



Selling, General and Administrative.  Selling, general and administrative expenses decreased $169,000 to$7,315,000 for the three months ended September 30, 2005, compared to $7,484,000 for the three months ended September 30, 2004.  The decrease is primarily due to a franchise tax refund of $65,000 and a reversal of the restructuring reserve of $67,000.



Amortization and Depreciation.  Amortization and depreciation expense decreased $156,000 to $275,000 for the three months ended September 30, 2005, compared to $431,000 for the three months ended September 30, 2004.  The expense mainly relates to the amortization of the intangible assets for the value of broker and TPA relationships of the MGUs.  These assets were part of the purchase price adjustments for the acquisition of IAHC, Marlton, and IndependenceCare-MidAtlantic.  Amortization expense for these intangible assets will decline over the useful lives of the assets.



Non-Cash Compensation Expense Related to Stock Options.  Non-cash compensation expense related to stock options decreased $23,000 to $63,000 for the three months ended September 30, 2005, compared to $86,000 for the three months ended September 30, 2004.  This expense relates to the fair value of options issued and accounted for under SFAS No. 123.



Income Taxes.The provision for income taxes decreased $323,000 to $678,000, an effective rate of 37.5%, for the three months ended September 30, 2005, compared to $1,001,000, an effective rate of 37.6%, for the three months ended September 30, 2004.  Net income for the third quarter of 2005 and 2004 includes a non-cash provision for federal income taxes of $577,000 and $842,000, respectively.  For as long as AMIC utilizes its net operating loss carryforwards, it will not pay any income taxes, except for federal alternative minimum taxes and state income taxes.

Loss on Discontinued Operations.Loss on discontinued operations was $59,000 for the three months ended September 30, 2005, and $0 for the three months ended September 30, 2004.  The loss in 2005 was primarily the result of the re-estimation of lease costs related to the Companys discontinued Intellicom operation.



Net Income.  The Company had net income of $1,073,000, or $.13 per share, diluted, for the three months ended September 30, 2005, compared to $1,662,000 or $.19 per share, diluted, for the three months ended September 30, 2004.



Results of Operations for the Nine Months Ended September 30, 2005, Compared to the Nine Months Ended September 30, 2004



Premiums Earned.  Premiums earned increased $5,556,000 to $49,309,000 for the nine months ended September 30, 2005, compared to $43,753,000 for the nine months ended September 30, 2004, an increase of 13%.  The Company currently assumes three lines of business from IHC.  Independence American assumed 22.7% ($35,491,000) and 18.9% ($35,213,000) of IHCs Medical Stop-Loss business for the nine months ended September 30, 2005 and 2004, respectively.  Total premiums relating to Medical Stop-Loss were $43,382,000 and $42,703,000 for the nine months ended September 30, 2005 and 2004, respectively, primarily due to an increase in retention.  Independence American began assuming 20% of IHCs DBL business effective July 1, 2004.  Premiums relating to DBL were $3,081,000 and $1,050,000 for 2005 and 2004, respectively.  Independence American began assuming 10% of IHCs small group medical business effective January 1, 2005.  Premiums relating to small group major medical were $2,781,000 and $0 for 2005 and 2004, respectively.  Independence American began writing and assuming STM business effective July 1, 2005.  Premiums relating to STM were $65,000 (of which $45,000 was assumed from IHC) and $0 for 2005 and 2004, respectively.



MGU Fee Income.  MGU fee income decreased $2,274,000 to $10,890,000 for the nine months ended September 30, 2005, compared to $13,164,000 for the nine months ended September 30, 2004.  MGU fee income-regular decreased $1,780,000 to $9,348,000 as the MGUs have decreased their block of business in an effort to improve margins. MGU



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fee income-profit-sharing commission decreased $494,000 to $1,542,000 for the nine months ended September 30, 2005, compared to $2,036,000 for the nine months ended September 30, 2004, due to higher loss ratios experienced on the MGUs block of business in more recent treaty years.



Net Investment Income.  Net investment income increased $52,000 to $1,754,000 for the nine months ended September 30, 2005, compared to $1,702,000 for the nine months ended September 30, 2004, mainly due to lower yields partially offset by an increase in invested assets.  The return on investments of the Company was 4.6% in the first nine months of 2005 and 5.1% for the comparable period in 2004.



Net Realized Gains.  Net realized gains decreased $95,000 to $250,000 for the nine months ended September 30, 2005, compared to $345,000 for the same period of 2004.  The Company's decision as to whether to sell securities is based on cash flow needs, investment opportunities, and economic market conditions, thus creating fluctuations in realized gains or losses from period to period.  Offsetting net realized gains for the nine months ended September 30, 2004, is a realized loss of $53,000 from unrealized losses on securities that the Company deemed to be other than temporary in nature.  For the nine months ended September 30, 2005, there was no realized loss from unrealized losses on securities that the Company deemed to be other than temporary in nature.



Insurance Benefits, Claims and Reserves.  Insurance, benefits claims and reserves increased $3,686,000 to $31,760,000 for the nine months ended September 30, 2005, compared to $28,074,000 for the nine months ended September 30, 2004, an increase of 13%.  The increase is primarily due to an increase in premiums earned and an increase in loss ratios on the Companys Medical Stop-Loss business in the first nine months of 2005 as compared to the first nine months of 2004, due to unfavorable loss development on the 2004 treaty year partially offset by favorable loss development on the 2003 treaty year recognized during the first nine months of 2005.



Selling, General and Administrative.  Selling, general and administrative expenses increased $2,087,000 to$23,423,000 for the nine months ended September 30, 2005, compared to $21,336,000 for the nine months ended September 30, 2004.  The increase is primarily due to $2,145,000 higher commission expense incurred by Independence American resulting from an increase in premium volume in 2005.



Amortization and Depreciation.  Amortization and depreciation expense decreased $409,000 to $825,000 for the nine months ended September 30, 2005, compared to $1,234,000 for the nine months ended September 30, 2004.  The expense mainly relates to the amortization of the intangible assets for the value of broker and TPA relationships of the MGUs.  These assets were part of the purchase price adjustments for the acquisition of IAHC, Marlton, and IndependenceCare-MidAtlantic.  Amortization expense for these intangible assets will decline over the useful lives of the assets.



Non-Cash Compensation Expense Related to Stock Options.  Non-cash compensation expense related to stock options decreased $188,000 to $165,000 for the nine months ended September 30, 2005, compared to $353,000 for the nine months ended September 30, 2004.  This expense primarily relates to the fair value of options issued and accounted for under SFAS No. 123.



Income Taxes.The provision for income taxes decreased $763,000 to $2,149,000, an effective rate of 37.7%, for the nine months ended September 30, 2005, compared to $2,912,000, an effective rate of 38.8% for the nine months ended September 30, 2004.  Net income for the first nine months of 2005 and 2004 includes a non-cash provision for federal income taxes of $1,833,000 and $2,326,000, respectively.  For as long as AMIC utilizes its net operating loss carryforwards, it will not pay any income taxes, except for federal alternative minimum taxes and state income taxes.

Loss/Gain on Discontinued Operations.Loss on discontinued operations was $59,000 compared to a gain of $10,000 for the nine months ended September 30, 2004. The loss in 2005 was primarily the result of the re-estimation of lease costs related to the Companys discontinued Intellicom operations.



Net Income.  The Company had net income of $3,488,000 or $.41 per share, diluted, for the nine months ended September 30, 2005, compared to $4,595,000 or $.54 per share, diluted, for the nine months ended September 30, 2004.



Liquidity and Capital Resources



Independence American



Independence American principally derives cash flow from: (i) operations; (ii) the receipt of scheduled principal payments on its portfolio of fixed income securities; and (iii) earnings on investments.  Such cash flow is partially used to finance liabilities for insurance policy benefits and reinsurance obligations.





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Independence American maintains a revolving Letter of Credit (LOC) with a financial institution to support reinsurance obligations of Independence American in the ordinary course of business.  The LOC has an outstanding face up to $5,000,000 although Independence American has not drawn upon funds to date.  The LOC renews October 15 of each year, unless cancelled by Independence American.



Corporate



Corporate derives cash flow funds principally from: dividends and tax payments from its subsidiaries and investment income from corporate liquidity.  There are no regulatory constraints on the MGUs ability to dividend to the parent company, however, state insurance laws have restrictions relating to the ability of the parent company to use cash generated by Independence American.



Cash Flows



As of September 30, 2005 the Company had $54,559,000 of cash, cash equivalents, and investments net of amounts due to brokers compared with $47,499,000 as of December 31, 2004.



Net cash provided by operating activities of continuing operations for the nine months ended September 30, 2005 was $7,610,000.  Net cash flows were generated from premium volume and fees from MGUs, partially offset by higher claims and losses.



Net cash used by investing activities of continuing operations for the nine months ended September 30, 2005 was $2,359,000.  This resulted from purchases of fixed maturities, equity securities, and short-term investments, net of sales of all such securities.



Net cash provided by financing activities from continuing operations was $123,000 resulting from the exercise of common stock options during the nine months ended September 30, 2005.



At September 30, 2005, the Company had $16,151,000 of restricted cash at the MGUs.  The amount at the MGUs is directly offset by corresponding liabilities for Premium and Claim Funds Payable of $16,151,000.  This asset, in part, represents the premium that is remitted by the insureds and is collected by the MGUs on behalf of the insurance carriers they represent.  Each month the premium is remitted to the insurance carriers by the MGUs.  Until such remittance is made the collected premium is carried as an asset on the balance sheet of each MGU with a corresponding payable to each risk taker.  In addition to the premium being held at the MGUs, the MGUs are in possession of cash to pay claims Claim Funds.  The cash is deposited by each risk taker into a bank account that the MGUs can access.  The cash is used by the MGUs to pay claims on behalf of the risk takers.  The availability of cash enables the MGUs to reimburse claims in a timely manner.



The Company has $19,238,000 of insurance reserves that it expects to pay out of assets and cash flows from future business.  If necessary, the Company could sell its fixed maturity investments if the timing of claim payments associated with insurance resources does not coincide with future cash flows.



The Company believes it has sufficient cash to meet its currently anticipated business requirements over the next twelve months including the funding of discontinued operations, working capital requirements, and capital investments. The Company expects continued cash usage for its discontinued operations for the year ending December 31, 2005.



The relative maturity distribution of the Companys contractual obligations at September 30, 2005 is not materially different than that reported in the schedule of such obligations at December 31, 2004, which was included in Item 7 of the Companys Annual Report on Form 10-K.



Investment Impairments



The Company reviews its investments regularly and monitors its investments continually for impairments.  The Company's gross unrealized losses on investments totaled $791,000 at September 30, 2005.  Substantially all of these securities were investment grade.  The unrealized losses have been evaluated in accordance with the Company's policy and were determined to be temporary in nature at  September 30, 2005.  The Company holds all fixed maturities and preferred stock as available-for-sale and accordingly marks such investments to market through accumulated other comprehensive income (loss).





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Outlook



Independence American, which is domiciled in Delaware, is licensed to write property and/or casualty insurance in 36 states and the District of Columbia, and has improved to a B++ (Very Good) rating from A.M. Best Company, Inc. ("A.M. Best"). An A.M. Best rating is assigned after an extensive quantitative and qualitative evaluation of a company's financial condition and operating performance, and is also based upon factors relevant to policyholders, agents, and intermediaries, and is not directed towards protection of investors. A.M. Best ratings are not recommendations to buy, sell or hold securities of the Company.



Independence American is primarily a reinsurer, and currently derives most of its Medical Stop-Loss business from pro-rata quota share reinsurance treaties (the IHC Treaties) with Standard Life and Madison Life.  IHC owns 48% of the Companys common stock.  The IHC Treaties were entered into in 2002 and terminate on December 31, 2014, unless terminated sooner by Independence American.



Upon renewal of each of the programs underlying the IHC Treaties, Standard Life and Madison Life determine the maximum percentage of risk to be offered to Independence American and Independence American determines the percentage that it wishes to accept. A typical pro rata quota share reinsurance treaty is for a twelve month period in which the ceding company and the reinsurer share the premiums as well as the losses and expenses in an agreed proportion for all policies written with an effective date within this period.  Most treaties run from January 1 to December 31, but others could begin and end in other periods.  Therefore the percentage ceded could change as the year progresses.



With respect to the IHC Treaties, the Companys operating results are affected by the following factors: (i) the percentage of business ceded to Independence American pursuant to the IHC Treaties; (ii) the amount of gross premium written by Standard Life and Madison Life that can be ceded pursuant to the IHC Treaties; and (iii) the profitability of the business ceded.



IHC must cede a minimum of 15% of its Medical Stop-Loss business to Independence American, and IHC has increased this percentage each year since inception of the IHC Treaties.   Standard Life, Madison Life and Independence American have received regulatory approval for Standard Life and Madison Life to cede up to 30% to Independence American under most of IHCs Medical Stop-Loss programs. For the nine months ended September 30, 2005 and September 30, 2004, Standard Life and Madison Life ceded an average of 22.7% and 18.9%, respectively, of their Medical Stop-Loss business to Independence American.  This increase in ceding percentage combined with the DBL and new group major medical and STM products ceded from IHC accounts for the majority of the 13% increase in premiums earned.



Premiums increased 59% from the twelve months ended December 31, 2004 as compared to the same period of 2003.  The Company does not expect a similar increase in premiums earned in 2005, due to a smaller increase in the percentage ceded under the IHC Treaties during 2005 as compared to the increase in prior years.  In addition to the increase in the percentage of business IHC ceded to Independence American, IHC reported that in 2004 it wrote $291 million of gross Medical Stop-Loss premiums, an increase of 13% from the $257 million it wrote in 2003.  IHC has also reported, and the MGUs also expect, that gross Medical Stop-Loss premiums will decrease in 2005 as a result of writing and/or renewing fewer policies due to stricter underwriting guidelines imposed by IHC, partially offset by increases in rates on the policies retained.  This will result in a decrease in the gross amount of premium available to be ceded to Independence American and will adversely affect MGU income in 2005. Although, there is no guaranty that IHC will continue to increase the amount of business ceded to Independence American or, in fact, cede in excess of 15%, the AMIC MGUs are the largest producers of Medical Stop-Loss business for IHC, controlling a majority of this premium in 2005.



If Independence American, Standard Life, and Madison Life had agreed to increase the average amount ceded to Independence American by 1% (from the 19.3% ceded for the twelve months ended December 31, 2004) and Standard Lifes and Madison Lifes gross written premium had remained unchanged, Independence Americans premium would have increased by approximately $2.5 million, which is approximately 4% of total net premiums earned for the year ended December 31, 2004. That premium, however, would not have flowed directly to pre-tax operating income because of insurance benefits, claims and reserves and other expenses attributable to the increase in premiums.



The Medical Stop-Loss market is generally cyclical in nature. When a product experiences several consecutive years of underwriting profitability, it is not unusual for there to be more competitors entering that line which can increase pressure on pricing and create a softer market. The Medical Stop-Loss market began to soften in 2003 and less favorable conditions continued through 2005. As a result of these market conditions, the rate that the carriers that cede business to the Company were able to charge for Medical Stop-Loss increased at a lesser rate in recent years



21





however, increases in medical trend have also been held in check to a greater extent and deductibles and attachment points have increased. This reduces the risk takers overall risk exposure.  Despite these market conditions, the Company produced profitable results in 2003 and 2004, and expects continued profitability in 2005.  However, profit sharing commissions for 2005 and future years will be adversely affected by higher loss ratios for business written in 2003 and 2004 for certain of the MGUs.  The Company remains optimistic that it will continue to produce profitable results due to stricter underwriting guidelines.



Therefore, the impact on the Companys operating results relating to the IHC Treaties can be summarized as follows: (i) assuming continuing profitability of the underlying business, the Companys results would be positively impacted if IHC were to cede a higher percentage and  adversely affected if IHC were to cede less; (ii) Independence Americans income and the AMIC MGUs income would be negatively impacted if IHCs gross premium were to decrease,  and (iii) Independence Americans profitability and the AMIC MGUs profit sharing income in future years would be positively affected if IHC were to produce higher profit margins, and negatively impacted if loss ratios increase.



Commencing in July 2004, Independence American began reinsuring 20% of Standard Lifes DBL.  Standard Life is not contractually obligated to continue to cede this business to Independence American after termination of the current treaty year.  In 2005, Standard Life and Madison Life began ceding 10% of employer-sponsored group major medical, and 10% of its individual short-term medical products (Short-Term) to Independence American. Standard Life and Madison Life are not contractually obligated to continue to cede this business to Independence American after termination of the current treaty years.  The Company does not expect the amount ceded to it from IHC will change significantly in the next twelve months.



Item 3.

Quantitative and Qualitative Disclosures about Market Risk



Risk Management



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



The Company monitors its investment portfolio on a continuous basis and believes that the liquidity of the Company will not be adversely affected by its current investments.



In the Company's analysis, a 100 to 200 basis point change in interest rates on the Companys liabilities would not be expected to have a material adverse effect on the Company and is not materially different than the expected change at December 31, 2004 included in Item 7 of the Companys Annual Report on Form 10-K. With respect to its investments, the Company employs (from time to time as warranted) investment strategies to mitigate interest rate and other market exposures.



Item 4.  Controls and Procedures



The President and the Chief Financial Officer of the Company (its principal executive officer and its principal financial officer, respectively) have concluded, based on their evaluation as of the end of the period covered by this Report, that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions (SEC) rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company's management, including the President and the Chief Financial Officer, as appropriate, and allow timely decisions regarding required disclosure.



There have not been any changes in the Company's internal control over financial reporting during the fiscal quarter ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.





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PART II - OTHER INFORMATION





Item 1.

Legal Proceedings



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



Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds



Not Applicable



Item 3.

Defaults Upon Senior Securities



Not Applicable



Item 4.

Submission of Matters to a Vote of Security Holders



Not Applicable



Item 5.

Other Information



Not Applicable



Item 6.  Exhibits



|     |  |                                                                                                                        
|---- |  | -----------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                 
|31.2 |  | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                 
|32.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|32.2 |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.









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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) 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.



AMERICAN INDEPENDENCE CORP.

(Registrant)



|                                                                                    |       |                  
|----------------------------------------------------------------------------------- | ----- | -----------------
|/s/ Roy T.K. Thung__________________________
Roy T.K. Thung
Chief Executive Officer | Date: | November  9, 2005











|                                                                                                          |       |                 
|--------------------------------------------------------------------------------------------------------- | ----- | ----------------
|/s/Teresa A. Herbert________________________
Teresa A. Herbert
Vice President and Chief Financial Officer | Date: | November 9, 2005







24