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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-K



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|x | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from
                         to

Commission file number 033-37576



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Union Security Insurance Company

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|IOWA                                                           |  | 81-0170040                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|6941 VISTA DRIVE WEST DES MOINES, IOWA                         |  | 50266                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code:

(651) 361-4000

Securities registered
pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None



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Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ̈No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ̈No x

NoteChecking the box above will not relieve any registrant required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act from their obligations under those Sections.

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 if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

 ̈Large accelerated
filer ̈Accelerated filer        x  Non-accelerated filer

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates is not applicable as no public market exists for the voting
stock of the registrant.

As of February 15, 2007, there were 1,000,000 shares of common stock of the registrant outstanding, all of
which are owned by Assurant, Inc.

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)(A) AND (B) OF FORM 10-K
AND IS FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

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UNION SECURITY INSURANCE COMPANY

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31, 2006

TABLE OF CONTENTS



|           |  |                                                                                                              |  |           
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----------
|ItemNumber |  |                                                                                                              |  | PageNumber
|PART I    
|1.         |  | Business                                                                                                     |  | 2         
|1A.        |  | Risk Factors                                                                                                 |  | 4         
|1B.        |  | Unresolved Staff Comments                                                                                    |  | 6         
|2.         |  | Properties                                                                                                   |  | 6         
|3.         |  | Legal Proceedings                                                                                            |  | 6         
|4.         |  | Submission of Matters to a Vote of Security Holders                                                          |  | 6         
|          
|PART II   
|5.         |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 7         
|6.         |  | Selected Financial Data                                                                                      |  | 7         
|7.         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 7         
|7A.        |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 8         
|8.         |  | Financial Statements and Supplementary Data                                                                  |  | 10        
|9.         |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 10        
|9A.        |  | Controls and Procedures                                                                                      |  | 10        
|9B.        |  | Other Information                                                                                            |  | 11        
|          
|PART III  
|10.        |  | Directors, Executive Officers and Corporate Governance                                                       |  | 12        
|11.        |  | Executive Compensation                                                                                       |  | 12        
|12.        |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 12        
|13.        |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 12        
|14.        |  | Principal Accounting Fees and Services                                                                       |  | 12        
|          
|PART IV   
|15.        |  | Exhibits and Financial Statement Schedules                                                                   |  | 13        
|Signatures |  | 15                                                                                                          



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FORWARD-LOOKING STATEMENTS

Some of the statements under Business, Managements Discussion and Analysis of Financial Condition and Results of
Operations, and elsewhere in this report may contain forward-looking statements which reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by
the use of forward-looking words such as outlook, believes, expects, potential, continues, may, will, should, seeks,
approximately, predicts, intends, plans, estimates, anticipates or the negative version of those words or other comparable words. Any forward-looking statements contained in
this report are based upon our historical performance and on current plans, estimates and expectations. The inclusion of this forward looking information should not be regarded as a representation by us or any other person that the future plans,
estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ
materially from those indicated in this report. We believe that these factors include but are not limited to those described under the subsection entitled Risk Factors and Managements Discussion and Analysis of Financial
Condition and Results of Operations. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. We undertake no obligation to publicly update or
review any forward-looking statement, whether as a result of new information, future developments or otherwise.

If one or more of
these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statements you read in this report reflect our current views
with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, financial condition, growth strategy and liquidity.



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PART I

Item 1.Business

Legal Organization

Union Security Insurance Company (formerly known as Fortis Benefits Insurance Company) is a stock life insurance company formed in 1910 and organized
under the laws of the State of Iowa. Since 1984, it has been an indirect wholly owned subsidiary of Assurant, Inc. (Assurant), which owns and operates companies that provide specialty insurance products and related services in North
America and selected other markets. Assurant is traded on the New York Stock Exchange under the symbol AIZ.

In this report, references to
the Union Security, we, us or our refer to Union Security Insurance Company.

Effective
December 31, 2006, International Dental Plans, Inc. (IDP), an indirect wholly-owned subsidiary of Assurant, was merged into the operations of Union Security. Accordingly, all prior period amounts have been restated to conform to the
2006 presentation.

Effective April 1, 2006, Union Security transferred assets and liabilities related to its Canadian operations to
Assurant Life of Canada (ALOC) for the purpose of re-domesticating Assurants Canadian operations. ALOC is also an indirect wholly-owned subsidiary of Assurant.

Effective November 9, 2005, Union Security signed an agreement with Forethought Life Insurance Company (Forethought) to sell via
reinsurance new preneed insurance policies written as of October 1, 2005 in the United States via independent funeral homes and funeral home chains other than those owned and operated by Service Corporation International (SCI).
Union Security will receive payments from Forethought over the next ten years based on the amount of business transitioned to Forethought.

Effective November 1, 2005, eight dental companies, all indirectly wholly owned subsidiaries of Assurant (the Dental Companies), were merged into the operations of Union Security. All of the Dental Companies engaged in the
business of marketing prepaid dental care. The assets, liabilities, and operations of the Dental Companies for the year ended December 31, 2005 are included in our consolidated financial statements. Assets and liabilities were included at the
current book value of the Dental Companies as of January 1, 2005. The Dental Companies had a combined net income of $3,358 for the year ended December 31, 2004. This amount is not included in our consolidated statements of operations for
that period.

Dollar amounts are presented in U.S. dollars and all amounts are in thousands, except number of shares and number of
employees.

Business Organization

Union Security is licensed to sell life, health and annuity insurance in the District of Columbia and in all states except New York. We write insurance products that are marketed by Assurants business segments (see Assurants
annual report on Form 10-K for the fiscal year ended December 31, 2006 for a full description of each of these businesses). We perform substantially all of the operations of the Assurant Employee Benefits segment. We market, sell and administer
directly the group disability, group life and certain of the group dental insurance products, and we manage other Assurant subsidiaries that provide the prepaid dental products. With respect to the Assurant Health segment, we issue small group
health insurance policies that are sold through an independent agency. Finally, with respect to the Assurant Solutions segment, we issue accidental death and dismemberment policies for which the segment performs the selling, marketing, and
administration functions. We discontinued marketing all pre-funded life insurance business as a result of two transactions.



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First, in November of 2005 we signed an agreement with Forethought to sell via reinsurance new preneed insurance policies written as of October 1, 2005
in the United States via independent funeral homes and funeral home chains other than those owned and operated by SCI. We will receive payments from Forethought over the next ten years based on the amount of business transitioned to Forethought.
Second, in April of 2006 we transferred assets and liabilities related to our Canadian operations to ALOC. ALOC is also an indirect wholly-owned subsidiary of Assurant. Of our total gross revenues generated during 2006, approximately 48% was from
the Assurant Employee Benefits segment, approximately 39% was from the Assurant Solutions segment and the remaining from the Assurant Health segment.

As an indirect wholly owned subsidiary of Assurant, Union Security does not have any publicly issued equity or debt securities. We are, however, subject to certain filing requirements of the Securities Exchange Act of
1934, as amended (the Exchange Act), because we have issued certain variable and market value adjusted insurance contracts, which are required to be registered under the Securities Act of 1933, as amended (the Securities
Act). Effective April 1, 2001, Assurant exited this line of business and sold the business segment, then referred to as Fortis Financial Group (FFG), to The Hartford Financial Services Group, Inc. and certain of its
subsidiaries (The Hartford). This sale was accomplished by means of reinsurance and modified coinsurance. As a result, The Hartford is contractually responsible for servicing the insurance contracts, including the payment of benefits,
oversight of investment management, overall contract administration and funding of reserves. If The Hartford fails to fulfill its obligations, however, we will be obligated to perform the services and make the required payments and funding.

Union Security was redomesticated to Iowa from Minnesota in 2004.

As of February 15, 2007, we had approximately 1,700 employees.

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to such reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are
available free of charge at the Securities and Exchange Commissions (SEC) website at www.sec.gov.

For additional
information that relates to our business, we refer you to Assurants annual report on Form 10-K for the fiscal year ended December 31, 2006, filed with the SEC and available on the SECs website at www.sec.gov or through
Assurants website at www.assurant.com.



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Item 1A.Risk Factors

Union Security is subject to risks associated with our
business. These risks include, among others:



| |  |  | Reliance on Relationships with Significant Clients, Distributors and Other Parties. If our significant clients, distributors and other parties with
which we do business decline to renew or seek to terminate our relationships or contractual arrangements, our results of operations and financial condition could be materially adversely affected. We are also subject to the risk that these parties
may face financial difficulties, reputational issues or problems with respect to their own products and services, which may lead to decreased sales of products and services.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Failure to Attract and Retain Sales Representatives or Develop and Maintain Distribution Sources. Our sales representatives interface with clients and
third party distributors. Our inability to attract and retain our sales representatives or an interruption in, or changes to, our relationships with various third-party distributors could impair our ability to compete and market our insurance
products and services and materially adversely affect our results of operations and financial condition. In addition, our ability to market our products and services depends on our ability to tailor our channels of distribution to comply with
changes in the regulatory environment.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Effect of General Economic, Financial Market and Political Conditions. Our results of operations and financial condition may be materially adversely
affected by general economic, financial market and political conditions, including:
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | insurance industry cycles;
| | - |  | --------------------------



| |  |  | levels of employment;
| | - |  | ---------------------



| |  |  | levels of inflation and movements of the financial markets;
| | - |  | -----------------------------------------------------------



| |  |  | fluctuations in interest rates;
| | - |  | -------------------------------



| |  |  | monetary policy;
| | - |  | ----------------



| |  |  | demographics; and
| | - |  | -----------------



| |  |  | legislative and competitive factors.
| | - |  | ------------------------------------



| |  |  | Failure to Predict Accurately Benefits and Other Costs and Claims. We may be unable to predict accurately benefits, claims and other costs or to
manage such costs through our loss limitation methods, which could have a material adverse effect on our results of operations and financial condition if claims substantially exceed our expectations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in Regulation. Legislation or other regulatory reform that increases the regulatory requirements imposed on us or that changes the way we are
able to do business may significantly harm our business or results of operations in the future.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reinsurers Failure to Fulfill Obligations.In 2001, Assurant entered into a reinsurance agreement with The Hartford for the sale of its FFG
division. Under the reinsurance agreement, The Hartford is obligated to contribute funds to increase the value of the separate account assets relating to modified guaranteed annuity business sold if such value declines below the value of the
associated liabilities. If The Hartford fails to fulfill these obligations, we will be obligated to make these payments and administer this business in the event of a default by the reinsurer. In 2000, Assurant divested its long-term care
(LTC) operations to John Hancock Life Insurance Company (John Hancock) through a reinsurance agreement. If John Hancock fails to fulfill its obligations, we would be obligated to make these payments.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Credit Risk of Some of Our Agents. We advance agents commissions as part of our pre-funded funeral insurance product offerings. These advances
are a percentage of the total face amount of coverage as opposed to a percentage of the first-year premium paid, the formula that is more common in other life
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | insurance markets. There is a one-year payback provision against the agency if death or lapse occurs within the first policy year. As a result of the sale of
the independent United States pre-funded funeral business distribution, we will incur losses on chargebacks from agents who have been terminated who will be unable to repay their obligation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For additional risks that relate to our business, we refer you to Assurants annual report on Form 10-K for the fiscal year ended December 31, 2006
filed with the SEC and available on the SECs website at www.sec.gov or through Assurants website at www.assurant.com.



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Item 1B.Unresolved Staff Comments

None.

Item 2.Properties

Our principal office is in Kansas City, Missouri, where we lease
office space in a building owned by Assurant. We also lease from an unrelated party office space in Birmingham, Alabama, which is used to house certain employees of our dental benefits division and office space in Atlanta, Georgia used for our
Assurant Solutions business. In addition, we have regional claims and sales offices throughout the United States. We believe that our leased properties are adequate for our current business operations.

Item 3.Legal Proceedings

We are regularly involved in litigation in the ordinary
course of business, both as a defendant and as a plaintiff. We may from time to time be subject to a variety of legal and regulatory actions relating to our current and past business operations. While we cannot predict the outcome of any pending or
future litigation, examination or investigation and although no assurances can be given, we do not believe that any pending matter will have a material adverse effect on our financial condition or results of operations.

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

Not required under
reduced disclosure format.



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Part II

Item 5.Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

There is no public trading market for our common stock. As of February 15, 2007, we had 1,000,000 shares of common stock outstanding, all of which
are owned directly by Interfinancial Inc., a Georgia corporation that is a direct wholly owned subsidiary of Assurant, Inc. We paid $210,000, $180,000, and $76,250 in dividends to our stockholder in 2006, 2005 and 2004, respectively.

Item 6.Selected Financial Data

Not required under reduced disclosure format.

Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operation

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this
report. It contains forward-looking statements that involve risks and uncertainties. Please see Forward-Looking Statements for more information. Our actual results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those discussed below and elsewhere in this report.

The table below presents
information regarding our consolidated results of operations:



|                                                         |  |                                  |           |      |   |           |  
|-------------------------------------------------------- |  | -------------------------------- | --------- | ---- | - | --------- | -
|                                                         |  | For the Years Ended December 31, |          
|                                                         |  | 2006                             |           | 2005 |  
|                                                         |  | (in thousands)                   |          
|Revenues:                                                |  |                                  |           |      |   |           |  
|Net earned premiums and other considerations             |  | $                                | 1,366,820 |      | $ | 1,710,771 |  
|Net investment income                                    |  |                                  | 286,974   |      |   | 293,910   |  
|Net realized gains (losses) on investments               |  |                                  | 8,490     |      |   | (1,651    | )
|Amortization of deferred gains on disposal of businesses |  |                                  | 14,929    |      |   | 33,098    |  
|Fees and other income                                    |  |                                  | 73,183    |      |   | 10,427    |  
|                                                         |  |                                  |           |      |   |           |  
|Total revenues                                           |  |                                  | 1,750,396 |      |   | 2,046,555 |  
|                                                         |  |                                  |           |      |   |           |  
|Benefits, losses and expenses:                           |  |                                  |           |      |   |           |  
|Policyholder benefits                                    |  |                                  | 1,027,054 |      |   | 1,293,289 |  
|Selling, underwriting and general expenses (1)           |  |                                  | 470,134   |      |   | 568,503   |  
|                                                         |  |                                  |           |      |   |           |  
|Total benefits, losses and expenses                      |  |                                  | 1,497,188 |      |   | 1,861,792 |  
|                                                         |  |                                  |           |      |   |           |  
|Income before income taxes                               |  |                                  | 253,208   |      |   | 184,763   |  
|Income taxes                                             |  |                                  | 106,576   |      |   | 68,792    |  
|                                                         |  |                                  |           |      |   |           |  
|Net income                                               |  | $                                | 146,632   |      | $ | 115,971   |  
|                                                         |  |                                  |           |      |   |           |  

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|(1) | Includes amortization of deferred acquisition costs (DAC) and value of business acquired (VOBA) and underwriting, general and administrative expenses.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

Year Ended December 31, 2006 Compared to December 31, 2005

Net Income

Net income
increased by $30,661, or 26%, to $146,632 for the year ended December 31, 2006 from $115,971 for the year ended December 31, 2005. This increase is primarily due to approximately $40,500 of



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after-tax income from a legal settlement and growth in our disability business written through our Disability Reinsurance Management Services
(DRMS) distribution channel. These increases are partially offset by a decrease in amortization of deferred gains on disposal of businesses and a decline in our group life business.

Total Revenues

Total revenues
decreased by $296,159, or 14%, to $1,750,396 for the year ended December 31, 2006 from $2,046,555 for the year ended December 31, 2005. This decrease is primarily due to a decrease in net earned premiums and other considerations of
$343,951 due to the sale of our IndependentUnited States distribution channel in our pre-funded funeral business, the loss of a client in our accidental death and dismemberment (AD&D) business and declines in our group dental,
group life and small employer group health businesses. Also contributing to the decrease in revenues was a decrease in amortization of deferred gains on disposal of businesses of $18,169, of which we took a charge of approximately $10,600 over prior
year as a result of our annual review of estimates affecting the deferred gain on disposal of businesses. These decreases were partially offset by a legal settlement, which resulted in a $62,300 increase to fees and other income, and an increase in
net realized gains (losses) on investments primarily due to the reduction of commercial mortgage loan loss reserves of approximately $9,800 due to a refinement of managements best estimate of this reserve.

Total Benefits, Losses and Expenses

Total benefits, losses and expenses decreased by $364,604, or 20%, to $1,497,188 for the year ended December 31, 2006 from $1,861,792 for the year ended December 31, 2005. This decrease is primarily due to a decrease in
policyholder benefits of $266,235 driven by the sale of our IndependentUnited States distribution channel in our pre-funded funeral business and favorable claims experience in our group dental, group disability and small employer group health
businesses. Also contributing to the decrease was lower selling, underwriting and general expenses of $98,369 primarily due to a decrease in commission expense as a result of the loss of a client in our AD&D business, the sale of the Independent
 United States distribution channel in our pre-funded funeral business, the transfer of our Canadian pre-funded funeral business, and lower commissions resulting from lower sales and renewals in our group dental, group life and small employer
group health businesses.

Income Taxes

Income taxes increased by $37,784, or 55%, to $106,576 for the year ended December 31, 2006 from $68,792 for the year ended December 31, 2005. The increase was primarily driven by approximately $20,000
associated with an increase in certain prior year tax liabilities.

Item 7A.Quantitative And Qualitative Disclosures About Market Risk

As a provider
of insurance products, effective risk management is fundamental to our ability to protect both our customers and our stockholders interests. We are exposed to potential loss from various market risks, in particular interest rate risk,
credit risk and inflation risk.

Interest rate risk is the possibility the fair value of liabilities will change more or less than the
market value of investments in response to changes in interest rates, including changes in the slope or shape of the yield curve and changes in spreads due to credit risks and other factors.

Credit risk is the possibility that counterparties may not be able to meet payment obligations when they become due. We assume counterparty credit risk
in many forms. A counterparty is any person or entity from which cash or other forms of consideration are expected to extinguish a liability or obligation to us. Primarily, our credit risk exposure is concentrated in our fixed income investment
portfolio and, to a lesser extent, in our reinsurance recoverables.

Inflation risk is the possibility that a change in domestic price
levels produces an adverse effect on earnings. This typically happens when only one of invested assets or liabilities is indexed to inflation.



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Interest Rate Risk

Interest rate risk arises as we invest substantial funds in interest-sensitive fixed income assets, such as fixed maturity investments, mortgage-backed and asset-backed securities and commercial mortgage loans,
primarily in the United States and Canada. There are two forms of interest rate riskprice risk and reinvestment risk. Price risk occurs when fluctuations in interest rates have a direct impact on the market valuation of these investments. As
interest rates rise, the market value of these investments falls, and conversely, as interest rates fall, the market value of these investments rises. Reinvestment risk occurs when fluctuations in interest rates have a direct impact on expected cash
flows from mortgage-backed and asset-backed securities. As interest rates fall, an increase in prepayments on these assets results in earlier than expected receipt of cash flows forcing us to reinvest the proceeds in an unfavorable lower interest
rate environment, and conversely as interest rates rise, a decrease in prepayments on these assets results in later than expected receipt of cash flows forcing us to forgo reinvesting in a favorable higher interest rate environment. As of
December 31, 2006, we held $2,915,346 of fixed maturity securities at fair market value and $750,283 of commercial mortgages at amortized cost for a combined total of 85% of total invested assets. As of December 31, 2005, we held
$3,488,415 of fixed maturity securities at fair market value and $758,966 of commercial mortgages at amortized cost for a combined total of 83% of total invested assets.

We expect to manage interest rate risk by selecting investments with characteristics such as duration, yield, currency and liquidity tailored to the anticipated cash outflow characteristics of our insurance and
reinsurance liabilities.

Our group long-term disability and group term life waiver of premium reserves are also sensitive to interest
rates. These reserves are discounted to the valuation date at the valuation interest rate. The valuation interest rate is determined by taking into consideration actual and expected earned rates on our asset portfolio, with adjustments for
investment expenses and provisions for adverse deviation.

Credit Risk

We have exposure to credit risk primarily as a holder of fixed income securities and by entering into reinsurance cessions.

Our risk management strategy and investment policy is to invest in debt instruments of high credit quality issuers and to limit the amount of credit
exposure with respect to any one issuer. We attempt to limit our credit exposure by imposing fixed maturity portfolio limits on individual issuers based upon credit quality. Currently our portfolio limits are 1.5% for issuers rated AA-and above, 1%
for issuers rated A- to A+, 0.75% for issuers rated BBB- to BBB+ and 0.38% for issuers rated BB- to BB+. These portfolio limits are further reduced for certain issuers with whom we have credit exposure on reinsurance agreements.

We use the lower of Moodys or Standard & Poors ratings to determine an issuers rating.

We are also exposed to the credit risk of our reinsurers. When we reinsure, we are still liable to our insureds regardless of whether we get reimbursed
by our reinsurer. As part of our overall risk and capacity management strategy, we purchase reinsurance for certain risks that we underwrite.

For at least 50% of our $1,303,620 of reinsurance recoverables at December 31, 2006, we are protected from the credit risk by using some type of risk mitigation mechanism such as a trust, letter of credit or by withholding the assets
in a modified coinsurance or co-funds-withheld arrangement. For example, reserves of $752,377 and $423,889 as of December 31, 2006 relating to two large coinsurance arrangements with The Hartford and John Hancock, respectively, related to sales
of businesses are secured by such mechanisms. If the value of the assets in these trusts decreases, The Hartford and John Hancock, as the case may be, will be required to put more assets in the trusts. We may be dependent on the financial condition
of The Hartford and John



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Hancock, whose A.M. Best ratings are currently A+ and A++, respectively. For recoverables that are not protected by these mechanisms, we are dependent solely
on the credit of the reinsurer. Occasionally, the credit worthiness of the reinsurer becomes questionable.

Inflation Risk

Inflation risk arises as we invest substantial funds in nominal assets which are not indexed to the level of inflation, whereas the underlying liabilities
are indexed to the level of inflation. Approximately 23% of our pre-funded funeral insurance policies with reserves of approximately $347,000 as of December 31, 2006 have death benefits that are guaranteed to grow with the Consumer Price Index.
In times of rapidly rising inflation the credited death benefit growth on these liabilities increases relative to the investment income earned on the nominal assets resulting in an adverse impact on earnings. We have partially mitigated this risk by
purchasing a contract with payments tied to the Consumer Price Index. See Derivatives.

In addition, we have inflation
risk in our individual and small employer group health insurance businesses to the extent that medical costs increase with inflation and we have not been able to increase premiums to keep pace with inflation.

Derivatives

Derivatives are financial
instruments whose values are derived from interest rates, foreign exchange rates, financial indices or the prices of securities or commodities. Derivative financial instruments may be exchange-traded or contracted in the over-the-counter market and
include swaps, futures, options and forward contracts.

Under insurance statutes, our insurance companies may use derivative financial
instruments to hedge actual or anticipated changes in their assets or liabilities, to replicate cash market instruments or for certain income-generating activities. These statutes generally prohibit the use of derivatives for speculative purposes.
We generally do not use derivative financial instruments.

We have purchased a contract to partially hedge the inflation risk exposure
inherent in some of our pre-funded funeral insurance policies.

In 2003, we determined that the modified coinsurance agreement with The
Hartford contained an embedded derivative. In accordance with the Financial Accounting Standards Boards Derivatives Implementation Group Statement 133 Implementation Issue No. 36, Embedded Derivatives: Modified Coinsurance Arrangements
and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments (DIG B36), we bifurcated the contract into its debt host and
embedded derivative (total return swap) and recorded the embedded derivative at fair value on the balance sheet. Contemporaneous with adoption of DIG B36, we reclassified the invested assets related to this modified coinsurance agreement from fixed
maturities available for sale to trading securities, included in other investments. The combination of the two aforementioned transactions has no net impact in the consolidated statements of operations for all periods presented.

Item 8.Financial Statements and Supplementary Data

The consolidated financial
statements and financial statement schedules in Part IV, Item 15(a) 1 and 2 of this report are incorporated by reference into this Item 8.

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There have been no changes in or disagreements with accountants on accounting and financial disclosure.

Item 9A.Controls and Procedures

Under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2006. Based on



10



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##### Table of Contents

this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of that
date in providing a reasonable level of assurance that information we are required to disclose in reports we file or furnish under the Exchange Act is recorded, processed, summarized and reported within the time periods in SEC rules and forms.
Further, our disclosure controls and procedures were effective in providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no
changes in our internal control over financial reporting that occurred during Union Securitys fourth fiscal quarter in 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.

Item 9B.Other Information

None.



11



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##### Table of Contents

PART III

Item 10.Directors, Executive Officers and Corporate Governance

Not required under
reduced disclosure format.

Item 11.Executive Compensation

Not required under reduced disclosure format.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Not required under reduced disclosure format.

Item 13.Certain Relationships and Related Transactions, and Director Independence

Not required under reduced disclosure format.

Item 14.Principal Accounting Fees and Services

PricewaterhouseCoopers LLP has
audited our financial statements for fiscal 2006. The following table shows the aggregate fees billed to us by PricewaterhouseCoopers LLP for services rendered and the percentage of those services that were approved by Assurants Audit
Committee, in its capacity as a committee of Assurants Board of Directors, during the fiscal years ended December 31, 2006 and 2005.



|                                   |  |                                    |       |            |                                    |   |        |   |            |  |     |  
|---------------------------------- |  | ---------------------------------- | ----- | ---------- | ---------------------------------- | - | ------ | - | ---------- |  | --- | -
|                                   |  | Fiscal Year EndedDecember 31, 2006 |       |            | Fiscal Year EndedDecember 31, 2005 |  
|Description of Fees (in thousands) |  | Amount                             |       | Percentage |                                    |   | Amount |   | Percentage | 
|Audit Fees                         |  | $                                  | 1,113 |            | 100                                | % |        | $ | 1,914      |  | 100 | %
|Audit Related Fees                 |  |                                    |      |            |                                   |   |        |   |           |  |    |  
|Tax Fees                           |  |                                    |      |            |                                   |   |        |   |           |  |    |  
|All Other Fees                     |  |                                    |      |            |                                   |   |        |   |           |  |    |  

The Audit Committee of Assurants Board of Directors adopted written procedures for
pre-approval of services by the independent auditors, including procedures relating to the Assurant Audit Committees power to:



| |  |  | Retain and terminate independent auditors and approve all audit engagement fees and terms;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Inform each registered public accounting firm performing work for Union Security that such shall report directly to the Assurant Audit Committee;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Directly oversee the work of any registered public accounting firm employed by Union Security, including the resolution of any disagreement between management and
the auditor regarding financial reporting, for the purpose of preparing or issuing an audit report or related work; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Approve in advance any significant audit or non-audit engagement or relationship between Union Security and the independent auditors, other than prohibited
non-auditing services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Prohibited nonauditing services are services that Congress, the SEC or the
Public Company Accounting Oversight Board prohibits through regulation. Notwithstanding the foregoing, pre-approval is not necessary for minor audit services if: (i) the aggregate amount of all such non-audit services provided to Assurant and
its subsidiaries constitutes not more than 5% of the total amount of revenues paid by Assurant and its subsidiaries to its auditor during the fiscal year in which the non-audit services are provided; (ii) such services were not recognized by
Assurant at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Assurant Audit Committee and approved prior to the completion of the audit by the Assurant Audit Committee or
by one or more members of the Assurant Audit Committee to whom authority to grant such approvals has been delegated by the Assurant Board of Directors. The Assurant Audit Committee may delegate to one or more of its members the authority to approve
in advance all significant audit or non-audit services to be provided by the independent auditors so long as it is presented to the full Assurant Audit Committee at a later time.



12



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##### Table of Contents

PART IV

Item 15.Exhibits and Financial Statement Schedules

(a)1. Financial
Statements

The following consolidated financial statements of Union Security Insurance Company, incorporated by reference into
Item 8, are attached hereto:



|                                                                                                                                                    |  |     
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                                    |  | Page
|                                                                                                                                                    | 
|Consolidated Financial Statements of Union Security Insurance Company Report of Independent Registered Public Accounting Firm                       |  | F-1 
|                                                                                                                                                    | 
|Consolidated Balance Sheets of Union Security Insurance Company at December 31, 2006 and 2005                                                       |  | F-2 
|                                                                                                                                                    | 
|Consolidated Statements of Operations of Union Security Insurance Company for the Years Ended December 31, 2006, 2005 and
2004                      |  | F-3 
|                                                                                                                                                    | 
|Consolidated Statements of Changes in Stockholders Equity of Union Security Insurance Company for the Years Ended December 31,
2006, 2005 and 2004 |  | F-4 
|                                                                                                                                                    | 
|Consolidated Statements of Cash Flows of Union Security Insurance Company for the Years Ended December 31, 2006, 2005 and
2004                      |  | F-5 
|                                                                                                                                                    | 
|Notes to Consolidated Financial Statements of Union Security Insurance Company                                                                      |  | F-7 

(a)2. Financial Statement Schedules

The following consolidated financial statement schedules of Union Security Insurance Company are attached hereto:

All schedules are omitted because they are not applicable, not required, or the information is included in the consolidated financial
statements or the notes thereto.

(a)3. Exhibits

The following exhibits either (a) are filed with this report or (b) have previously been filed with the SEC and are incorporated herein by reference to those prior filings. Exhibits are available upon
request at the investor relations section of the Assurant website, located at www.assurant.com.



|    |  |                                                                                                                                                                                                                                                                                                              
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1 |  | Articles of Incorporation of Fortis Benefits Insurance Company (incorporated by reference from the Registrants Registration Statement on Form S-6 and Variable Account C filed on
March 17, 1986, File No. 33-03919).                                                                                       
|    | 
|3.2 |  | By-laws of Fortis Benefits Insurance Company (incorporated by reference from the Registrants Registration Statement on Form S-6 and Variable Account C filed on March 17, 1986, File
No. 33-03919).                                                                                                         
|    | 
|3.3 |  | Amendments to Articles of Incorporation and By-laws of Fortis Benefits Insurance Company dated November 21, 1991 (incorporated by reference from the Registrants Post-Effective Amendment
No. 1 to the Registration Statement on Form N-4 and Variable Account D filed on March 2, 1992, File No. 33-37577).
|    | 
|3.4 |  | Amendment to By-laws of Fortis Benefits Insurance Company dated May 1, 1999 (incorporated by reference from Exhibit 3(d) to the Registrants Form 10-K filed on March 30, 2001, File No.
33-63799).                                                                                                          
|    | 
|3.5 |  | Restated Articles of Incorporation of Fortis Benefits Insurance Company dated September 29, 2004 (incorporated by reference from Exhibit 3.1 to Registrants Form 10-Q filed November 12,
2004, File No. 33-37576).                                                                                          



13



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##### Table of Contents

|     |  |                                                                                                                                                                                                                                                                                                                                             
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|3.6  |  | Amendment To The Restated Articles of Incorporation of Fortis Benefits Insurance Company, effective September 6, 2005.                                                                                                                                                                                                                      
|     | 
|3.7  |  | Restated By-laws of Fortis Benefits Insurance Company dated September 30, 2004 (incorporated by reference from Exhibit 3.6 to Registrants Form 10-K, originally filed March 31,
2005).                                                                                                                                                     
|     | 
|3.8  |  | Amendment To The Restated Bylaws of Union Security Insurance Company effective September 6, 2005 (incorporated by reference from Exhibit 3.7 to Registrants Form 10-K, originally filed
March 10, 2006).                                                                                                                                   
|     | 
|4.1  |  | Form of Annuity Contract (incorporated by reference from Registrants Post-Effective Amendment No. 14 to the Registration Statement on Form N-4 and Variable Account D filed on April 28,
1998, File No. 33-37577).                                                                                                                         
|     | 
|4.2  |  | Form of Certificate to be used in connection with Form of Combination Fixed and Variable Group Annuity Contract filed as Exhibit 4.1 to this report (incorporated by reference from
Registrants Post-Effective Amendment No. 1 to the Registration Statement on Form N-4 and Variable Account D filed on March 2, 1992, File No. 33-37577).
|     | 
|4.3  |  | Form of Application to be used in connection with Form of Contract filed as Exhibit 4.1 to this report (incorporated by reference from Registrants Post-Effective Amendment No. 17 to the
Registration Statement on Form N-4 and Variable Account D filed on April 19, 2002, File No. 33-37577).                                           
|     | 
|10.1 |  | Asset Purchase and Assumption Reinsurance Agreement between Union Security Insurance Company and Assurant Life of Canada dated as of April 1,
2006.                                                                                                                                                                                         
|     | 
|31.1 |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.                                                                                                                                                                                                                                                                      
|     | 
|31.2 |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.                                                                                                                                                                                                                                                                      
|     | 
|32.1 |  | Certification of Chief Executive Officer of Union Security Insurance Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                                                                                      
|     | 
|32.2 |  | Certification of Chief Financial Officer of Union Security Insurance Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                                                                                      



14



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##### Table of Contents

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 on March 1, 2007.



UNION SECURITY INSURANCE COMPANYBy:

/S/    P. BRUCE CAMACHOName:

P. Bruce CamachoTitle:

President and Chief Executive OfficerBy:

/S/    PETER A. WALKERName:

Peter A. WalkerTitle:

Treasurer and Chief Financial Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the capacities indicated on March 1, 2007.



|                                               |  |                                                                    
|---------------------------------------------- |  | -------------------------------------------------------------------
|Signature                                      |  | Title                                                              
|                                               | 
|/S/    ROBERT B.
POLLOCK Robert B. Pollock     |  | Chairman of the Board                                              
|                                               | 
|/S/    P. BRUCE
CAMACHO P. Bruce Camacho       |  | President and Chief Executive Officer (Principal Executive Officer)
|                                               | 
|/S/    S. CRAIG
LEMASTERS S. Craig Lemasters   |  | Director                                                           
|                                               | 
|/S/    MICHAEL J.
PENINGER Michael J. Peninger |  | Director                                                           
|                                               | 
|/S/    LESLEY G.
SILVESTER Lesley G. Silvester |  | Director                                                           





15



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholder of

Union Security Insurance
Company:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in
stockholders equity and cash flows present fairly, in all material respects, the financial position of Union Security Insurance Company and its subsidiaries (the Company), an indirect wholly owned subsidiary of Assurant, Inc. at
December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of
America. These consolidated financial statements are the responsibility of the Companys management; our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits of these
statements in accordance with standards of the Public Company Accounting Oversight Board (United States), which require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

March 1, 2007

Minneapolis, Minnesota



F-1



---

##### Table of Contents

Union Security Insurance Company

Consolidated Balance Sheets

At December 31, 2006 and 2005



|                                                                                                               |  |                                       |           |                  |   |           
|-------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | --------- | ---------------- | - | ----------
|                                                                                                               |  | December 31,2006                      |           | December 31,2005
|                                                                                                               |  | (in thousands except numberof shares)
|Assets                                                                                                         |  |                                       |           |                  |   |           
|Investments:                                                                                                   |  |                                       |           |                  |   |           
|Fixed maturities available for sale, at fair value (amortized cost$ 2,823,347 in 2006 and $3,316,091 in 2005) |  | $                                     | 2,915,346 |                  | $ | 3,488,415 
|Equity securities available for sale, at fair value (cost$316,087 in 2006 and $ 317,341 in 2005)              |  |                                       | 320,010   |                  |   | 318,120   
|Commercial mortgage loans on real estate at amortized cost                                                     |  |                                       | 750,283   |                  |   | 758,966   
|Policy loans                                                                                                   |  |                                       | 7,840     |                  |   | 9,773     
|Short-term investments                                                                                         |  |                                       | 48,141    |                  |   | 80,329    
|Collateral held under securities lending                                                                       |  |                                       | 176,937   |                  |   | 384,141   
|Other investments                                                                                              |  |                                       | 87,323    |                  |   | 61,024    
|                                                                                                               |  |                                       |           |                  |   |           
|Total investments                                                                                              |  |                                       | 4,305,880 |                  |   | 5,100,768 
|Cash and cash equivalents                                                                                      |  |                                       | 75,233    |                  |   | 19,042    
|Premiums and accounts receivable, net                                                                          |  |                                       | 98,598    |                  |   | 88,566    
|Reinsurance recoverables                                                                                       |  |                                       | 1,303,620 |                  |   | 1,261,030 
|Due from affiliates                                                                                            |  |                                       | 19,306    |                  |   |          
|Accrued investment income                                                                                      |  |                                       | 46,332    |                  |   | 51,353    
|Deferred acquisition costs                                                                                     |  |                                       | 63,571    |                  |   | 123,222   
|Property and equipment, at cost less accumulated depreciation                                                  |  |                                       | 577       |                  |   | 1,069     
|Deferred income taxes, net                                                                                     |  |                                       | 41,267    |                  |   | 25,344    
|Goodwill                                                                                                       |  |                                       | 156,817   |                  |   | 164,643   
|Value of business acquired                                                                                     |  |                                       | 26,667    |                  |   | 33,965    
|Other assets                                                                                                   |  |                                       | 38,153    |                  |   | 42,194    
|Assets held in separate accounts                                                                               |  |                                       | 3,020,811 |                  |   | 3,200,233 
|                                                                                                               |  |                                       |           |                  |   |           
|Total assets                                                                                                   |  | $                                     | 9,196,832 |                  | $ | 10,111,429
|                                                                                                               |  |                                       |           |                  |   |           
|Liabilities                                                                                                    |  |                                       |           |                  |   |           
|Future policy benefits and expenses                                                                            |  | $                                     | 2,747,384 |                  | $ | 3,154,577 
|Unearned premiums                                                                                              |  |                                       | 38,945    |                  |   | 39,980    
|Claims and benefits payable                                                                                    |  |                                       | 1,938,726 |                  |   | 1,936,611 
|Commissions payable                                                                                            |  |                                       | 16,188    |                  |   | 22,995    
|Reinsurance balances payable                                                                                   |  |                                       | 3,143     |                  |   | 10,529    
|Funds held under reinsurance                                                                                   |  |                                       | 107       |                  |   | 96        
|Deferred gains on disposal of businesses                                                                       |  |                                       | 158,155   |                  |   | 173,084   
|Obligation under securities lending                                                                            |  |                                       | 176,937   |                  |   | 384,141   
|Accounts payable and other liabilities                                                                         |  |                                       | 134,466   |                  |   | 174,644   
|Due to affiliates                                                                                              |  |                                       |          |                  |   | 5,887     
|Tax payable                                                                                                    |  |                                       | 62,706    |                  |   | 6,723     
|Liabilities related to separate accounts                                                                       |  |                                       | 3,020,811 |                  |   | 3,200,233 
|                                                                                                               |  |                                       |           |                  |   |           
|Total liabilities                                                                                              |  | $                                     | 8,297,568 |                  | $ | 9,109,500 
|                                                                                                               |  |                                       |           |                  |   |           
|Commitments and contingencies (Note 16)                                                                        |  |                                       |           |                  |   |           
|                                                                                                               |  |                                       |           |                  |   |           
|Stockholders equity                                                                                           |  |                                       |           |                  |   |           
|Common stock, par value $5 per share, 1,000,000 shares authorized, issued, and outstanding                     |  |                                       | 5,000     |                  |   | 5,000     
|Additional paid-in capital                                                                                     |  |                                       | 545,635   |                  |   | 542,472   
|Retained earnings                                                                                              |  |                                       | 286,350   |                  |   | 334,928   
|Accumulated other comprehensive income                                                                         |  |                                       | 62,279    |                  |   | 119,529   
|                                                                                                               |  |                                       |           |                  |   |           
|Total stockholders equity                                                                                     |  |                                       | 899,264   |                  |   | 1,001,929 
|                                                                                                               |  |                                       |           |                  |   |           
|Total liabilities and stockholders equity                                                                     |  | $                                     | 9,196,832 |                  | $ | 10,111,429
|                                                                                                               |  |                                       |           |                  |   |           

See the accompanying notes to the consolidated financial statements



F-2



---

##### Table of Contents

Union Security Insurance Company

Consolidated Statements of Operations

Years Ended December 31, 2006,
2005 and 2004



|                                                                          |  |                          |           |      |   |           |      |  |   |          
|------------------------------------------------------------------------- |  | ------------------------ | --------- | ---- | - | --------- | ---- |  | - | ---------
|                                                                          |  | Years Ended December 31,
|                                                                          |  | 2006                     |           | 2005 |   |           | 2004
|                                                                          |  | (in thousands)          
|Revenues                                                                  |  |                          |           |      |   |           |      |  |   |          
|Net earned premiums and other considerations                              |  | $                        | 1,366,820 |      | $ | 1,710,771 |      |  | $ | 1,756,630
|Net investment income                                                     |  |                          | 286,974   |      |   | 293,910   |      |  |   | 275,696  
|Net realized gains (losses) on investments                                |  |                          | 8,490     |      |   | (1,651    | )    |  |   | 8,371    
|Amortization of deferred gains on disposal of businesses                  |  |                          | 14,929    |      |   | 33,098    |      |  |   | 43,299   
|Fees and other income                                                     |  |                          | 73,183    |      |   | 10,427    |      |  |   | 13,033   
|                                                                          |  |                          |           |      |   |           |      |  |   |          
|Total revenues                                                            |  |                          | 1,750,396 |      |   | 2,046,555 |      |  |   | 2,097,029
|Benefits, losses and expenses                                             |  |                          |           |      |   |           |      |  |   |          
|Policyholder benefits                                                     |  |                          | 1,027,054 |      |   | 1,293,289 |      |  |   | 1,352,139
|Amortization of deferred acquisition costs and value of business acquired |  |                          | 46,376    |      |   | 78,258    |      |  |   | 75,011   
|Underwriting, general and administrative expenses                         |  |                          | 423,758   |      |   | 490,245   |      |  |   | 490,413  
|                                                                          |  |                          |           |      |   |           |      |  |   |          
|Total benefits, losses and expenses                                       |  |                          | 1,497,188 |      |   | 1,861,792 |      |  |   | 1,917,563
|                                                                          |  |                          |           |      |   |           |      |  |   |          
|Income before income taxes                                                |  |                          | 253,208   |      |   | 184,763   |      |  |   | 179,466  
|Income taxes                                                              |  |                          | 106,576   |      |   | 68,792    |      |  |   | 59,832   
|                                                                          |  |                          |           |      |   |           |      |  |   |          
|Net income                                                                |  | $                        | 146,632   |      | $ | 115,971   |      |  | $ | 119,634  
|                                                                          |  |                          |           |      |   |           |      |  |   |          



See the accompanying notes to
the consolidated financial statements



F-3



---

##### Table of Contents

Union Security Insurance Company

Consolidated Statements of Changes in Stockholders Equity

Years Ended
December 31, 2006, 2005 and 2004



|                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|-------------------------------------------- |  | -------------- | ----- | ------------------------ | - | ------- | ---------------- |  | - | ------------------------------------------ | - |  | ----- | ------- | - |  | - | --------- | -
|                                             |  | CommonStock    |       | AdditionalPaid-inCapital |   |         | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | Total |        
|                                             |  | (in thousands) |      
|Balance, January 1, 2004                     |  | $              | 5,000 |                          | $ | 516,873 |                  |  | $ | 344,097                                    |   |  | $     | 156,402 |   |  | $ | 1,022,372 |  
|Dividends on common stock                    |  |                |      |                          |   |        |                  |  |   | (76,250                                    | ) |  |       |        |   |  |   | (76,250   | )
|Other                                        |  |                |      |                          |   |        |                  |  |   | 1,674                                      |   |  |       |        |   |  |   | 1,674     |  
|Comprehensive income:                        |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Net income                                   |  |                |      |                          |   |        |                  |  |   | 119,634                                    |   |  |       |        |   |  |   | 119,634   |  
|Net change in unrealized gains on securities |  |                |      |                          |   |        |                  |  |   |                                           |   |  |       | 13,489  |   |  |   | 13,489    |  
|Foreign currency translation                 |  |                |      |                          |   |        |                  |  |   | (23                                        | ) |  |       | 2,784   |   |  |   | 2,761     |  
|                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Total comprehensive income                   |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   | 135,884   |  
|                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Balance, December 31, 2004                   |  |                | 5,000 |                          |   | 516,873 |                  |  |   | 389,132                                    |   |  |       | 172,675 |   |  |   | 1,083,680 |  
|Dental mergers (see Note 1)                  |  |                |      |                          |   | 25,599  |                  |  |   | 9,825                                      |   |  |       | 34      |   |  |   | 35,458    |  
|Dividends on common stock                    |  |                |      |                          |   |        |                  |  |   | (180,000                                   | ) |  |       |        |   |  |   | (180,000  | )
|Comprehensive income:                        |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Net income                                   |  |                |      |                          |   |        |                  |  |   | 115,971                                    |   |  |       |        |   |  |   | 115,971   |  
|Net change in unrealized gains on securities |  |                |      |                          |   |        |                  |  |   |                                           |   |  |       | (53,480 | ) |  |   | (53,480   | )
|Foreign currency translation                 |  |                |      |                          |   |        |                  |  |   |                                           |   |  |       | 300     |   |  |   | 300       |  
|                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Total comprehensive income                   |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   | 62,791    |  
|                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Balance, December 31, 2005                   |  |                | 5,000 |                          |   | 542,472 |                  |  |   | 334,928                                    |   |  |       | 119,529 |   |  |   | 1,001,929 |  
|Dividends on common stock                    |  |                |      |                          |   |        |                  |  |   | (210,000                                   | ) |  |       |        |   |  |   | (210,000  | )
|Transfer of Canadian Operations (See Note 1) |  |                |      |                          |   | 5,824   |                  |  |   | 14,790                                     |   |  |       | (18,956 | ) |  |   | 1,658     |  
|Capital Contribution                         |  |                |      |                          |   | 10      |                  |  |   |                                           |   |  |       |        |   |  |   | 10        |  
|Other                                        |  |                |      |                          |   | (2,671  | )                |  |   |                                           |   |  |       |        |   |  |   | (2,671    | )
|Comprehensive income:                        |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Net income                                   |  |                |      |                          |   |        |                  |  |   | 146,632                                    |   |  |       |        |   |  |   | 146,632   |  
|Net change in unrealized gains on securities |  |                |      |                          |   |        |                  |  |   |                                           |   |  |       | (38,445 | ) |  |   | (38,445   | )
|Foreign currency translation                 |  |                |      |                          |   |        |                  |  |   |                                           |   |  |       | 151     |   |  |   | 151       |  
|                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Total comprehensive income                   |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   | 108,338   |  
|                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Balance, December 31, 2006                   |  | $              | 5,000 |                          | $ | 545,635 |                  |  | $ | 286,350                                    |   |  | $     | 62,279  |   |  | $ | 899,264   |  
|                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  



See the accompanying notes to
the consolidated financial statements



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##### Table of Contents

Union Security Insurance Company

Consolidated Statements of Cash Flows

Years Ended December 31, 2006,
2005 and 2004



|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                  |  | Years Ended December 31, |         
|                                                                                  |  | 2006                     |          |   | 2005 |   |          | 2004 | 
|                                                                                  |  | (in thousands)           |         
|Operating activities                                                              |  |                          |          |   |      |   |          |      |  |   |          |  
|Net income                                                                        |  | $                        | 146,632  |   |      | $ | 115,971  |      |  | $ | 119,634  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |          |   |      |   |          |      |  |   |          |  
|Change in reinsurance recoverable                                                 |  |                          | (42,590  | ) |      |   | (22,919  | )    |  |   | (27,812  | )
|Change in premiums and accounts receivable                                        |  |                          | (25,271  | ) |      |   | 2,370    |      |  |   | (19,060  | )
|Depreciation and amortization                                                     |  |                          | 1,519    |   |      |   | 2,293    |      |  |   | 2,641    |  
|Change in deferred acquisition costs and value of businesses acquired             |  |                          | 18,501   |   |      |   | (213     | )    |  |   | (3,095   | )
|Change in accrued investment income                                               |  |                          | (476     | ) |      |   | 655      |      |  |   | (2,001   | )
|Change in insurance policy reserves and expenses                                  |  |                          | (13,885  | ) |      |   | 159,969  |      |  |   | 211,066  |  
|Change in accounts payable and other liabilities                                  |  |                          | (4,657   | ) |      |   | (9,270   | )    |  |   | 7,019    |  
|Change in commissions payable                                                     |  |                          | (3,393   | ) |      |   | 2,978    |      |  |   | 3,637    |  
|Change in reinsurance balances payable                                            |  |                          | (7,386   | ) |      |   | 3,802    |      |  |   | 1,589    |  
|Change in funds held under reinsurance                                            |  |                          | 11       |   |      |   | 3        |      |  |   | (7       | )
|Amortization of deferred gain on disposal of businesses                           |  |                          | (14,929  | ) |      |   | (33,098  | )    |  |   | (43,299  | )
|Change in income taxes                                                            |  |                          | 66,750   |   |      |   | 22,239   |      |  |   | 11,396   |  
|Net realized (gains) losses on investments                                        |  |                          | (8,490   | ) |      |   | 1,651    |      |  |   | (8,371   | )
|Other                                                                             |  |                          | 8,919    |   |      |   | 7,837    |      |  |   | 2,123    |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                         |  |                          | 121,255  |   |      |   | 254,268  |      |  |   | 255,460  |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Investing activities                                                              |  |                          |          |   |      |   |          |      |  |   |          |  
|Sales of:                                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Fixed maturities available for sale                                               |  |                          | 670,674  |   |      |   | 499,575  |      |  |   | 578,205  |  
|Equity securities available for sale                                              |  |                          | 153,615  |   |      |   | 56,683   |      |  |   | 44,282   |  
|Property and equipment                                                            |  |                          | 26       |   |      |   |         |      |  |   |         |  
|Maturities, prepayments, and scheduled redemption of:                             |  |                          |          |   |      |   |          |      |  |   |          |  
|Fixed maturities available for sale                                               |  |                          | 158,376  |   |      |   | 253,806  |      |  |   | 175,875  |  
|Purchase of:                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Fixed maturities available for sale                                               |  |                          | (702,666 | ) |      |   | (745,141 | )    |  |   | (831,922 | )
|Equity securities available for sale                                              |  |                          | (198,150 | ) |      |   | (74,251  | )    |  |   | (103,020 | )
|Property and equipment                                                            |  |                          |         |   |      |   | (22      | )    |  |   |         |  
|Change in other investments                                                       |  |                          | (26,299  | ) |      |   | (12,004  | )    |  |   | 5,742    |  
|Change in commercial mortgage loans on real estate                                |  |                          | (8,312   | ) |      |   | (62,152  | )    |  |   | (59,273  | )
|Change in short-term investments                                                  |  |                          | 31,206   |   |      |   | (15,324  | )    |  |   | 24,237   |  
|Change in collateral held under securities lending                                |  |                          | 207,204  |   |      |   | (51,865  | )    |  |   | (47,622  | )
|Change in policy loans                                                            |  |                          | 562      |   |      |   | 225      |      |  |   | 803      |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                               |  | $                        | 286,236  |   |      | $ | (150,470 | )    |  | $ | (212,693 | )
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  

See the accompanying notes to the consolidated financial statements



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##### Table of Contents

Union Security Insurance Company

Consolidated Statements of Cash Flows(Continued)

Years Ended
December 31, 2006, 2005 and 2004



|                                                        |  |                          |          |   |      |   |          |      |  |   |         |  
|------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                        |  | Years Ended December 31, |         
|                                                        |  | 2006                     |          |   | 2005 |   |          | 2004 | 
|                                                        |  | (in thousands)           |         
|Financing activities                                    |  |                          |          |   |      |   |          |      |  |   |         |  
|Net cash received from transfer of Canadian operations  |  | $                        | 65,894   |   |      | $ |         |      |  | $ |        |  
|Dividends paid                                          |  |                          | (210,000 | ) |      |   | (180,000 | )    |  |   | (76,250 | )
|Change in obligation under securities lending           |  |                          | (207,204 | ) |      |   | 51,865   |      |  |   | 47,622  |  
|Contributed capital                                     |  |                          | 10       |   |      |   |         |      |  |   |        |  
|                                                        |  |                          |          |   |      |   |          |      |  |   |         |  
|Net cash used in financing activities                   |  | $                        | (351,300 | ) |      | $ | (128,135 | )    |  | $ | (28,628 | )
|Change in cash and cash equivalents                     |  |                          | 56,191   |   |      |   | (24,337  | )    |  |   | 14,139  |  
|Cash and cash equivalents at beginning of period        |  |                          | 19,042   |   |      |   | 43,379   |      |  |   | 29,240  |  
|                                                        |  |                          |          |   |      |   |          |      |  |   |         |  
|Cash and cash equivalents at end of period              |  | $                        | 75,233   |   |      | $ | 19,042   |      |  | $ | 43,379  |  
|                                                        |  |                          |          |   |      |   |          |      |  |   |         |  
|Supplemental information:                               |  |                          |          |   |      |   |          |      |  |   |         |  
|Income taxes paid (net of refunds)                      |  | $                        | 39,446   |   |      | $ | 45,964   |      |  | $ | 48,447  |  
|                                                        |  |                          |         
|Supplemental schedule of non-cash investing activities: |  |                          |          |   |      |   |          |      |  |   |         |  
|                                                        |  |                          |         
|Non-cash activities:                                    |  |                          |          |   |      |   |          |      |  |   |         |  
|Foreign currency translation                            |  | $                        | 151      |   |      | $ | 300      |      |  | $ | 2,784   |  



See the accompanying notes to
the consolidated financial statements



F-6



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2006, 2005 and
2004

(In thousands except share data)

1. Nature of Operations

Union Security Insurance Company (the Company), formerly known as Fortis Benefits
Insurance Company, is a provider of life and health insurance products. The Company is an indirect wholly owned subsidiary of Assurant, Inc. (the Parent). The Parents common stock is traded on the New York Stock Exchange under the
symbol AIZ.

The Company was redomesticated to Iowa from Minnesota in 2004. The Company distributes its products in all states except New
York. The Companys revenues are derived principally from group employee benefits and group health products. The Company offers group disability insurance, group dental insurance, group life insurance and small employer group health insurance.

Effective December 31, 2006, International Dental Plans, Inc. (IDP), an indirect wholly-owned subsidiary of the Parent,
was merged into the operations of the Company. Accordingly, all prior period amounts have been restated to conform to the 2006 presentation.

Effective April 1, 2006, the Company transferred assets and liabilities related to its Canadian operations to Assurant Life of Canada (ALOC) for the purpose of re-domesticating Assurants Canadian operations. ALOC is
also an indirect wholly-owned subsidiary of the Parent. See Note 15  Related Party Transactions.

Effective November 9, 2005, the
Company signed an agreement with Forethought Life Insurance Company (Forethought) to sell via reinsurance new preneed insurance policies written as of October 1, 2005 in the United States via independent funeral homes and funeral
home chains other than those owned and operated by Service Corporation International (SCI). The Company will receive payments from Forethought over the next ten years based on the amount of business transitioned to Forethought.

Effective November 1, 2005, eight dental companies, indirectly wholly owned subsidiaries of the Parent (the Dental
Companies), were merged into the operations of the Company. All of the Dental Companies engaged in the business of marketing prepaid dental care. The assets, liabilities, and operations of the Dental Companies for the year ended
December 31, 2005 are included in the consolidated financial statements of the Company. Assets and liabilities were included at the current book value of the Dental Companies as of January 1, 2005. The Dental Companies had a combined net
income of $3,358 for the year ended December 31, 2004. This amount is not included in the consolidated statements of operations of the Company for that period.

2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(GAAP). Dollar amounts are presented in U.S. dollars and all amounts are in thousands, except for number of shares.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all of its
wholly owned subsidiaries. All significant inter-company transactions and balances are eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities. The most significant items on the



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



Companys balance sheet affected by the use of estimates are investments, reinsurance recoverables, deferred acquisition costs (DAC),
deferred income taxes, goodwill, valuation of business acquired (VOBA), future policy benefits and expenses, unearned premiums, claims and benefits payable, deferred gain on disposal of businesses, and commitments and contingencies. The
estimates are sensitive to market conditions, investment yields, mortality, morbidity, commissions and other acquisition expenses, policyholder behavior and other factors. Actual results could differ from the estimates reported. The Company believes
the amounts reported are reasonable and adequate.

Comprehensive Income

Comprehensive income is comprised of net income, unrealized gains and losses on foreign currency translation and unrealized gains and losses on securities
classified as available for sale, less deferred income taxes.

Reclassifications

Certain prior period amounts have been reclassified to conform to the 2006 presentation.

Revenue Recognition

The
Company recognizes and reports revenue when realized or realizable and earned. Revenue generally is realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price
is fixed or determinable, and collectibility is reasonably assured.

Foreign Currency Translation

For those foreign affiliates where the foreign currency is the functional currency, unrealized foreign currency translation gains (losses) net of deferred
income taxes have been reflected in accumulated other comprehensive income.

Investments

Fixed maturities and equity securities are classified as available-for-sale and reported at fair value. If the fair value is higher than the amortized
cost for debt securities or the purchase cost for equity securities, the excess is an unrealized gain; and, if lower than cost, the difference is an unrealized loss. The net unrealized gains and losses, less deferred income taxes, are included in
accumulated other comprehensive income.

Commercial mortgage loans on real estate are reported at unpaid balances, adjusted for
amortization of premium or discount, less allowance for losses. The allowance is based on managements analysis of factors including actual loan loss experience, specific events based on geographical, political or economic conditions, industry
experience and individually impaired loan analysis. A loan is considered individually impaired when it becomes probable the Company will be unable to collect all amounts due, including principal and interest. Changes in the allowance for loan losses
are recorded in net realized gains and losses.

Policy loans are reported at unpaid principal balances, which do not exceed the cash
surrender value of the underlying policies.

Short-term investments include all investment cash and short maturity investments. These
amounts are reported at cost, which approximates fair value.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



Collateral held under securities lending and the obligation under securities lending are reported at
cost, which approximates fair value.

Other investments consist primarily of investments in joint ventures, partnerships and invested
assets associated with a modified coinsurance arrangement. The joint ventures and partnerships are valued according to the equity method of accounting. The invested assets related to modified coinsurance arrangements are classified as trading
securities and are reported at fair value.

The Company monitors its investment portfolio to identify investments that may be other than
temporarily impaired. In addition, securities whose market price is equal to 85% or less of their original purchase price are added to the impairment watchlist, which is discussed at quarterly meetings attended by members of the Companys
investment, accounting and finance departments. Any security whose price decrease is deemed other-than-temporary is written down to its then current market level with the amount of the writedown reported as a realized loss in that period. Assessment
factors include, but are not limited to, the length of time and the extent to which the market value has been less than cost, the financial condition and rating of the issuer, whether any collateral is held and the intent and ability of the Company
to retain the investment for a period of time sufficient to allow for recovery. Realized gains and losses on sales of investments and declines in value judged to be other-than-temporary are recognized on the specific identification basis.

Investment income is reported as earned net of investment expenses.

The Company anticipates prepayments of principal in the calculation of the effective yield for mortgage-backed securities and structured securities. The
majority of the Companys mortgage-backed securities and structured securities are of high credit quality. The retrospective method is used to adjust the effective yield.

Cash and Cash Equivalents

The
Company considers cash on hand, all operating cash and working capital cash to be cash equivalents. These amounts are carried principally at cost, which approximates fair value. Cash balances are reviewed at the end of each reporting period to
determine if negative cash balances exist. If negative cash balances do exist, the cash accounts are netted with other positive cash accounts of the same bank providing the right of offset exists between the accounts. If the right of offset does not
exist, the negative cash balances are reclassified to accounts payable.



Receivables

The Company reports a receivable when revenue has been recognized and reported but not collected. The
Company maintains allowances for doubtful accounts for probable losses resulting from the inability to collect payments.

Reinsurance

Reinsurance recoverables include amounts related to paid benefits and estimated amounts related to unpaid policy and contract
claims, future policyholder benefits and policyholder contract deposits. The cost of reinsurance is recognized over the terms of the underlying reinsured policies using assumptions consistent with those used to account for the policies. Amounts
recoverable from reinsurers are estimated in a manner consistent



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



with claim and claim adjustment expense reserves or future policy benefits reserves and are reported in the consolidated balance sheets. The cost of
reinsurance related to long-duration contracts is recognized over the life of the underlying reinsured policies. The ceding of insurance does not discharge the Companys primary liability to insureds. An allowance for doubtful accounts is
recorded on the basis of periodic evaluations of balances due from reinsurers, reinsurer solvency, managements experience, and current economic conditions.

Reinsurance balances payable are reported for reinsurance assumed based upon ceding entities estimations.

Funds held under reinsurance represent amounts contractually held from assuming companies in accordance with reinsurance agreements.

Reinsurance premiums assumed are calculated based upon payments received from ceding companies together with accrual estimates, which are based on both payments received and in force policy information received from ceding companies. Any
subsequent differences arising on such estimates are recorded in the period in which they are determined.

Income Taxes

The Company reports its taxable income in a consolidated federal income tax return along with other affiliated subsidiaries of the
Parent. Income tax expense or credit is allocated among the affiliated subsidiaries by applying corporate income tax rates to taxable income or loss determined on a separate return basis according to a tax allocation agreement.

Current federal income taxes are charged to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for
the current year. Deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in
which we expect the temporary differences to reverse. The Company is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. In the opinion of management, it is more
likely than not that the Company will realize the benefit of the deferred tax assets and, therefore, no such valuation allowance has been established.

Deferred Acquisition Costs

The costs of acquiring new business that vary with and are
primarily related to the production of new business are deferred to the extent that such costs are deemed recoverable from future premiums or gross profits. Acquisition costs primarily consist of commissions, policy issuance expenses, and certain
direct marketing expenses.

Loss recognition testing is performed annually and reviewed quarterly. Such testing involves the use of best
estimate assumptions including the anticipation of interest income to determine if anticipated future policy premiums are adequate to recover all DAC and related claims, benefits and expenses. To the extent a premium deficiency exists, it is
recognized immediately by a charge to the statement of operations and a corresponding reduction in DAC. If the premium deficiency is greater than unamortized DAC, a liability will be accrued for the excess deficiency.

Long Duration Contracts

Acquisition
costs for pre-funded funeral life insurance policies and life insurance policies no longer offered are deferred and amortized in proportion to anticipated premiums over the premium-paying period. These acquisition costs consist primarily of first
year commissions paid to agents and sales and policy issue costs.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



Acquisition costs relating to worksite group disability and life consist primarily of first year
commissions to brokers and one time policy transfer fees and costs of issuing new certificates. These acquisition costs are front-end loaded, thus they are deferred and amortized over the estimated terms of the underlying contracts.

For pre-funded funeral investment type annuities and universal life and investment-type annuities no longer offered, DAC is amortized in proportion to
the present value of estimated gross margins or profits from investment, mortality, expense margins and surrender charges over the estimated life of the policy or contract. The assumptions used for the estimates are consistent with those used in
computing the policy or contract liabilities.

Acquisition costs on Fortis Financial Group (FFG) and Long-Term Care
(LTC) disposed businesses were written off when the businesses were sold.

Short Duration Contracts

Acquisition costs relating to monthly pay credit insurance business consist mainly of direct marketing costs and are deferred and amortized over the
estimated average terms and balances of the underlying contracts.

Acquisition costs relating to group term life, group disability and
group dental consist primarily of compensation to sales representatives. These acquisition costs are front-end loaded; thus, they are deferred and amortized over the estimated terms of the underlying contracts.

Acquisition costs on small group medical contracts consist primarily of commissions to agents and brokers and compensation to representatives. These
contracts are considered short duration because the terms of the contract are not fixed at issue and they are not guaranteed renewable. As a result, these costs are not deferred, but rather they are recorded in the consolidated statement of
operations in the period in which they are incurred.

Property and Equipment

Property and equipment are reported at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over estimated useful lives
with a maximum of 39.5 years for buildings, a maximum of 7 years for furniture and a maximum of 5 years for equipment. Expenditures for maintenance and repairs are charged to income and reported as incurred. Expenditures for improvements are
capitalized and depreciated over the remaining useful life of the asset.

Goodwill

Goodwill represents the excess of acquisition costs over the net fair values of identifiable assets acquired and liabilities assumed in a business
combination. Goodwill is deemed to have an indefinite life and is not amortized, but rather tested at least annually for impairment. The goodwill impairment test has two steps. The first identifies potential impairments by comparing the fair value
of a reporting unit with its book value, including goodwill. If the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired and the second step is not required. If the carrying value exceeds the fair value, the second
step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied goodwill is less than the carrying amount, a write down is recorded. The fair value is based on an evaluation of
ranges of future discounted earnings, public company trading multiples and acquisitions of similar companies. Certain key assumptions considered include forecasted trends in revenues, operating expenses and effective tax rates.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



The Company adopted the Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (FAS 142) No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. As part of the adoption of FAS 142, the Company is required to test goodwill on at least an annual basis. The
Company performed a January 1, 2005 impairment test during the first quarter and concluded that goodwill is not impaired. Effective September 30, 2005, the Company changed the timing of its annual goodwill impairment test to the fourth
quarter based on actual data through October 1st. The Company determined this change in accounting principle is preferable because it will allow management to incorporate this test into the normal flow of the financial planning and reporting
cycle and provide more timely analysis on the recoverability of goodwill. The Companys fourth quarter 2006 impairment test also concluded that goodwill is not impaired.

Value of Businesses Acquired

VOBA is the identifiable intangible asset representing the value of the insurance businesses acquired. The amount is determined using best estimates for mortality, lapse, maintenance expenses and investment returns at date of purchase. The
amount determined represents the purchase price paid to the seller for producing the business. Similar to the amortization of DAC, the amortization of VOBA is over the premium payment period for traditional life insurance policies and a small block
of limited payment policies. For the remaining limited payment policies, pre-funded funeral life insurance policies, all universal life policies and annuities, the amortization of VOBA is over the expected lifetime of the policies.

VOBA is tested for recoverability annually. If it is determined that future policy premiums and investment income or gross profits are not adequate to
cover related losses or loss expenses, then an expense is reported in current earnings.

Other Assets

Other assets include prepaid items and intangible assets. Identifiable intangible assets with finite lives, including costs capitalized relating to
developing software for internal use, are amortized on a straight-line basis over their estimated useful lives. The Company tests the intangible assets for impairment whenever circumstances warrant, but at least annually. If impairment exists, then
the excess of the unamortized balance over the fair value of the intangible assets will be charged to earnings at that time.

Separate Accounts

Assets and liabilities associated with separate accounts relate to premium and annuity
considerations for variable life and annuity products for which the contract-holder, rather than the Company, bears the investment risk. Separate account assets are reported at fair value. Revenues and expenses related to the separate account assets
and liabilities, to the extent of benefits paid or provided to the separate account policyholders, are excluded from the amounts reported in the accompanying consolidated statements of operations.

Prior to April 2, 2001, FFG had issued variable insurance products registered as securities under the Securities Act of 1933, as amended. These
products featured fixed premiums, a minimum death benefit, and policyholder returns linked to an underlying portfolio of securities. The variable insurance products issued by FFG have been 100% reinsured with The Hartford Financial Services Group
Inc. (The Hartford).

Reserves

Reserves are established according to GAAP, using generally accepted actuarial methods and are based on a number of factors. These factors include experience derived from historical claim payments and actuarial



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



assumptions to arrive at loss development factors. Such assumptions and other factors include trends, the incidence of incurred claims, the extent to which
all claims have been reported, and internal claims processing charges. The process used in computing reserves cannot be exact, particularly for liability coverages, since actual claim costs are dependent upon such complex factors as inflation,
changes in doctrines of legal liabilities and damage awards. The methods of making such estimates and establishing the related liabilities are periodically reviewed and updated.

Reserves do not represent an exact calculation of exposure, but instead represent our best estimates, generally involving actuarial projections at a
given time, of what we expect the ultimate settlement and administration of a claim or group of claims will cost based on our assessment of facts and circumstances then known. The adequacy of reserves will be impacted by future trends in claims
severity, frequency, judicial theories of liability and other factors. These variables are affected by both external and internal events, such as: changes in the economic cycle, changes in the social perception of the value of work, emerging medical
perceptions regarding physiological or psychological causes of disability, emerging health issues and new methods of treatment or accommodation, inflation, judicial trends, legislative changes and claims handling procedures.

Many of these items are not directly quantifiable, particularly on a prospective basis. Reserve estimates are refined as experience develops. Adjustments
to reserves, both positive and negative, are reflected in the statement of operations of the period in which such estimates are updated. Because establishment of reserves is an inherently uncertain process involving estimates of future losses, there
can be no certainty that ultimate losses will not exceed existing claims reserves. Future loss development could require reserves to be increased, which could have a material adverse effect on our earnings in the periods in which such increases are
made.

Long Duration Contracts

Future policy benefits and expense reserves on LTC, life insurance policies and annuity contracts that are no longer offered and the traditional life insurance contracts within FFG are reported at the present value of future benefits to be
paid to policyholders and related expenses less the present value of the future net premiums. These amounts are estimated and include assumptions as to the expected investment yield, inflation, mortality, morbidity and withdrawal rates as well
as other assumptions that are based on the Companys experience. These assumptions reflect anticipated trends and include provisions for possible unfavorable deviations.

Future policy benefits and expense reserves for pre-funded funeral investment-type annuities, universal life insurance policies and investment-type
annuity contracts no longer offered, and the variable life insurance and investment-type annuity contracts within FFG consist of policy account balances before applicable surrender charges and certain deferred policy initiation fees that are being
recognized in income over the terms of the policies. Policy benefits charged to expense during the period include amounts paid in excess of policy account balances and interest credited to policy account balances.

Future policy benefits and expense reserves for pre-funded funeral life insurance contracts are reported at the present value of future benefits to
policyholders and related expenses less the present value of future net premiums. Reserve assumptions are selected using best estimates for expected investment yield, inflation, mortality and withdrawal rates. These assumptions reflect current
trends, are based on Company experience and include provision for possible unfavorable deviation. An unearned revenue reserve is also recorded for these contracts which represents the balance of the excess of gross premiums over net premiums that is
still to be recognized in future years income in a constant relationship to insurance in force.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



For worksite group disability, the case reserves and incurred but not reported (IBNR)
reserves are recorded at an amount equal to the net present value of the expected future claims payments. Worksite group disability reserves are discounted to the valuation date at the valuation interest rate. The valuation interest rate is reviewed
quarterly by taking into consideration actual and expected earned rates on our asset portfolio.

Changes in the estimated liabilities are
reported as a charge or credit to policyholder benefits as the estimates are revised.

Short Duration Contracts

For short duration contracts, claims and benefits payable reserves are reported when insured events occur. The liability is based on the expected ultimate
cost of settling the claims. The claims and benefits payable reserves include (1) case reserves for known but unpaid claims as of the balance sheet date; (2) IBNR reserves for claims where the insured event has occurred but has not been
reported to the Company as of the balance sheet date; and (3) loss adjustment expense reserves for the expected handling costs of settling the claims.

For group disability, the case reserves and the IBNR reserves are reported at an amount equal to the net present value of the expected claims future payments. Group long-term disability and group term life waiver of
premiums reserves are discounted to the valuation date at the valuation interest rate. The valuation interest rate is reviewed quarterly by taking into consideration actual and expected earned rates on our asset portfolio. Group long term disability
and group term life reserve adequacy studies are performed annually, and morbidity and mortality assumptions are adjusted where appropriate.

Unearned premium reserves are maintained for the portion of the premiums on short duration contracts that is related to the unexpired period of the policies.

Changes in the estimated liabilities are reported as a charge or credit to policyholder benefits as estimates are revised.

Deferred Gains on Disposal of Businesses

The Company reports deferred gains on disposal of
businesses for disposals utilizing reinsurance. On March 1, 2000, the Parent sold its LTC business using a coinsurance contract. On April 1, 2001, the Parent sold its FFG business using a modified coinsurance contract. Since the form of
sale did not discharge the Companys primary liability to the insureds, the gains on these disposals were deferred and reported as a liability and decreased as recognized and reported as revenue over the estimated life of the contracts
terms. The Company reviews and evaluates the estimates affecting the deferred gains on disposal of businesses annually or when significant information affecting the estimates becomes known to the Company.

Premiums

Long Duration
Contracts

Currently, the Companys long duration contracts being sold are pre-funded funeral life insurance, investment type
annuities and worksite group disability and life insurance. The pre-funded funeral life insurance policies include provisions for death benefit growth that is either pegged to the changes in the Consumer Price



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



Index or determined periodically at the discretion of management. For pre-funded funeral life insurance policies, revenues are recognized and reported when
due from policyholders. For pre-funded funeral investment-type annuity contracts, revenues consist of charges assessed against policy balances. Revenues are recognized when earned on the worksite group disability.

For traditional life insurance contracts previously sold by the preneed business but no longer offered, revenue is recognized and reported when due from
policyholders.

Premiums for LTC insurance and traditional life insurance contracts within FFG are recognized and reported as revenue when
due from the policyholder. For universal life insurance and investment-type annuity contracts within FFG, revenues consist of charges assessed against policy balances. For the FFG and LTC businesses previously sold, all revenue is ceded.

Short Duration Contracts

The
Companys short duration contracts are those on which the Company recognizes and reports revenue on a pro-rata basis over the contract term. The Companys short duration contracts primarily include group term life, group disability,
medical, dental, and credit life and disability.

Fee Income

The Company primarily derives income from fees received from providing administrative services. Fee income is recognized and reported when services are
performed.

Underwriting, General and Administrative Expenses

Underwriting, general and administrative expenses consist primarily of commissions, premium taxes, licenses, fees, amortization of DAC and VOBA, salaries
and personnel benefits and other general operating expenses. These expenses are reported as incurred.

Leases

The Company reports expenses for operating leases on a straight-line basis over the lease term.

Contingencies

The Company
follows SFAS No. 5, Accounting for Contingencies (FAS 5), which requires the Company to evaluate each contingent matter separately. A loss is reported if reasonably estimable and probable. The Company establishes
reserves for these contingencies at the best estimate, or if no one estimated number within the range of possible losses is more probable than any other, the Company reports an estimated reserve at the low end of the estimated range. Contingencies
affecting the Company include litigation matters which are inherently difficult to evaluate and are subject to significant changes.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



Recent Accounting Pronouncements Adopted

On January 1, 2006, the Parent adopted Statement of Financial Accounting Standards (FAS) No. 123 (revised 2004), Share-Based
Payment (FAS 123R) which replaces Statement of Financial Accounting Standards No. 123, Share-Based Payment and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
FAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under FAS 123 are no longer
an alternative to financial statement recognition. Under FAS 123R, companies must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost, and the transition method to be
used at date of adoption. The Parent adopted FAS 123R using the modified prospective method which requires that compensation expense be recorded for all unvested stock options at the beginning of the first quarter of adoption of FAS 123R. The
adoption of FAS 123R did not have a material impact on the Companys consolidated financial statements.

On January 1, 2006, the
Company adopted FAS No. 154, Accounting Changes and Error Corrections(FAS 154),a replacement of APB Opinion No. 20,Accounting Changes,and Statement No. 3,Reporting Accounting Changes in Interim
Financial Statements. FAS 154 changes the accounting and reporting of a change in accounting principle. Prior to FAS 154, the majority of voluntary changes in accounting principles were required to be recognized as a cumulative effect adjustment
within net income during the period of the change. FAS 154 requires retrospective application to prior period financial statements unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The
adoption of FAS 154 did not have a material effect on the Companys consolidated financial position or results of operations.

On
September 29, 2006 the FASB issued FAS 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (FAS 158). This standard requires companies to recognize a net liability or asset to report the
funded status of their defined benefit pension and other postretirement plans on their balance sheet with an offsetting adjustment to accumulated other comprehensive income. FAS 158 requires companies to make additional disclosures, but does not
change how pensions and postretirement benefits are accounted for and reported in the income statement. The Parent sponsors a defined benefit pension plan and certain other post retirement benefits covering employees and certain agents who meet
eligibility requirements as to age and length of service. The Company has no legal obligation for benefits under these plans. The adoption of FAS 158 did not have a material impact on the Companys consolidated financial statements.

In September 2006, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides guidance for how errors should be evaluated to assess materiality from a quantitative perspective. SAB 108 permits
companies to initially apply its provisions by either restating prior financial statements or recording the cumulative effect of initially applying the approach as adjustments to the carrying values of assets and liabilities as of January 1,
2006 with an offsetting adjustment to retained earnings. The Company adopted SAB 108 as of December 31, 2006. The adoption of SAB 108 did not have a material impact on the Companys consolidated financial statements.

Recent Accounting Pronouncements Outstanding

In September 2005, the AICPA issued Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts,
(SOP 05-1). SOP 05-1 provides guidance on internal replacements of insurance and investment contracts. An internal



F-16



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



replacement is a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by
amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. Modifications that result in a new contract that is substantially different from the replaced contract are accounted for as an
extinguishment of the replaced contract, and the associated unamortized DAC, unearned revenue liabilities and deferred sales inducements from the replaced contract must be reported as an expense immediately. Modifications resulting in a new contract
that is substantially the same as the replaced contract are accounted for as a continuation of the replaced contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The adoption of
SOP 05-1 will not have a material impact on the Companys consolidated financial statements.

In June 2006, the Financial Accounting
Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48). This Interpretation clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Interpretation is effective for fiscal years
beginning after December 15, 2006 and, therefore, the Company is required to adopt FIN 48 by the first quarter of 2007. The adoption of FIN 48 will not have a material impact on the Companys consolidated financial statements.

On September 15, 2006, the FASB issued FAS 157, Fair Value Measurements(FAS 157). FAS 157 defines fair value, addresses how
companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP, and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Therefore, the Company is required to adopt FAS 157 by the first quarter of 2008. The Company is currently evaluating the requirements of FAS 157 and
the potential impact on the Companys consolidated financial statements.

In February, 2007, the FASB issued FAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities (FAS 159). FAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. FAS 159 is effective for fiscal years beginning after November 15, 2007. Therefore, the Company is required to adopt FAS 159 by the first quarter of 2008. The Company is currently
evaluating the requirements of FAS 159 and the potential impact on the Companys consolidated financial statements.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



3. Investments

The amortized cost and fair value of fixed maturities and equity securities at December 31, 2006 were as follows:



|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|---------------------------------------------------------------- |  | -------------------- | --------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | ---------
|                                                                 |  | Cost orAmortizedCost |           | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Fixed maturities                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Bonds:                                                           |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|United States Government and government agencies and authorities |  | $                    | 68,277    |                      | $ | 2,838                 |  | $ | (67        | ) |  | $ | 71,048   
|States, municipalities and political subdivisions                |  |                      | 47,800    |                      |   | 1,692                 |  |   | (63        | ) |  |   | 49,429   
|Foreign governments                                              |  |                      | 73,985    |                      |   | 6,860                 |  |   | (128       | ) |  |   | 80,717   
|Public utilities                                                 |  |                      | 457,894   |                      |   | 17,497                |  |   | (4,278     | ) |  |   | 471,113  
|All other corporate bonds                                        |  |                      | 1,907,149 |                      |   | 84,770                |  |   | (14,722    | ) |  |   | 1,977,197
|Mortgage backed securities                                       |  |                      | 268,242   |                      |   | 1,071                 |  |   | (3,471     | ) |  |   | 265,842  
|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Total fixed maturities                                           |  | $                    | 2,823,347 |                      | $ | 114,728               |  | $ | (22,729    | ) |  | $ | 2,915,346
|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Equity securities                                                |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Non-redeemable preferred stocks:                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Non-sinking fund preferred stocks                                |  |                      | 316,087   |                      |   | 6,387                 |  |   | (2,464     | ) |  |   | 320,010  
|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Total equity securities                                          |  | $                    | 316,087   |                      | $ | 6,387                 |  | $ | (2,464     | ) |  | $ | 320,010  
|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          

The amortized cost and fair value of fixed maturities and equity securities at December 31,
2005 were as follows:



|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|---------------------------------------------------------------- |  | -------------------- | --------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | ---------
|                                                                 |  | Cost orAmortizedCost |           | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Fixed maturities                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Bonds:                                                           |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|United States Government and government agencies and authorities |  | $                    | 119,519   |                      | $ | 6,469                 |  | $ | (183       | ) |  | $ | 125,805  
|States, municipalities and political subdivisions                |  |                      | 31,302    |                      |   | 2,144                 |  |   | (25        | ) |  |   | 33,421   
|Foreign governments                                              |  |                      | 211,743   |                      |   | 18,018                |  |   | (182       | ) |  |   | 229,579  
|Public utilities                                                 |  |                      | 458,182   |                      |   | 26,545                |  |   | (2,976     | ) |  |   | 481,751  
|All other corporate bonds                                        |  |                      | 2,140,014 |                      |   | 134,878               |  |   | (10,592    | ) |  |   | 2,264,300
|Mortgage backed securities                                       |  |                      | 355,331   |                      |   | 1,890                 |  |   | (3,662     | ) |  |   | 353,559  
|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Total fixed maturities                                           |  | $                    | 3,316,091 |                      | $ | 189,944               |  | $ | (17,620    | ) |  | $ | 3,488,415
|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Equity securities                                                |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Non-redeemable preferred stocks:                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Non-sinking fund preferred stocks                                |  |                      | 317,341   |                      |   | 5,053                 |  |   | (4,274     | ) |  |   | 318,120  
|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Total equity securities                                          |  | $                    | 317,341   |                      | $ | 5,053                 |  | $ | (4,274     | ) |  | $ | 318,120  
|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          



F-18



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



The amortized cost and fair value of fixed maturities at December 31, 2006 by contractual
maturity are shown below. Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.



|                                       |  |               |           |            |   |          
|-------------------------------------- |  | ------------- | --------- | ---------- | - | ---------
|                                       |  | AmortizedCost |           | Fair Value
|Due in one year or less                |  | $             | 51,416    |            | $ | 51,530   
|Due after one year through five years  |  |               | 323,735   |            |   | 331,716  
|Due after five years through ten years |  |               | 562,098   |            |   | 568,438  
|Due after ten years                    |  |               | 1,617,856 |            |   | 1,697,820
|                                       |  |               |           |            |   |          
|Total                                  |  |               | 2,555,105 |            |   | 2,649,504
|Mortgage and asset backed securities   |  |               | 268,242   |            |   | 265,842  
|                                       |  |               |           |            |   |          
|Total                                  |  | $             | 2,823,347 |            | $ | 2,915,346
|                                       |  |               |           |            |   |          

Proceeds from sales of available for sale securities were $829,365, $559,833, and $622,416 during
2006, 2005 and 2004, respectively. Gross gains of $13,077, $13,824 and $16,151 and gross losses of $14,010, $15,399 and $6,870 were realized on dispositions in 2006, 2005 and 2004, respectively.

Major categories of net investment income were as follows:



|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|---------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                         |  | Years Ended December 31, |        
|                                         |  | 2006                     |         |   | 2005 |   |         | 2004 | 
|Fixed maturities                         |  | $                        | 191,823 |   |      | $ | 208,916 |      |  | $ | 203,862 |  
|Equity securities                        |  |                          | 21,877  |   |      |   | 21,012  |      |  |   | 19,622  |  
|Commercial mortgage loans on real estate |  |                          | 55,112  |   |      |   | 54,563  |      |  |   | 55,329  |  
|Policy loans                             |  |                          | 497     |   |      |   | 555     |      |  |   | 574     |  
|Short-term investments                   |  |                          | 2,769   |   |      |   | 2,037   |      |  |   | 717     |  
|Other investments                        |  |                          | 23,886  |   |      |   | 15,704  |      |  |   | 5,149   |  
|Cash and cash equivalents                |  |                          | 687     |   |      |   | 613     |      |  |   | 264     |  
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Investment income                        |  |                          | 296,651 |   |      |   | 303,400 |      |  |   | 285,517 |  
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Investment expenses                      |  |                          | (9,677  | ) |      |   | (9,490  | )    |  |   | (9,821  | )
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Net investment income                    |  | $                        | 286,974 |   |      | $ | 293,910 |      |  | $ | 275,696 |  
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  

The net realized gains (losses) recorded in income for 2006, 2005 and 2004 are summarized as
follows:



|                            |  |                          |        |   |      |   |        |      |  |   |       |  
|--------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                            |  | Years Ended December 31, |       
|                            |  | 2006                     |        |   | 2005 |   |        | 2004 | 
|Fixed maturities            |  | $                        | 848    |   |      | $ | (373   | )    |  | $ | 8,711 |  
|Equity securities           |  |                          | (2,129 | ) |      |   | (1,468 | )    |  |   | 439   |  
|                            |  |                          |        |   |      |   |        |      |  |   |       |  
|Total marketable securities |  |                          | (1,281 | ) |      |   | (1,841 | )    |  |   | 9,150 |  
|Real estate                 |  |                          |       |   |      |   |       |      |  |   | (130  | )
|Other                       |  |                          | 9,771  |   |      |   | 190    |      |  |   | (649  | )
|                            |  |                          |        |   |      |   |        |      |  |   |       |  
|Total                       |  | $                        | 8,490  |   |      | $ | (1,651 | )    |  | $ | 8,371 |  
|                            |  |                          |        |   |      |   |        |      |  |   |       |  



F-19



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



The Company recorded $348, $266 and $131 of pre-tax realized losses in 2006, 2005 and 2004,
respectively, associated with other-than-temporary declines in value of available for sale securities.

The investment category and
duration of the Companys gross unrealized losses on fixed maturities and equity securities at December 31, 2006 were as follows:



|                                                                 |  |                     |         |                  |                   |         |            |       |                  |         |  |            |        |                  |  |   |           |  |   |         |  
|---------------------------------------------------------------- |  | ------------------- | ------- | ---------------- | ----------------- | ------- | ---------- | ----- | ---------------- | ------- |  | ---------- | ------ | ---------------- |  | - | --------- |  | - | ------- | -
|                                                                 |  | Less than 12 months |         |                  | 12 Months or More |         |            | Total |                 
|                                                                 |  | Fair Value          |         | UnrealizedLosses |                   |         | Fair Value |       | UnrealizedLosses |         |  | Fair Value |        | UnrealizedLosses | 
|Fixed maturities                                                 |  |                     |         |                  |                   |         |            |       |                  |         |  |            |        |                  |  |   |           |  |   |         |  
|Bonds:                                                           |  |                     |         |                  |                   |         |            |       |                  |         |  |            |        |                  |  |   |           |  |   |         |  
|United States Government and government agencies and authorities |  | $                   | 33,131  |                  | $                 | (65     | )          |       | $                | 49      |  | $          | (2     | )                |  | $ | 33,180    |  | $ | (67     | )
|States, municipalities and political subdivisions                |  |                     | 3,739   |                  |                   | (51     | )          |       |                  | 1,013   |  |            | (12    | )                |  |   | 4,752     |  |   | (63     | )
|Foreign governments                                              |  |                     | 4,599   |                  |                   | (123    | )          |       |                  | 244     |  |            | (5     | )                |  |   | 4,843     |  |   | (128    | )
|Public utilities                                                 |  |                     | 140,191 |                  |                   | (3,613  | )          |       |                  | 16,773  |  |            | (665   | )                |  |   | 156,964   |  |   | (4,278  | )
|All other corporate bonds                                        |  |                     | 579,739 |                  |                   | (12,003 | )          |       |                  | 71,450  |  |            | (2,719 | )                |  |   | 651,189   |  |   | (14,722 | )
|Mortgage backed securities                                       |  |                     | 164,216 |                  |                   | (2,326  | )          |       |                  | 30,053  |  |            | (1,145 | )                |  |   | 194,269   |  |   | (3,471  | )
|                                                                 |  |                     |         |                  |                   |         |            |       |                  |         |  |            |        |                  |  |   |           |  |   |         |  
|Total fixed maturities                                           |  | $                   | 925,615 |                  | $                 | (18,181 | )          |       | $                | 119,582 |  | $          | (4,548 | )                |  | $ | 1,045,197 |  | $ | (22,729 | )
|                                                                 |  |                     |         |                  |                   |         |            |       |                  |         |  |            |        |                  |  |   |           |  |   |         |  
|Equity securities                                                |  |                     |         |                  |                   |         |            |       |                  |         |  |            |        |                  |  |   |           |  |   |         |  
|Non-redeemable preferred stocks:                                 |  |                     |         |                  |                   |         |            |       |                  |         |  |            |        |                  |  |   |           |  |   |         |  
|Non-sinking fund preferred stocks                                |  |                     | 95,523  |                  |                   | (1,645  | )          |       |                  | 18,071  |  |            | (819   | )                |  |   | 113,594   |  |   | (2,464  | )
|                                                                 |  |                     |         |                  |                   |         |            |       |                  |         |  |            |        |                  |  |   |           |  |   |         |  
|Total equity securities                                          |  | $                   | 95,523  |                  | $                 | (1,645  | )          |       | $                | 18,071  |  | $          | (819   | )                |  | $ | 113,594   |  | $ | (2,464  | )
|                                                                 |  |                     |         |                  |                   |         |            |       |                  |         |  |            |        |                  |  |   |           |  |   |         |  



F-20



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



The investment category and duration of the Companys gross unrealized losses on fixed
maturities and equity securities at December 31, 2005 were as follows:



|                                                                 |  |                     |         |                  |                   |         |           |       |                  |        |  |            |        |                  |  |   |         |  |   |         |  
|---------------------------------------------------------------- |  | ------------------- | ------- | ---------------- | ----------------- | ------- | --------- | ----- | ---------------- | ------ |  | ---------- | ------ | ---------------- |  | - | ------- |  | - | ------- | -
|                                                                 |  | Less than 12 months |         |                  | 12 Months or More |         |           | Total |                 
|                                                                 |  | Fair Value          |         | UnrealizedLosses |                   |         | FairValue |       | UnrealizedLosses |        |  | Fair Value |        | UnrealizedLosses | 
|Fixed maturities                                                 |  |                     |         |                  |                   |         |           |       |                  |        |  |            |        |                  |  |   |         |  |   |         |  
|Bonds:                                                           |  |                     |         |                  |                   |         |           |       |                  |        |  |            |        |                  |  |   |         |  |   |         |  
|United States Government and government agencies and authorities |  | $                   | 14,141  |                  | $                 | (181    | )         |       | $                | 48     |  | $          | (2     | )                |  | $ | 14,189  |  | $ | (183    | )
|States, municipalities and political subdivisions                |  |                     |        |                  |                   |        |           |       |                  | 1,036  |  |            | (25    | )                |  |   | 1,036   |  |   | (25     | )
|Foreign governments                                              |  |                     | 10,156  |                  |                   | (165    | )         |       |                  | 467    |  |            | (17    | )                |  |   | 10,623  |  |   | (182    | )
|Public utilities                                                 |  |                     | 84,348  |                  |                   | (2,577  | )         |       |                  | 12,454 |  |            | (399   | )                |  |   | 96,802  |  |   | (2,976  | )
|All other corporate bonds                                        |  |                     | 447,496 |                  |                   | (9,015  | )         |       |                  | 28,249 |  |            | (1,577 | )                |  |   | 475,745 |  |   | (10,592 | )
|Mortgage backed securities                                       |  |                     | 168,489 |                  |                   | (2,144  | )         |       |                  | 44,631 |  |            | (1,518 | )                |  |   | 213,120 |  |   | (3,662  | )
|                                                                 |  |                     |         |                  |                   |         |           |       |                  |        |  |            |        |                  |  |   |         |  |   |         |  
|Total fixed maturities                                           |  | $                   | 724,630 |                  | $                 | (14,082 | )         |       | $                | 86,885 |  | $          | (3,538 | )                |  | $ | 811,515 |  | $ | (17,620 | )
|                                                                 |  |                     |         |                  |                   |         |           |       |                  |        |  |            |        |                  |  |   |         |  |   |         |  
|Equity securities                                                |  |                     |         |                  |                   |         |           |       |                  |        |  |            |        |                  |  |   |         |  |   |         |  
|Non-redeemable preferred stocks:                                 |  |                     |         |                  |                   |         |           |       |                  |        |  |            |        |                  |  |   |         |  |   |         |  
|Non-sinking fund preferred stocks                                |  |                     | 134,790 |                  |                   | (2,979  | )         |       |                  | 24,213 |  |            | (1,295 | )                |  |   | 159,003 |  |   | (4,274  | )
|                                                                 |  |                     |         |                  |                   |         |           |       |                  |        |  |            |        |                  |  |   |         |  |   |         |  
|Total equity securities                                          |  | $                   | 134,790 |                  | $                 | (2,979  | )         |       | $                | 24,213 |  | $          | (1,295 | )                |  | $ | 159,003 |  | $ | (4,274  | )
|                                                                 |  |                     |         |                  |                   |         |           |       |                  |        |  |            |        |                  |  |   |         |  |   |         |  

The total unrealized losses represent 2% of the aggregate fair value of the related securities at
December 31, 2006 and 2005. Approximately 79% and 78% of these unrealized losses have been in a continuous loss position for less than twelve months in 2006 and 2005, respectively. The total unrealized losses are comprised of 518 and 543
individual securities with 95% and 97% of the individual securities having an unrealized loss of less than $200 in 2006 and 2005, respectively. The total unrealized losses on securities that were in a continuous unrealized loss position for greater
than six months but less than 12 months were approximately $793 and $4,224 in 2006 and 2005, respectively. There were no securities with an unrealized loss of greater than $200 having a market value below 90% and 86% of book value at
December 31, 2006 and 2005, respectively.

As part of the Companys ongoing monitoring process, the Company regularly reviews its
investment portfolio to ensure that investments that may be other-than-temporarily impaired are identified on a timely basis and that any impairment is charged against earnings in the proper period. The Company has reviewed these securities and
recorded $348, $266 and $131 of additional other-than-temporary impairments as of December 31, 2006, 2005 and 2004, respectively. Due to issuers continued satisfaction of the securities obligations in accordance with their
contractual terms and their continued expectations to do so, as well as the Companys evaluation of the fundamentals of the issuers financial condition, the Company believes that the prices of the securities in an unrealized loss position
as of December 31, 2006 in the sectors discussed above were temporarily depressed primarily as a result of the prevailing level of interest rates at the time the securities were purchased. The Company has the intent and ability to hold these
assets until the date of recovery.

The Company has made commercial mortgage loans, collateralized by the underlying real estate, on
properties located throughout the United States. At December 31, 2006, approximately 42% of the outstanding



F-21



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



principal balance of commercial mortgage loans was concentrated in the states of California, New York and Pennsylvania. Although the Company has a
diversified loan portfolio, an economic downturn could have an adverse impact on the ability of its debtors to repay their loans. The outstanding balance of commercial mortgage loans range in size from $62 to $13,664 at December 31, 2006 and
from $21 to $13,953 at December 31, 2005. The mortgage loan balance valuation allowance for losses was $2,705 and $12,831 at December 31, 2006 and 2005, respectively.

At December 31, 2006, loan commitments outstanding totaled approximately $11,995. Furthermore, at December 31, 2006, the Company is committed
to fund additional capital contributions of $10,723 to joint ventures and to certain investments in limited partnerships.

The Company has
short term investments and fixed maturities carried at $4,740 and $334,131 at December 31, 2006 and 2005, respectively, on deposit with various governmental authorities as required by law. The reason for the large decrease is due to the
transfer of the Companys Canadian business to ALOC. See Note 15Related Party Transactions.

Security Lending

The Company engages in transactions in which fixed maturities, especially bonds issued by the United States Government, agencies,
and U.S. Corporations, are loaned to selected broker/dealers. Collateral, greater than or equal to 102% of the fair value of the securities lent plus accrued interest, is received in the form of cash held by a custodian bank for the benefit of the
Company. The Company monitors the fair value of securities loaned and the collateral received, with additional collateral obtained as necessary. The Company is subject to the risk of loss to the extent there is a loss in the investment of cash
collateral. At December 31, 2006 and 2005, securities with a fair value of $172,528 and $370,272, respectively, were on loan to select brokers and are included in the Companys available for sale investment. At December 31, 2006 and
2005, collateral with a fair value of $176,937 and $384,141, respectively, is included in the Companys assets with offsetting liabilities.

4.
Income Taxes

The Company and its subsidiaries are subject to U.S. tax and are part of a U.S. consolidated federal income tax return
with the Parent. Information about the Companys current and deferred tax expense are as follows:



|                           |  |                          |         |      |   |        |      |  |   |        |  
|-------------------------- |  | ------------------------ | ------- | ---- | - | ------ | ---- |  | - | ------ | -
|                           |  | Years Ended December 31, |        
|                           |  | 2006                     |         | 2005 |   |        | 2004 | 
|Current expense:           |  |                          |         |      |   |        |      |  |   |        |  
|Federal                    |  | $                        | 94,368  |      | $ | 43,766 |      |  | $ | 35,244 |  
|Foreign                    |  |                          | 274     |      |   | 788    |      |  |   | 494    |  
|                           |  |                          |         |      |   |        |      |  |   |        |  
|Total current expense      |  |                          | 94,642  |      |   | 44,554 |      |  |   | 35,738 |  
|Deferred expense (benefit) |  |                          |         |      |   |        |      |  |   |        |  
|Federal                    |  |                          | 11,934  |      |   | 24,968 |      |  |   | 24,712 |  
|Foreign                    |  |                          |        |      |   | (730   | )    |  |   | (618   | )
|                           |  |                          |         |      |   |        |      |  |   |        |  
|Total deferred expense     |  |                          | 11,934  |      |   | 24,238 |      |  |   | 24,094 |  
|                           |  |                          |         |      |   |        |      |  |   |        |  
|Total income tax expense   |  | $                        | 106,576 |      | $ | 68,792 |      |  | $ | 59,832 |  
|                           |  |                          |         |      |   |        |      |  |   |        |  

International operations of the Company are subject to income taxes imposed by the jurisdiction in
which they operate.



F-22



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



A reconciliation of the federal income tax rate to the Companys effective income tax rate
follows:



|                                       |  |              |   |  |      |   |  |      |  
|-------------------------------------- |  | ------------ | - |  | ---- | - |  | ---- | -
|                                       |  | December 31, |  
|                                       |  | 2006         |   |  | 2005 |   |  | 2004 |  
|Federal income tax rate                |  | 35.0         | % |  | 35.0 | % |  | 35.0 | %
|Reconciling items:                     |  |              |   |  |      |   |  |      |  
|Dividends received deduction           |  | (2.1         | ) |  | (2.9 | ) |  | (2.7 | )
|Permanent nondeductible expenses       |  | (0.3         | ) |  | 0.2  |   |  | 0.2  |  
|Adjustment for deferred liabilities    |  |             |   |  |     |   |  | (0.5 | )
|Change in reserve for prior year taxes |  | 9.5          |   |  | 4.8  |   |  | 1.7  |  
|Goodwill                               |  |             |   |  | 0.1  |   |  |     |  
|Other                                  |  |             |   |  |     |   |  | (0.4 | )
|                                       |  |              |   |  |      |   |  |      |  
|Effective income tax rate:             |  | 42.1         | % |  | 37.2 | % |  | 33.3 | %
|                                       |  |              |   |  |      |   |  |      |  

The tax effects of temporary differences that result in significant deferred tax assets and
deferred tax liabilities are as follows:



|                                                  |  |              |        |      |   |        
|------------------------------------------------- |  | ------------ | ------ | ---- | - | -------
|                                                  |  | December 31,
|                                                  |  | 2006         |        | 2005
|Deferred tax assets:                              |  |              |        |      |   |        
|Policyholder and separate account reserves        |  | $            | 923    |      | $ | 21,485 
|Accrued liabilities                               |  |              | 11,881 |      |   | 3,837  
|Investment adjustments                            |  |              | 131    |      |   | 3,850  
|Deferred acquisition costs                        |  |              | 26,794 |      |   | 10,858 
|Deferred gains on reinsurance                     |  |              | 55,354 |      |   | 60,579 
|                                                  |  |              |        |      |   |        
|Gross deferred tax assets                         |  |              | 95,083 |      |   | 100,609
|                                                  |  |              |        |      |   |        
|Deferred tax liabilities:                         |  |              |        |      |   |        
|Unrealized gains on fixed maturities and equities |  |              | 33,132 |      |   | 60,587 
|Other liabilities                                 |  |              | 20,684 |      |   | 14,678 
|                                                  |  |              |        |      |   |        
|Gross deferred tax liabilities                    |  |              | 53,816 |      |   | 75,265 
|                                                  |  |              |        |      |   |        
|Net deferred income tax asset                     |  | $            | 41,267 |      | $ | 25,344 
|                                                  |  |              |        |      |   |        

At December 31, 2006, the Company and its subsidiaries had no capital loss carryforwards for
U.S. federal income tax purposes.

5. Premiums and Accounts Receivable

Receivables are reported net of an allowance for uncollectible items. A summary of such receivables is as follows:





|                                  |  |                    |        |   |      |   |        |  
|--------------------------------- |  | ------------------ | ------ | - | ---- | - | ------ | -
|                                  |  | As of December 31, |       
|                                  |  | 2006               |        |   | 2005 |  
|Insurance premiums receivable     |  | $                  | 77,187 |   |      | $ | 82,263 |  
|Other receivables                 |  |                    | 28,023 |   |      |   | 12,829 |  
|Allowance for uncollectible items |  |                    | (6,612 | ) |      |   | (6,526 | )
|                                  |  |                    |        |   |      |   |        |  
|Total                             |  | $                  | 98,598 |   |      | $ | 88,566 |  
|                                  |  |                    |        |   |      |   |        |  



F-23



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



6. Stockholders Equity

The Board of Directors of the Company has authorized 1,000,000 shares of common stock with a par value of $5 per share. All the shares are issued and outstanding as of December 31, 2006 and 2005. All the
outstanding shares at December 31, 2006 are owned by the Parent (see Note 1). The Company paid dividends of $210,000, $180,000 and $76,250 at December 31, 2006, 2005 and 2004, respectively.

The maximum amount of dividends which can be paid by the State of Iowa insurance companies to shareholders without prior approval of the Insurance
Commissioner is subject to restrictions relating to statutory surplus (see Note 7).

7. Statutory Information

Statutory-basis financial statements are prepared in accordance with accounting practices prescribed or permitted by the Iowa Department of Commerce.
Prescribed Statutory Accounting Principles (SAP) includes the Accounting Practices and Procedures Manual of the National Association of Insurance Commissioners (NAIC) as well as state laws, regulations and administrative
rules.

The principal differences between SAP and GAAP are: 1) policy acquisition costs are expensed as incurred under SAP, but are
deferred and amortized under GAAP; 2) the value of business acquired is not capitalized under SAP but is under GAAP; 3) amounts collected from holders of universal life-type and annuity products are recognized as premiums when collected under SAP,
but are initially recorded as contract deposits under GAAP, with cost of insurance recognized as revenue when assessed and other contract charges recognized over the periods for which services are provided; 4) the classification and carrying amounts
of investments in certain securities are different under SAP than under GAAP; 5) the criteria for providing asset valuation allowances, and the methodologies used to determine the amounts thereof, are different under SAP than under GAAP; 6) the
timing of establishing certain reserves, and the methodologies used to determine the amounts thereof, are different under SAP than under GAAP; 7) certain assets are not admitted for purposes of determining surplus under SAP; 8) methodologies used to
determine the amounts of deferred taxes and goodwill are different under SAP than under GAAP; and 9) the criteria for obtaining reinsurance accounting treatment is different under SAP than under GAAP.

The Companys statutory net income and capital and surplus are as follows:



|                              |  |                                 |         |     |      |   |         |  |   |        
|----------------------------- |  | ------------------------------- | ------- | --- | ---- | - | ------- |  | - | -------
|                              |  | Years Ended and at December 31,
|                              |  | 2006                            |         |     | 2005 |   | 2004   
|Statutory Net Income          |  | $                               | 212,898 | (1) |      | $ | 127,094 |  | $ | 127,187
|                              |  |                                 |         |     |      |   |         |  |   |        
|Statutory Capital and Surplus |  | $                               | 515,105 |     |      | $ | 535,418 |  | $ | 602,875
|                              |  |                                 |         |     |      |   |         |  |   |        

---

|(1) | The $212,898 net income in 2006 includes a gain of approximately $31,700, after-tax, resulting from the April 2006 transfer of the Companys Canadian insurance operations to an
affiliated entity not subject to SAP and approximately $40,500, after-tax, from a settlement awarded to the Company in the fourth quarter of 2006 resulting from the successful resolution of a contract dispute with Progeny Marketing Innovations, a
wholly-owned subsidiary of Cendant Corporation.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Insurance enterprises are required by state insurance departments to adhere
to minimum risk-based capital (RBC) requirements developed by the NAIC. The Company exceeds the minimum RBC requirements.

Dividend distributions to the Parent are restricted as to the amount by state regulatory requirements. A dividend is extraordinary when combined with all other dividends and distributions made within the preceding 12 months exceeds the
greater of 10% of the insurers surplus as regards to policyholders on December 31 of the next preceding year, or the net gain from operations. In 2006, the Company declared and paid dividends of $210,000, of which all was extraordinary. In
2005, the Company declared and paid dividends of $180,000, of which



F-24



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



$120,280 was ordinary and $59,720 was extraordinary. In 2004, the Company declared and paid dividends of $76,250, all of which were ordinary. The Company has
the ability, under state regulatory requirements, to dividend up to $144,000 to its parent in 2007 without permission from Iowa regulators.

8.
Reinsurance

In the ordinary course of business, the Company is involved in both the assumption and cession of reinsurance with
non-affiliated companies. The following table provides details of the reinsurance recoverables balance for the years ended December 31:



|                                                |  |      |           |      |   |          
|----------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                |  | 2006 |           | 2005
|Ceded future policyholder benefits and expenses |  | $    | 1,212,991 |      | $ | 1,181,660
|Ceded unearned premium                          |  |      | 19,579    |      |   | 19,263   
|Ceded claims and benefits payable               |  |      | 56,427    |      |   | 45,003   
|Ceded paid losses                               |  |      | 14,623    |      |   | 15,104   
|                                                |  |      |           |      |   |          
|Total                                           |  | $    | 1,303,620 |      | $ | 1,261,030
|                                                |  |      |           |      |   |          

The effect of reinsurance on premiums earned and benefits incurred was as follows:



|                                             |  |                          |          |   |               |   |           |       |  |   |              |   |  |               |          |   |       |   |           |              |  |   |               |   |  |       |          |   |  |   |           |   |  |   |           |  
|-------------------------------------------- |  | ------------------------ | -------- | - | ------------- | - | --------- | ----- |  | - | ------------ | - |  | ------------- | -------- | - | ----- | - | --------- | ------------ |  | - | ------------- | - |  | ----- | -------- | - |  | - | --------- | - |  | - | --------- | -
|                                             |  | Years Ended December 31, |         
|                                             |  | 2006                     |          |   | 2005          |   |           | 2004  | 
|                                             |  | LongDuration             |          |   | ShortDuration |   |           | Total |  |   | LongDuration |   |  | ShortDuration |          |   | Total |   |           | LongDuration |  |   | ShortDuration |   |  | Total |         
|Gross earned                                 |  |                          |          |   |               |   |           |       |  |   |              |   |  |               |          |   |       |   |           |              |  |   |               |   |  |       |          |   |  |   |           |   |  |   |           |  
|Premiums and other considerations            |  | $                        | 384,626  |   |               | $ | 1,089,002 |       |  | $ | 1,473,628    |   |  | $             | 475,081  |   |       | $ | 1,360,420 |              |  | $ | 1,835,501     |   |  | $     | 512,103  |   |  | $ | 1,367,581 |   |  | $ | 1,879,684 |  
|Premiums assumed                             |  |                          | 11,655   |   |               |   | 180,522   |       |  |   | 192,177      |   |  |               | 14,513   |   |       |   | 153,412   |              |  |   | 167,925       |   |  |       | 18,383   |   |  |   | 160,827   |   |  |   | 179,210   |  
|Premiums ceded                               |  |                          | (291,700 | ) |               |   | (7,285    | )     |  |   | (298,985     | ) |  |               | (276,240 | ) |       |   | (16,415   | )            |  |   | (292,655      | ) |  |       | (278,496 | ) |  |   | (23,768   | ) |  |   | (302,264  | )
|                                             |  |                          |          |   |               |   |           |       |  |   |              |   |  |               |          |   |       |   |           |              |  |   |               |   |  |       |          |   |  |   |           |   |  |   |           |  
|Net earned premiums and other considerations |  | $                        | 104,581  |   |               | $ | 1,262,239 |       |  | $ | 1,366,820    |   |  | $             | 213,354  |   |       | $ | 1,497,417 |              |  | $ | 1,710,771     |   |  | $     | 251,990  |   |  | $ | 1,504,640 |   |  | $ | 1,756,630 |  
|                                             |  |                          |          |   |               |   |           |       |  |   |              |   |  |               |          |   |       |   |           |              |  |   |               |   |  |       |          |   |  |   |           |   |  |   |           |  
|Gross policyholder                           |  |                          |          |   |               |   |           |       |  |   |              |   |  |               |          |   |       |   |           |              |  |   |               |   |  |       |          |   |  |   |           |   |  |   |           |  
|Benefits                                     |  | $                        | 851,688  |   |               | $ | 710,890   |       |  | $ | 1,562,578    |   |  | $             | 877,175  |   |       | $ | 905,968   |              |  | $ | 1,783,143     |   |  | $     | 771,003  |   |  | $ | 935,771   |   |  | $ | 1,706,774 |  
|Benefits assumed                             |  |                          | 36,405   |   |               |   | 179,652   |       |  |   | 216,057      |   |  |               | 39,758   |   |       |   | 159,283   |              |  |   | 199,041       |   |  |       | 43,067   |   |  |   | 151,705   |   |  |   | 194,772   |  
|Benefits ceded                               |  |                          | (748,887 | ) |               |   | (2,694    | )     |  |   | (751,581     | ) |  |               | (682,240 | ) |       |   | (6,655    | )            |  |   | (688,895      | ) |  |       | (545,646 | ) |  |   | (3,761    | ) |  |   | (549,407  | )
|                                             |  |                          |          |   |               |   |           |       |  |   |              |   |  |               |          |   |       |   |           |              |  |   |               |   |  |       |          |   |  |   |           |   |  |   |           |  
|Net policyholder benefits                    |  | $                        | 139,206  |   |               | $ | 887,848   |       |  | $ | 1,027,054    |   |  | $             | 234,693  |   |       | $ | 1,058,596 |              |  | $ | 1,293,289     |   |  | $     | 268,424  |   |  | $ | 1,083,715 |   |  | $ | 1,352,139 |  
|                                             |  |                          |          |   |               |   |           |       |  |   |              |   |  |               |          |   |       |   |           |              |  |   |               |   |  |       |          |   |  |   |           |   |  |   |           |  

The Company had $127,789 and $126,940 of assets held in trusts as of December 31, 2006 and
2005, respectively, for the benefit of others related to certain reinsurance arrangements.

The Company utilizes ceded reinsurance for loss
protection and capital management, business divestitures, client risk and profit sharing.



F-25



---

##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



Loss Protection and Capital Management

As part of the Companys overall risk and capacity management strategy, the Company purchases reinsurance for certain risks underwritten by the
Company, including significant individual or catastrophic claims, and to free up capital to enable the Company to write additional business.

Under indemnity reinsurance transactions in which the Company is the ceding insurer, the Company remains liable for policy claims if the assuming company fails to meet its obligations. To limit this risk, the Company has control procedures
in place to evaluate the financial condition of reinsurers and to monitor the concentration of credit risk to minimize this exposure. The selection of reinsurance companies is based on criteria related to solvency and reliability and, to a lesser
degree, diversification as well as on developing strong relationships with the Companys reinsurance partners for the sharing of risks.

Business Divestitures

The Company has used reinsurance to exit certain businesses.

In 2005, the Parent signed an agreement with Forethought whereby the Company agreed to discontinue writing new preneed insurance policies in the United
States via independent funeral homes and funeral home chains other than those owned and operated by SCI for a period of ten years. The Company will receive payments from Forethought over the next ten years based on the amount of business the Company
transitions to Forethought.

In 2001, the Parent entered into a reinsurance agreement with The Hartford for the sale of its FFG division.
The Companys reinsurance recoverable from The Hartford was $752,377 and $819,735 as of December 31, 2006 and 2005, respectively. The Company would be responsible to administer this business in the event of a default by the reinsurer. In
addition, under the reinsurance agreement, The Hartford is obligated to contribute funds to increase the value of the separate account assets relating to modified guaranteed annuity business sold if such value declines below the value of the
associated liabilities. If The Hartford fails to fulfill these obligations, the Company will be obligated to make these payments. Assets backing ceded liabilities related to these businesses are held in trust for the benefit of the Company and the
separate accounts relating to the annuity business are still reflected as separate accounts in the Companys balance sheet.

In 2000,
the Parent divested its LTC operations to John Hancock. The Companys reinsurance recoverable from John Hancock was $423,889 and $354,288 as of December 31, 2006 and 2005, respectively.



F-26



---

##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



9. Reserves

The following table provides reserve information by major lines of business as of December 31, 2006 and 2005:



|                                                                                 |  |                                  |           |                   |   |             |  |                                 |           |                                  |   |                  |  |             |           |                                 |   |        |  |   |           |  |   |        
|-------------------------------------------------------------------------------- |  | -------------------------------- | --------- | ----------------- | - | ----------- |  | ------------------------------- | --------- | -------------------------------- | - | ---------------- |  | ----------- | --------- | ------------------------------- | - | ------ |  | - | --------- |  | - | -------
|                                                                                 |  | December 31, 2006                |           | December 31, 2005
|                                                                                 |  | FuturePolicyBenefits andExpenses |           | UnearnedPremiums  |   | CaseReserve |  | IncurredBut NotReportedReserves |           | FuturePolicyBenefits andExpenses |   | UnearnedPremiums |  | CaseReserve |           | IncurredBut NotReportedReserves
|Long Duration Contracts:                                                         |  |                                  |           |                   |   |             |  |                                 |           |                                  |   |                  |  |             |           |                                 |   |        |  |   |           |  |   |        
|Pre-funded funeral life insurance policies and investment-type annuity contracts |  | $                                | 1,354,105 |                   | $ | 1,554       |  | $                               | 4,643     |                                  | $ | 899              |  | $           | 1,740,023 |                                 | $ | 1,940  |  | $ | 5,494     |  | $ | 1,125  
|Life insurance no longer offered                                                 |  |                                  | 278,578   |                   |   | 655         |  |                                 | 730       |                                  |   | 26               |  |             | 289,078   |                                 |   | 687    |  |   | 856       |  |   | 27     
|FFG and LTC disposed businesses                                                  |  |                                  | 1,110,516 |                   |   | 18,632      |  |                                 | 41,838    |                                  |   | 5,280            |  |             | 1,121,837 |                                 |   | 18,964 |  |   | 30,533    |  |   | 2,689  
|All other                                                                        |  |                                  | 4,185     |                   |   | 514         |  |                                 | 14,019    |                                  |   | 7,439            |  |             | 3,639     |                                 |   | 636    |  |   | 10,940    |  |   | 8,329  
|Short Duration Contracts:                                                        |  |                                  |           |                   |   |             |  |                                 |           |                                  |   |                  |  |             |           |                                 |   |        |  |   |           |  |   |        
|Group term life                                                                  |  |                                  |          |                   |   | 6,448       |  |                                 | 309,144   |                                  |   | 51,278           |  |             |          |                                 |   | 5,824  |  |   | 312,096   |  |   | 55,832 
|Group disability                                                                 |  |                                  |          |                   |   | 1,926       |  |                                 | 1,298,627 |                                  |   | 149,944          |  |             |          |                                 |   | 1,913  |  |   | 1,269,320 |  |   | 162,413
|Medical                                                                          |  |                                  |          |                   |   | 6,002       |  |                                 | 10,451    |                                  |   | 16,901           |  |             |          |                                 |   | 6,360  |  |   | 13,263    |  |   | 21,041 
|Dental                                                                           |  |                                  |          |                   |   | 3,208       |  |                                 | 3,331     |                                  |   | 18,392           |  |             |          |                                 |   | 3,561  |  |   | 3,142     |  |   | 21,516 
|Credit life and disability                                                       |  |                                  |          |                   |   | 6           |  |                                 | 1,505     |                                  |   | 4,279            |  |             |          |                                 |   | 95     |  |   | 3,464     |  |   | 14,531 
|                                                                                 |  |                                  |           |                   |   |             |  |                                 |           |                                  |   |                  |  |             |           |                                 |   |        |  |   |           |  |   |        
|Total                                                                            |  | $                                | 2,747,384 |                   | $ | 38,945      |  | $                               | 1,684,288 |                                  | $ | 254,438          |  | $           | 3,154,577 |                                 | $ | 39,980 |  | $ | 1,649,108 |  | $ | 287,503
|                                                                                 |  |                                  |           |                   |   |             |  |                                 |           |                                  |   |                  |  |             |           |                                 |   |        |  |   |           |  |   |        



F-27



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



The following table provides a roll forward of the claims and benefits payable for the Companys
group term life and group disability lines of business. These are the Companys product lines with the most significant short duration claims and benefits payable balances.



|                                                      |  |               |         |   |                 |   |           |  
|----------------------------------------------------- |  | ------------- | ------- | - | --------------- | - | --------- | -
|                                                      |  | GroupTermLife |         |   | GroupDisability |  
|Balance as of January 1, 2004, gross of reinsurance   |  | $             | 368,873 |   |                 | $ | 1,307,849 |  
|Less: Reinsurance ceded and other (1)                 |  |               | (37     | ) |                 |   | (16,182   | )
|                                                      |  |               |         |   |                 |   |           |  
|Balance as of January 1, 2004, net of reinsurance     |  |               | 368,836 |   |                 |   | 1,291,667 |  
|Incurred losses related to:                           |  |               |         |   |                 |   |           |  
|Current year                                          |  |               | 207,733 |   |                 |   | 388,819   |  
|Prior years interest                                 |  |               | 9,552   |   |                 |   | 57,010    |  
|Prior year(s)                                         |  |               | (44,375 | ) |                 |   | (67,488   | )
|                                                      |  |               |         |   |                 |   |           |  
|Total incurred losses                                 |  |               | 172,910 |   |                 |   | 378,341   |  
|Paid losses related to:                               |  |               |         |   |                 |   |           |  
|Current year                                          |  |               | 130,901 |   |                 |   | 67,214    |  
|Prior year(s)                                         |  |               | 41,671  |   |                 |   | 247,883   |  
|                                                      |  |               |         |   |                 |   |           |  
|Total paid losses                                     |  |               | 172,572 |   |                 |   | 315,097   |  
|Balance as of December 31, 2004, net of reinsurance   |  |               | 369,174 |   |                 |   | 1,354,911 |  
|Plus: Reinsurance ceded and other (1)                 |  |               | 36      |   |                 |   | 13,909    |  
|                                                      |  |               |         |   |                 |   |           |  
|Balance as of December 31, 2004, gross of reinsurance |  | $             | 369,210 |   |                 | $ | 1,368,820 |  
|Less: Reinsurance ceded and other (1)                 |  |               | (36     | ) |                 |   | (13,909   | )
|                                                      |  |               |         |   |                 |   |           |  
|Balance as of January 1, 2005, net of reinsurance     |  |               | 369,174 |   |                 |   | 1,354,911 |  
|Incurred losses related to:                           |  |               |         |   |                 |   |           |  
|Current year                                          |  |               | 199,360 |   |                 |   | 370,700   |  
|Prior years interest                                 |  |               | 9,159   |   |                 |   | 61,415    |  
|Prior year(s)                                         |  |               | (50,890 | ) |                 |   | (37,384   | )
|                                                      |  |               |         |   |                 |   |           |  
|Total incurred losses                                 |  |               | 157,629 |   |                 |   | 394,731   |  
|Paid losses related to:                               |  |               |         |   |                 |   |           |  
|Current year                                          |  |               | 121,059 |   |                 |   | 69,114    |  
|Prior year(s)                                         |  |               | 38,072  |   |                 |   | 263,098   |  
|                                                      |  |               |         |   |                 |   |           |  
|Total paid losses                                     |  |               | 159,131 |   |                 |   | 332,212   |  
|Balance as of December 31, 2005, net of reinsurance   |  |               | 367,672 |   |                 |   | 1,417,430 |  
|Plus: Reinsurance ceded and other (1)                 |  |               | 256     |   |                 |   | 14,303    |  
|                                                      |  |               |         |   |                 |   |           |  
|Balance as of December 31, 2005, gross of reinsurance |  | $             | 367,928 |   |                 | $ | 1,431,733 |  
|Less: Reinsurance ceded and other (1)                 |  |               | (256    | ) |                 |   | (14,303   | )
|                                                      |  |               |         |   |                 |   |           |  
|Balance as of January 1, 2006, net of reinsurance     |  |               | 367,672 |   |                 |   | 1,417,430 |  
|Incurred losses related to:                           |  |               |         |   |                 |   |           |  
|Current year                                          |  |               | 188,983 |   |                 |   | 373,609   |  
|Prior years interest                                 |  |               | 9,575   |   |                 |   | 62,270    |  
|Prior year(s)                                         |  |               | (54,438 | ) |                 |   | (78,352   | )
|                                                      |  |               |         |   |                 |   |           |  
|Total incurred losses                                 |  |               | 144,120 |   |                 |   | 357,527   |  
|Paid losses related to:                               |  |               |         |   |                 |   |           |  
|Current year                                          |  |               | 117,626 |   |                 |   | 64,914    |  
|Prior year(s)                                         |  |               | 34,156  |   |                 |   | 271,526   |  
|                                                      |  |               |         |   |                 |   |           |  
|Total paid losses                                     |  |               | 151,782 |   |                 |   | 336,440   |  
|Balance as of December 31, 2006, net of reinsurance   |  |               | 360,010 |   |                 |   | 1,438,517 |  
|Plus: Reinsurance ceded and other (1)                 |  |               | 412     |   |                 |   | 10,054    |  
|                                                      |  |               |         |   |                 |   |           |  
|Balance as of December 31, 2006, gross of reinsurance |  | $             | 360,422 |   |                 | $ | 1,448,571 |  
|                                                      |  |               |         |   |                 |   |           |  

---

|(1) | Reinsurance ceded and other includes claims and benefits payable balance that have either been [a] reinsured to third parties, [b] established for claims related expenses whose
subsequent payment is not recorded as a paid claim, or [c] reserves established for obligations that would persist even if contracts were cancelled (such as extension of benefits), which cannot be analyzed appropriately under a roll-forward
approach.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-28



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



Claims and benefits payable include claims in process as well as provisions for incurred but not
reported claims. Such amounts are developed using actuarial principles and assumptions that consider, among other things, contractual requirements, historical utilization trends and payment patterns, benefit changes, medical inflation, seasonality,
membership, product mix, legislative and regulatory environment, economic factors, disabled life mortality and claim termination rates and other relevant factors. The Company consistently applies the principles and assumptions listed above from year
to year, while also giving due consideration to the potential variability of these factors.

Since claims and benefits payable include
estimates developed from various actuarial methods, the Companys actual losses incurred may be more or less than the Companys previously developed estimates. As shown in the table above, if the amounts listed on the line labeled
Incurred losses related to: Prior year are negative (redundant) this means that the Companys actual losses incurred related to prior years for these lines were less than the estimates previously made by the Company. If the line
labeled Incurred losses related to: Prior year are positive (deficient) this means that the Companys actual losses incurred related to prior years for these lines were greater than the estimates previously made by the Company.

The Group Term Life redundancies in all years are due to actual mortality rates running below those assumed in prior year reserves, and
actual recovery rates running higher than those assumed in prior year reserves.

Group Disability claims and benefits payable show
redundancies in all years due to actual claim recovery rates exceeding those assumed in prior year reserves.

Long Duration Contracts

The Companys long duration contracts are comprised of pre-funded funeral life insurance policies and annuity contracts, life
insurance policies no longer offered, and FFG and LTC disposed businesses. The principal products and services included in these categories are described in the summary of significant accounting polices (see Note 2).

PreNeed BusinessIndependent Division

Interest and discount rates for pre-funded funeral life insurance are level, vary by year of issuance and product, and ranged from 4.7% to 7.3% in 2006 and 2005 before provisions for adverse deviation, which ranged
from 0.2% to 0.5% in both 2006 and 2005.

Interest and discount rates for traditional life insurance no longer offered vary by year of
issuance and products and were 7.5% grading to 5.3% over 20 years in 2006 and 2005 with the exception of a block of pre-1980 business which had a level 8.8% discount rate in both 2006 and 2005.

Mortality assumptions are based upon pricing assumptions and modified to allow provisions for adverse deviation. Surrender rates vary by product and are
based upon pricing assumptions.

Future policy benefit increases on pre-funded funeral life insurance policies ranged from 1.0% to 7.0% in
2006 and 2005. Some policies have future policy benefit increases, which are guaranteed or tied to equal some measure of inflation. The inflation assumption for most of these inflation-linked benefits was 3.0% in both 2006 and 2005 with the
exception of most policies issued in 2006 and 2005 where the assumption was 2.3%. Traditional life products issued by the PreNeed business have level benefits.



F-29



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



The reserves for annuities issued by the independent division are based on assumed interest rates
credited on deferred annuities, which vary by year of issue, and ranged from 2.0% to 5.5% in 2006 and 2005. Withdrawal charges, if any, generally range from 7.0% to 0% and grade to zero over a period of seven years for business issued in the United
States. Canadian annuity products have a surrender charge that varies by product series and premium paying period, typically grading to zero after all premiums have been paid.

FFG and LTC

The reserves for
FFG and LTC are included in the companys reserves in accordance with Statement of Financial Accounting Standards No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts (FAS 113). The
Company maintains an offsetting reinsurance recoverable related to these reserves (see note 8).

Short Duration Contracts

The Companys short duration contracts are comprised of group term life, group disability, medical, dental, and credit life
and disability. The principal products and services included in these categories are described in the summary of significant accounting polices (see note 2).

The Companys short duration group disability category includes short and long term disability products. Claims and benefits payable for long-term disability have been discounted at 5.25%. The December 31,
2006 and 2005 liabilities include $1,410,711 and $1,376,793, respectively, of such reserves. The amount of discounts deducted from outstanding reserves as of December 31, 2006 and 2005 are $445,004 and $445,984, respectively.

10. Fair Value Disclosures

Statement of Financial
Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments (FAS 107) requires disclosure of fair value information about financial instruments, as defined therein, for which it is practicable to
estimate such fair value. These financial instruments may or may not be recognized in the consolidated balance sheets. In the measurement of the fair value of certain financial instruments, if quoted market prices were not available other valuation
techniques were utilized. These derived fair value estimates are significantly affected by the assumptions used. Additionally, FAS 107 excludes certain financial instruments including those related to insurance contracts.

In estimating the fair value of the financial instruments presented, the Company used the following methods and assumptions:

Cash, cash equivalents and short-term investments: the carrying amount reported approximates fair value because of the short maturity of the
instruments.

Fixed maturity securities: the fair value for fixed maturity securities, which includes both public and 144A
securities, is based on quoted market prices, where available. For fixed maturity securities that are not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements,
excluding 144A securities, are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments.

Equity securities: the fair value of equity securities and non-sinking fund preferred stocks is based on quoted market prices.



F-30



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



Commercial mortgage loans and policy loans: the fair values of mortgage loans are estimated
using discounted cash flow analyses, based on interest rates currently being offered for similar loans to borrowers with similar credit ratings. Mortgage loans with similar characteristics are aggregated for purposes of the calculations. The
carrying amounts of policy loans reported in the balance sheets approximate fair value.

Other investments: the fair values of joint
ventures are based on financial statements provided by partnerships or members. The carrying amounts of the remaining other investments approximate fair value.

Policy reserves under investment products: the fair values for the Companys policy reserves under the investment products are determined using cash surrender value.

Collateral and obligations under securities lending: the fair values of securities lending assets and liabilities are based on quoted market
prices.

Separate account assets and liabilities: separate account assets and liabilities are reported at their estimated fair
values in the balance sheet.

Other assets: a derivative instrument, the Consumer Price Index Cap, is recorded in other assets. The
fair value of this derivative is based on quoted market prices.



|                                                                                                              |  |                   |           |                   |   |               |  |            |           |  |   |          
|------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | ----------------- | - | ------------- |  | ---------- | --------- |  | - | ---------
|                                                                                                              |  | December 31, 2006 |           | December 31, 2005
|                                                                                                              |  | CarryingValue     |           | Fair Value        |   | CarryingValue |  | Fair Value
|Financial assets                                                                                              |  |                   |           |                   |   |               |  |            |           |  |   |          
|Cash and cash equivalents                                                                                     |  | $                 | 75,233    |                   | $ | 75,233        |  | $          | 19,042    |  | $ | 19,042   
|Fixed maturities                                                                                              |  |                   | 2,915,346 |                   |   | 2,915,346     |  |            | 3,488,415 |  |   | 3,488,415
|Equity securities                                                                                             |  |                   | 320,010   |                   |   | 320,010       |  |            | 318,120   |  |   | 318,120  
|Commercial mortgage loans on real estate                                                                      |  |                   | 750,283   |                   |   | 774,030       |  |            | 758,966   |  |   | 815,753  
|Policy loans                                                                                                  |  |                   | 7,840     |                   |   | 7,840         |  |            | 9,773     |  |   | 9,773    
|Short-term investments                                                                                        |  |                   | 48,141    |                   |   | 48,141        |  |            | 80,329    |  |   | 80,329   
|Collateral held under securities lending                                                                      |  |                   | 176,937   |                   |   | 176,937       |  |            | 384,141   |  |   | 384,141  
|Other investments                                                                                             |  |                   | 87,323    |                   |   | 87,323        |  |            | 61,024    |  |   | 61,024   
|Other assets                                                                                                  |  |                   | 6,451     |                   |   | 6,451         |  |            | 8,753     |  |   | 8,753    
|Assets held in separate accounts                                                                              |  |                   | 3,020,811 |                   |   | 3,020,811     |  |            | 3,200,233 |  |   | 3,200,233
|Financial liabilities                                                                                         |  |                   |           |                   |   |               |  |            |           |  |   |          
|Policy reserves under investment products(Individual and group annuities, subject todiscretionary withdrawal) |  | $                 | 355,178   |                   | $ | 352,809       |  | $          | 616,733   |  | $ | 609,603  
|Obligations under securities lending                                                                          |  |                   | 176,937   |                   |   | 176,937       |  |            | 384,141   |  |   | 384,141  
|Liabilities related to separate accounts                                                                      |  |                   | 3,020,811 |                   |   | 3,020,811     |  |            | 3,200,233 |  |   | 3,200,233

The fair value of the Companys liabilities for insurance contracts other than
investment-type contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Companys overall management of interest rate risk, such that the
Companys exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.



F-31



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



11. Retirement and Other Employee Benefits

The Parent sponsors a defined benefit pension plan and certain other post retirement benefits covering employees and certain agents who meet eligibility
requirements as to age and length of service. Plan assets of the defined benefit plans are not specifically identified by each participating subsidiary. Therefore, a breakdown of plan assets is not reflected in these financial statements. The
Company has no legal obligation for benefits under these plans. The benefits are based on years of service and career compensation. The Parents pension plan funding policy is to contribute amounts to the plan sufficient to meet the minimum
funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus additional amounts as the Parent may determine to be appropriate from time to time up to the maximum permitted, and to charge each subsidiary an allocable
amount based on its employee census. Pension cost allocated to the Company amounted to $8,240, $7,881 and $9,409 for 2006, 2005 and 2004, respectively.

The Company participates in a contributory profit sharing plan, sponsored by the Parent, covering employees and certain agents who meet eligibility requirements as to age and length of service. Benefits are payable to
participants on retirement or disability and to the beneficiaries of participants in the event of death. For employees hired on or before December 31, 2000, the first 3% of an employees contribution is matched 200% by the Company. The
second 2% is matched 50% by the Company. For employees hired after December 31, 2000, the first 3% of an employees contribution is matched 100% by the Company. The second 2% is matched 50% by the Company. The amount expensed was $5,688,
$5,656 and $5,462 for 2006, 2005 and 2004, respectively.

With respect to retirement benefits, the Company participates in other health
care and life insurance benefit plans (postretirement benefits) for retired employees, sponsored by the Parent. Health care benefits, either through the Parents sponsored retiree plan for retirees under age 65 or through a cost offset for
individually purchased Medigap policies for retirees over age 65, are available to employees who retire on or after January 1, 1993, at age 55 or older, with 10 years or more service. Life insurance, on a retiree pay all basis, is available to
those who retire on or after January 1, 1993. The Company made contributions to the postretirement benefit plans of $0, $0 and $1,767 in 2006, 2005 and 2004, respectively, as claims were incurred. During 2006, 2005 and 2004 the Company incurred
expenses related to retirement benefits of $1,532, $1,505 and $4,333, respectively.

12. Deferred Policy Acquisition Costs

Information about deferred policy acquisition costs follows:





|                              |  |              |         |   |      |   |         |      |  |   |         |  
|----------------------------- |  | ------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                              |  | December 31, |        
|                              |  | 2006         |         |   | 2005 |   |         | 2004 | 
|Beginning Balance             |  | $            | 123,222 |   |      | $ | 116,060 |      |  | $ | 103,606 |  
|Transfer of Canadian Business |  |              | (45,690 | ) |      |   |        |      |  |   |        |  
|Costs deferred                |  |              | 27,874  |   |      |   | 78,432  |      |  |   | 78,106  |  
|Amortization                  |  |              | (41,772 | ) |      |   | (72,726 | )    |  |   | (68,508 | )
|Foreign currency translation  |  |              | (63     | ) |      |   | 1,456   |      |  |   | 2,856   |  
|                              |  |              |         |   |      |   |         |      |  |   |         |  
|Ending Balance                |  | $            | 63,571  |   |      | $ | 123,222 |      |  | $ | 116,060 |  
|                              |  |              |         |   |      |   |         |      |  |   |         |  



F-32



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



13. Goodwill and Value of Business Acquired

Information about goodwill and value of business acquired (VOBA) are as follows:



|                                      |  |                                           |         |   |                                     |   |         |      |  |   |         |   |  |      |        |   |      |   |        |   |  |   |        |  
|------------------------------------- |  | ----------------------------------------- | ------- | - | ----------------------------------- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------ | - | ---- | - | ------ | - |  | - | ------ | -
|                                      |  | Goodwill for the Year EndedDecember 31, ` |         |   | VOBA for the Year EndedDecember 31, |  
|                                      |  | 2006                                      |         |   | 2005                                |   |         | 2004 |  |   | 2006    |   |  | 2005 |        |   | 2004 |  
|Beginning Balance                     |  | $                                         | 164,643 |   |                                     | $ | 156,143 |      |  | $ | 157,024 |   |  | $    | 33,965 |   |      | $ | 39,413 |   |  | $ | 45,710 |  
|Transfer of Canadian Business         |  |                                           | (7,817  | ) |                                     |   |        |      |  |   |        |   |  |      | (2,692 | ) |      |   |       |   |  |   |       |  
|Dental mergers (see Note 1)           |  |                                           |        |   |                                     |   | 8,594   |      |  |   |        |   |  |      |       |   |      |   |       |   |  |   |       |  
|Acquisitions (Dispositions)           |  |                                           |        |   |                                     |   | (340    | )    |  |   |        |   |  |      |       |   |      |   |       |   |  |   |       |  
|Amortization, net of interest accrued |  |                                           |        |   |                                     |   |        |      |  |   |        |   |  |      | (4,603 | ) |      |   | (5,532 | ) |  |   | (6,503 | )
|Foreign Currency Translation          |  |                                           | (9      | ) |                                     |   | 246     |      |  |   | (881    | ) |  |      | (3     | ) |      |   | 84     |   |  |   | 206    |  
|                                      |  |                                           |         |   |                                     |   |         |      |  |   |         |   |  |      |        |   |      |   |        |   |  |   |        |  
|Ending Balance                        |  | $                                         | 156,817 |   |                                     | $ | 164,643 |      |  | $ | 156,143 |   |  | $    | 26,667 |   |      | $ | 33,965 |   |  | $ | 39,413 |  
|                                      |  |                                           |         |   |                                     |   |         |      |  |   |         |   |  |      |        |   |      |   |        |   |  |   |        |  

As of December 31, 2006, the majority of the outstanding balance of VOBA relates to the
Companys pre-funded funeral insurance business. VOBA in this segment assumes an interest rate ranging from 6.5% to 7.5%.

At
December 31, 2006 the estimated amortization of VOBA for the next five years is as follows:



|     |  |         
|---- |  | --------
|Year |  | Amount $
|2007 |  | 3,851   
|2008 |  | 3,051   
|2009 |  | 2,272   
|2010 |  | 1,799   
|2011 |  | 1,638   

14. Other Comprehensive Income

The Companys components of other comprehensive income (loss) net of tax at December 31 are as follows:



|                              |  |                                       |        |   |                                       |   |         |                                      |  |   |         |  
|----------------------------- |  | ------------------------------------- | ------ | - | ------------------------------------- | - | ------- | ------------------------------------ |  | - | ------- | -
|                              |  | Foreign CurrencyTranslationAdjustment |        |   | Unrealized Gains(Losses) onSecurities |   |         | Accumulated OtherComprehensiveIncome | 
|Balance at December 31, 2003  |  | $                                     | 3,933  |   |                                       | $ | 152,469 |                                      |  | $ | 156,402 |  
|Activity in 2004              |  |                                       | 2,784  |   |                                       |   | 13,489  |                                      |  |   | 16,273  |  
|                              |  |                                       |        |   |                                       |   |         |                                      |  |   |         |  
|Balance at December 31, 2004  |  |                                       | 6,717  |   |                                       |   | 165,958 |                                      |  |   | 172,675 |  
|Dental Merger (See Note 2)    |  |                                       |       |   |                                       |   | 34      |                                      |  |   | 34      |  
|Activity in 2005              |  |                                       | 300    |   |                                       |   | (53,480 | )                                    |  |   | (53,180 | )
|                              |  |                                       |        |   |                                       |   |         |                                      |  |   |         |  
|Balance at December 31, 2005  |  |                                       | 7,017  |   |                                       |   | 112,512 |                                      |  |   | 119,529 |  
|Transfer of Canadian Business |  |                                       | (7,227 | ) |                                       |   | (11,729 | )                                    |  |   | (18,956 | )
|Activity in 2006              |  |                                       | 151    |   |                                       |   | (38,445 | )                                    |  |   | (38,294 | )
|                              |  |                                       |        |   |                                       |   |         |                                      |  |   |         |  
|Balance at December 31, 2006  |  | $                                     | (59    | ) |                                       | $ | 62,338  |                                      |  | $ | 62,279  |  
|                              |  |                                       |        |   |                                       |   |         |                                      |  |   |         |  



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)



15. Related Party Transactions

The Company receives various services from the Parent and its affiliates. These services include assistance in benefit plan administration, corporate insurance, accounting, tax, auditing, investment, information
technology and other administrative functions. The fees paid to the Parent for these services for years ended December 31, 2006, 2005 and 2004, were $36,181, $32,103 and $27,940, respectively. Net expenses paid to affiliates were $33,245,
$38,846 and $34,462, for the years ended December 31, 2006, 2005 and 2004. Information technology expenses were $44,470, $56,866 and $51,295 for years ended December 31, 2006, 2005 and 2004, respectively.

Administrative expenses allocated for the Company may be greater or less than the expenses that would be incurred if the Company were operating on its
own.

The Company assumes pre-funded funeral business from its affiliate, United Family Life Insurance Company (UFL). The
Company has assumed premium from UFL of $9,838, $12,215 and $15,136 in 2006, 2005 and 2004, respectively. The Company assumed $548,472 and $572,790 of reserves in 2006 and 2005, respectively, from UFL.

The Company assumes group disability business from its affiliate, Union Security Life Insurance Company of New York (USLIC). The Company
assumed $6,916, $6,588 and $6,526 of premium from USLIC in 2006, 2005 and 2004, respectively. The Company assumed $29,151 and $24,879 of reserves in 2006 and 2005, respectively, from USLIC.

On April 1, 2006, the Company transferred the assets and liabilities related to its Canadian operations to ALOC, an indirectly wholly owned
subsidiary of the Parent, in exchange for ALOC common stock equal to the fair value of the net assets transferred. The Company transferred assets of approximately $473,000 and liabilities of approximately $400,000 related to its Canadian operations
to ALOC for the purpose of re-domesticating its Canadian operations to Canada. In return, the Company received approximately $75,000 of ALOC common stock which was then sold to the Parent. In addition, there was a reinsurance agreement between the
Company and ALOC for the existing insurance in force in which the Company was relieved of any liability to the insured. As a result of these transactions, the Company recognized an increase to equity of approximately $2,000.

16. Commitments and Contingencies

The Company and
its subsidiaries lease office space and equipment under operating lease arrangements. Certain facility leases contain escalation clauses based on increases in the lessors operating expenses. At December 31, 2006, the aggregate future
minimum lease payment under operating lease agreements that have initial or non-cancelable terms in excess of one year are:



|                                    |  |   |       
|----------------------------------- |  | - | ------
|2007                                |  | $ | 8,350 
|2008                                |  |   | 7,670 
|2009                                |  |   | 6,531 
|2010                                |  |   | 6,092 
|2011                                |  |   | 5,032 
|Thereafter                          |  |   | 625   
|                                    |  |   |       
|Total minimum future lease payments |  | $ | 34,300
|                                    |  |   |       



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements(Continued)

December 31,
2006, 2005 and 2004

(In thousands except share data)

Rent expense was $8,713, $9,699 and $10,904 for 2006, 2005 and 2004 respectively.

The Company is regularly involved in litigation in the ordinary course of business, both as a defendant and as a plaintiff. The Company may from time to
time be subject to a variety of legal and regulatory actions relating to the Companys current and past business operations. While the Company cannot predict the outcome of any pending or future litigation, examination or investigation, the
Company does not believe that any pending matter will have a material adverse effect on the Companys business, financial condition or results of operations.



F-35