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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K







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

For the fiscal year ended December 31, 2007

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





UNION SECURITY INSURANCE COMPANY

(Exact name of registrant as
specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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





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     ̈  Smaller Reporting Company

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, 2008, 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, 2007

TABLE OF CONTENTS



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



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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 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 Union Security,
we, us or our refer to Union Security Insurance Company.

Amounts are presented in United States of
America (U.S.) dollars and all amounts are in thousands, except number of shares and number of employees.

Business Organization

Union Security, which is licensed to sell life, health and annuity insurance in the District of Columbia and in all states except New
York, writes 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, 2007 for a full description of each of these businesses). We perform
substantially all of the operations of the Assurant Employee Benefits segment. We directly market, sell and administer the group disability, group life and certain of the group dental insurance products, and we manage other Assurant subsidiaries
that provide 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 funeral life insurance business (preneed) as a result of two
transactions. First, in November 2005 we 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 U.S. via independent
funeral homes and funeral home chains other than those owned and operated by Service Corporation International (SCI). Second, in April 2006 we transferred assets and liabilities related to our Canadian operations to Assurant Life of
Canada (ALOC). ALOC is also an indirect wholly-owned subsidiary of Assurant. Of our total gross revenues generated during 2007, approximately 79% was from the Assurant Employee Benefits segment, approximately 11% from the Assurant
Solutions segment and the remaining from the Assurant Health and Assurant Corporate and Other segments.

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.



2



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Union Security was redomesticated to Iowa from Minnesota in 2004.

As of February 15, 2008, 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 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 filed with the SEC and available on the SEC website at www.sec.gov or through Assurants website at www.assurant.com.



|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 Accurately Predict Benefits and Other Costs and Claims. We may be unable to accurately predict 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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, the Company 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, the Company 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 preneed 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 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 preneed business distribution, we will incur losses on chargebacks from agents who have been terminated who will be unable to repay their obligation.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Risks related to litigation and regulatory actions. From time to time we may be involved in various regulatory investigations and examinations
relating to our insurance and other related business operations. We are subject to comprehensive regulation and oversight by insurance departments in jurisdictions in which we do business. These insurance departments have broad administrative powers
with respect to all aspects of the insurance business and, in particular, monitor the manner in which an insurance company offers, sells and administers its products. Therefore, we may from time to time be subject to a variety of legal and
regulatory actions relating to our current and past business operations and practices.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The prevalence and
outcomes of any such actions cannot be predicted, and no assurances can be given that such actions or any litigation would not materially adversely affect our results of operations and financial condition. In addition, if we were to experience
difficulties with our relationship with a regulatory body in a given jurisdiction, it could have a material adverse effect on our ability to do business in that jurisdiction.

One particular area of focus which has affected our parent, Assurant, has been the accounting treatment for finite reinsurance or other
non-traditional or loss mitigation insurance products. For specific details, please see the Risk Factor entitled Our business is subject to risks related to litigation and regulatory actions in our parents
Annual Report on Form 10-K, which we incorporate by reference herein. Some state regulators have made routine inquiries to some of Assurants insurers regarding finite reinsurance We depend on our parent, Assurant, for certain administrative,
strategic and operational support. We cannot predict at this time the effect that current litigation, investigations and regulatory activity will have on Assurant or our business, but any adverse outcome could have a material adverse affect on our
business, results of operations or financial condition.

For additional risks that relate to our business, we incorporate by reference the
Risk Factors in Assurants Annual Report on Form 10-K filed with the SEC and available on the SECs website at www.sec.gov or through Assurants website at www.assurant.com.



|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 office space from an unrelated party 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 U.S. 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, 2008, 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 have no equity compensation plan. We paid $197,000, $210,000, and $180,000 in dividends to our stockholder in 2007, 2006
and 2005, respectively.



|Item 6. | Selected Financial Data
|------- | -----------------------

Not
required under reduced disclosure format.



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|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

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 elsewhere in this report, particularly under the headings Item 1A - Risk Factors and
Forward-Looking Statements.

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



|                                                         |  |                                |           |   |      |   |          
|-------------------------------------------------------- |  | ------------------------------ | --------- | - | ---- | - | ---------
|                                                         |  | For the Year EndedDecember 31,
|                                                         |  | 2007                           |           |   | 2006
|                                                         |  | (in thousands)                
|Revenues:                                                |  |                                |           |   |      |   |          
|Net earned premiums and other considerations             |  | $                              | 1,259,930 |   |      | $ | 1,366,820
|Net investment income                                    |  |                                | 286,235   |   |      |   | 286,974  
|Net realized (losses) gains on investments               |  |                                | (28,219   | ) |      |   | 8,490    
|Amortization of deferred gains on disposal of businesses |  |                                | 23,548    |   |      |   | 14,929   
|Fees and other income                                    |  |                                | 16,395    |   |      |   | 73,183   
|                                                         |  |                                |           |   |      |   |          
|Total revenues                                           |  |                                | 1,557,889 |   |      |   | 1,750,396
|                                                         |  |                                |           |   |      |   |          
|Benefits, losses and expenses:                           |  |                                |           |   |      |   |          
|Policyholder benefits                                    |  |                                | 934,609   |   |      |   | 1,023,627
|Selling, underwriting and general expenses (1)           |  |                                | 426,681   |   |      |   | 473,561  
|                                                         |  |                                |           |   |      |   |          
|Total benefits, losses and expenses                      |  |                                | 1,361,290 |   |      |   | 1,497,188
|                                                         |  |                                |           |   |      |   |          
|Income before income tax expense                         |  |                                | 196,599   |   |      |   | 253,208  
|Income tax expense                                       |  |                                | 57,121    |   |      |   | 106,576  
|                                                         |  |                                |           |   |      |   |          
|Net income                                               |  | $                              | 139,478   |   |      | $ | 146,632  
|                                                         |  |                                |           |   |      |   |          



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

Year Ended December 31, 2007 Compared to December 31, 2006

Net Income

Net income
decreased $7,154, or 5%, to $139,478 for the year ended December 31, 2007 from $146,632 for the year ended December 31, 2006. This decrease is primarily due to approximately $40,500 (after-tax) of income from a legal settlement in the
prior year, approximately $13,800 (after-tax) of other than temporary impairments in our investment portfolio and a decline in our small employer group health business. These decreases were partially offset by favorable experience in our group
disability business. Also, in 2007, we had a decrease in certain tax liabilities of approximately $9,900 compared with an increase of approximately $20,000 in 2006.

Total Revenues

Total revenues
decreased $192,507, or 11%, to $1,557,889 for the year ended December 31, 2007 from $1,750,396 for the year ended December 31, 2006. This decrease is primarily due to a decrease in net earned premiums and other considerations of $106,890
partly due to a decrease in our small employer group health business driven by lower sales and declining membership, and decreases in our group disability, group dental and group life businesses, all due to lower persistency of



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large cases over the past several quarters as the business continues to implement its small case strategy. Net earned premiums also decreased due to the sale
of our Independent  U.S. distribution channel in our preneed business, the loss of a client in our accidental death and dismemberment (AD&D) business and the transfer of our Canadian business to an affiliate. In addition, total
revenues decreased due to $28,219 of net realized losses in 2007 compared to net realized gains of $8,490 in 2006 driven by approximately $21,000 of other than temporary impairments in our investment portfolio, and a decrease in fees and other
income due to a legal settlement of approximately $62,300 in the prior year.

Total Benefits, Losses and Expenses

Total benefits, losses and expenses decreased $135,898, or 9%, to $1,361,290 for the year ended December 31, 2007 from $1,497,188 for the year ended
December 31, 2006. This decrease is primarily due to a decrease in policyholder benefits of $89,018 driven by declines in our small employer group health business resulting from declining membership, and in our group disability business as a
result of favorable experience. The sale of our Independent  U.S. distribution channel in our preneed business, the transfer of our Canadian business to an affiliate and the loss of a client in our AD&D business contributed to decreases in
policyholder benefits and selling, underwriting and general expenses due to lower commission expense.

Income Taxes

Income taxes decreased $49,455, or 46%, to $57,121 for the year ended December 31, 2007 from $106,576 for the year ended December 31, 2006. The
effective tax rate of 29.1% for the year ended December 31, 2007 decreased from 42.1% for the year ended December 31, 2006 due to a $9,900 reduction in certain tax liabilities in 2007 associated with the resolution of tax audits compared
with approximately $20,000 associated with an increase in certain tax liabilities in 2006.



|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.

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. 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



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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, 2007, we held $2,654,969 of fixed maturity securities at fair market value and $822,184 of commercial mortgages at amortized cost for a combined total of 85% of total invested assets. 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.

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 $1,312,268 of reinsurance recoverables at December 31, 2007, 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 $700,483 and $489,865 as of December 31, 2007 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 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. We believe that a majority of our reinsurance exposure has been ceded to companies rated A- or better by A.M. Best.

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 22% of our preneed insurance policies with reserves of approximately $327,000 as of December 31, 2007 have death
benefits that are guaranteed to grow with the Consumer Price Index. In times of



8



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##### Table of Contents

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 preneed 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
|-------- | -----------------------

Disclosure
Controls and Procedures

Under the supervision and with the participation of our Interim Chief Executive Officer and Chief Financial
Officer, we have evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2007. Based on this evaluation, our Interim 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



9



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##### Table of Contents

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 Interim Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Managements Annual Report on Internal Control Over
Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.

A companys internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles
generally accepted in the United States. A companys internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted
in the United States, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the companys assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

The Companys management assessed its internal control over financial reporting as of December 31,
2007 using criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Management, including the Companys interim chief executive officer and its chief financial officer, based on their evaluation of the Companys internal control over financial reporting (as defined in
Securities Exchange Act Rule 13a-15(f)), have concluded that the Companys internal control over financial reporting was effective as of December 31, 2007.

There have been no changes in the Companys internal control over financial reporting that occurred during the Companys fourth fiscal quarter in 2007 that have materially affected, or is reasonably likely
to materially affect, the Companys internal control over financial reporting.



|Item 9B. | Other Information
|-------- | -----------------

None.

PART III



|Item 10. | Directors and Executive Officers of The Registrant
|-------- | --------------------------------------------------

Not required under reduced disclosure format.



|Item 11. | Executive Compensation
|-------- | ----------------------

Not
required under reduced disclosure format.



10



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##### Table of Contents

|Item 12. | Security Ownership of Certain Beneficial Owners and Management
|-------- | --------------------------------------------------------------

Not required under reduced disclosure format.



|Item 13. | Certain Relationships and Related Transactions
|-------- | ----------------------------------------------

Not required under reduced disclosure format.



|Item 14. | Principal Accounting Fees and Services
|-------- | --------------------------------------

PricewaterhouseCoopers LLP has audited our financial statements for fiscal 2007. 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, 2007 and 2006.



|                    |  |                                    |     |            |                                    |   |        |   |            |  |     |  
|------------------- |  | ---------------------------------- | --- | ---------- | ---------------------------------- | - | ------ | - | ---------- |  | --- | -
|                    |  | Fiscal Year EndedDecember 31, 2007 |     |            | Fiscal Year EndedDecember 31, 2006 |  
|Description of Fees |  | Amount                             |     | Percentage |                                    |   | Amount |   | Percentage | 
|Audit fees          |  | $                                  | 981 |            | 100                                | % |        | $ | 1,113      |  | 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 registered public accounting firm, including procedures relating to the Assurant Audit Committees power to:



| |  |  | Retain and terminate the independent registered public accounting firm and approve all audit engagement fees and terms;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Inform each independent 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 independent registered public accounting firm employed by Union Security, including the resolution of any disagreement between
management and the independent registered public accounting firm 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 registered public accounting firm, other
than prohibited non-auditing services.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Prohibited non-auditing 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 the Company 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 registered public accounting firm so long as it is presented to the full Assurant Audit Committee at a later time.



11



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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, 2007 and 2006                                                       |  | F-2 
|Consolidated Statements of Operations of Union Security Insurance Company for the Years Ended December 31, 2007, 2006 and 2005                      |  | F-3 
|Consolidated Statements of Changes in Stockholders Equity of Union Security Insurance Company for the Years Ended December 31, 2007, 2006 and 2005 |  | F-4 
|Consolidated Statements of Cash Flows of Union Security Insurance Company for the Years Ended December 31, 2007, 2006 and 2005                      |  | F-5 
|Notes to Consolidated Financial Statements of Union Security Insurance Company                                                                      |  | F-7 

(a)2. Consolidated 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 our
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).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



12



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##### Table of Contents

|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).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3.6 | Amendment To The Restated Articles of Incorporation of Fortis Benefits Insurance Company, effective September 6, 2005 (incorporated by reference from Exhibit 3.6 to
Registrants Form 10-K, originally filed March 1, 2007).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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 (incorporated by reference
from Exhibit 10.1 to Registrants Form 10-K, originally filed March 1, 2007).
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.2 | Adjustment to Asset Purchase and Assumption Reinsurance Agreement between Union Security Insurance Company and Assurant Life of Canada dated as of June 15, 2006.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



|24.1 | Power of Attorney.
|---- | ------------------



|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 Interim 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.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



13



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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
February 29, 2008.



UNION SECURITY INSURANCE COMPANYBy:

/s/ John S. RobertsName:  John S. Roberts Title:    Interim President and Chief Executive 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 February 29, 2008.



|                       |  |                                              
|---------------------- |  | ---------------------------------------------
|Signature              |  | Title                                        
|                       | 
|/s/ John S. Roberts    |  | Interim President and Chief Executive Officer
|John S. Roberts        |  | (Principal Executive Officer)                
|                       | 
|/s/ Stacia N. Almquist |  | Treasurer and Chief Financial Officer        
|Stacia N. Almquist     |  | (Principal Financial Officer)                
|                       | 
|*                      |  | Chairman of the Board                        
|Robert B. Pollock      |  |                                              
|                       | 
|                       |  | Director                                     
|P. Bruce Camacho       |  |                                              
|                       | 
|*                      |  | Director                                     
|S. Craig Lemasters     |  |                                              
|                       | 
|*                      |  | Director                                     
|Michael J. Peninger    |  |                                              
|                       | 
|*                      |  | Director                                     
|Lesley G. Silvester    |  |                                              



|      |  |                                 
|----- |  | --------------------------------
|By:   |  | /s/ John S. Roberts             
|Name: |  | John S. Roberts Attorney-in-Fact



14



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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, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 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
|                          
|February 29, 2008         
|Minneapolis, Minnesota    



F-1



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##### Table of Contents

Union Security Insurance Company

Consolidated Balance Sheets

At December 31, 2007 and 2006







|                                                                                                                         |  |                                                             |           |                  |   |          
|------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------- | --------- | ---------------- | - | ---------
|                                                                                                                         |  | December 31,2007                                            |           | December 31,2006
|                                                                                                                         |  | (in thousands except number of sharesand per share amounts)
|Assets                                                                                                                   |  |                                                             |           |                  |   |          
|Investments:                                                                                                             |  |                                                             |           |                  |   |          
|Fixed maturity securities available for sale, at fair value (amortized cost - $2,611,076 in 2007 and $2,823,347 in 2006) |  | $                                                           | 2,654,969 |                  | $ | 2,915,346
|Equity securities available for sale, at fair value (cost - $303,785 in 2007 and $316,087 in 2006)                       |  |                                                             | 268,672   |                  |   | 320,010  
|Commercial mortgage loans on real estate at amortized cost                                                               |  |                                                             | 822,184   |                  |   | 750,283  
|Policy loans                                                                                                             |  |                                                             | 7,724     |                  |   | 7,840    
|Short-term investments                                                                                                   |  |                                                             | 44,092    |                  |   | 48,141   
|Collateral held under securities lending                                                                                 |  |                                                             | 240,049   |                  |   | 176,937  
|Other investments                                                                                                        |  |                                                             | 74,781    |                  |   | 87,323   
|                                                                                                                         |  |                                                             |           |                  |   |          
|Total investments                                                                                                        |  |                                                             | 4,112,471 |                  |   | 4,305,880
|Cash and cash equivalents                                                                                                |  |                                                             | 32,832    |                  |   | 75,233   
|Premiums and accounts receivable, net                                                                                    |  |                                                             | 106,229   |                  |   | 98,598   
|Reinsurance recoverables                                                                                                 |  |                                                             | 1,312,268 |                  |   | 1,303,620
|Due from affiliates                                                                                                      |  |                                                             | 6,381     |                  |   | 19,306   
|Accrued investment income                                                                                                |  |                                                             | 42,352    |                  |   | 46,332   
|Deferred acquisition costs                                                                                               |  |                                                             | 50,575    |                  |   | 63,571   
|Property and equipment, at cost less accumulated depreciation                                                            |  |                                                             | 298       |                  |   | 577      
|Deferred income taxes, net                                                                                               |  |                                                             | 60,624    |                  |   | 41,267   
|Goodwill                                                                                                                 |  |                                                             | 156,817   |                  |   | 156,817  
|Value of business acquired                                                                                               |  |                                                             | 22,816    |                  |   | 26,667   
|Other assets                                                                                                             |  |                                                             | 36,378    |                  |   | 38,153   
|Assets held in separate accounts                                                                                         |  |                                                             | 2,867,617 |                  |   | 3,020,811
|                                                                                                                         |  |                                                             |           |                  |   |          
|Total assets                                                                                                             |  | $                                                           | 8,807,658 |                  | $ | 9,196,832
|                                                                                                                         |  |                                                             |           |                  |   |          
|Liabilities                                                                                                              |  |                                                             |           |                  |   |          
|Future policy benefits and expenses                                                                                      |  | $                                                           | 2,675,363 |                  | $ | 2,735,515
|Unearned premiums                                                                                                        |  |                                                             | 40,147    |                  |   | 38,945   
|Claims and benefits payable                                                                                              |  |                                                             | 1,840,353 |                  |   | 1,855,299
|Commissions payable                                                                                                      |  |                                                             | 15,507    |                  |   | 16,188   
|Reinsurance balances payable                                                                                             |  |                                                             | 2,706     |                  |   | 3,143    
|Funds held under reinsurance                                                                                             |  |                                                             | 118       |                  |   | 107      
|Deferred gains on disposal of businesses                                                                                 |  |                                                             | 134,607   |                  |   | 158,155  
|Obligations under securities lending                                                                                     |  |                                                             | 240,049   |                  |   | 176,937  
|Accounts payable and other liabilities                                                                                   |  |                                                             | 208,691   |                  |   | 229,762  
|Income taxes payable                                                                                                     |  |                                                             | 1,459     |                  |   | 62,706   
|Liabilities related to separate accounts                                                                                 |  |                                                             | 2,867,617 |                  |   | 3,020,811
|                                                                                                                         |  |                                                             |           |                  |   |          
|Total liabilities                                                                                                        |  |                                                             | 8,026,617 |                  |   | 8,297,568
|                                                                                                                         |  |                                                             |           |                  |   |          
|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   |                  |   | 545,635  
|Retained earnings                                                                                                        |  |                                                             | 224,710   |                  |   | 286,350  
|Accumulated other comprehensive income                                                                                   |  |                                                             | 5,696     |                  |   | 62,279   
|                                                                                                                         |  |                                                             |           |                  |   |          
|Total stockholders equity                                                                                               |  |                                                             | 781,041   |                  |   | 899,264  
|                                                                                                                         |  |                                                             |           |                  |   |          
|Total liabilities and stockholders equity                                                                               |  | $                                                           | 8,807,658 |                  | $ | 9,196,832
|                                                                                                                         |  |                                                             |           |                  |   |          

See the accompanying notes to the consolidated financial statements



F-2



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##### Table of Contents

Union Security Insurance Company

Consolidated Statements of Operations

Years Ended December 31, 2007, 2006 and 2005







|                                                                          |  |                          |           |   |      |   |           |  |   |           |  
|------------------------------------------------------------------------- |  | ------------------------ | --------- | - | ---- | - | --------- |  | - | --------- | -
|                                                                          |  | Years Ended December 31, |          
|                                                                          |  | 2007                     |           |   | 2006 |   | 2005      | 
|                                                                          |  | (in thousands)           |          
|Revenues                                                                  |  |                          |           |   |      |   |           |  |   |           |  
|Net earned premiums and other considerations                              |  | $                        | 1,259,930 |   |      | $ | 1,366,820 |  | $ | 1,710,771 |  
|Net investment income                                                     |  |                          | 286,235   |   |      |   | 286,974   |  |   | 293,910   |  
|Net realized (losses) gains on investments                                |  |                          | (28,219   | ) |      |   | 8,490     |  |   | (1,651    | )
|Amortization of deferred gains on disposal of businesses                  |  |                          | 23,548    |   |      |   | 14,929    |  |   | 33,098    |  
|Fees and other income                                                     |  |                          | 16,395    |   |      |   | 73,183    |  |   | 10,427    |  
|                                                                          |  |                          |           |   |      |   |           |  |   |           |  
|Total revenues                                                            |  |                          | 1,557,889 |   |      |   | 1,750,396 |  |   | 2,046,555 |  
|                                                                          |  |                          |           |   |      |   |           |  |   |           |  
|Benefits, losses and expenses                                             |  |                          |           |   |      |   |           |  |   |           |  
|Policyholder benefits                                                     |  |                          | 934,609   |   |      |   | 1,023,627 |  |   | 1,291,384 |  
|Amortization of deferred acquisition costs and value of business acquired |  |                          | 43,575    |   |      |   | 46,375    |  |   | 78,258    |  
|Underwriting, general and administrative expenses                         |  |                          | 383,106   |   |      |   | 427,186   |  |   | 492,150   |  
|                                                                          |  |                          |           |   |      |   |           |  |   |           |  
|Total benefits, losses and expenses                                       |  |                          | 1,361,290 |   |      |   | 1,497,188 |  |   | 1,861,792 |  
|                                                                          |  |                          |           |   |      |   |           |  |   |           |  
|Income before provision for income taxes                                  |  |                          | 196,599   |   |      |   | 253,208   |  |   | 184,763   |  
|Provision for income taxes                                                |  |                          | 57,121    |   |      |   | 106,576   |  |   | 68,792    |  
|                                                                          |  |                          |           |   |      |   |           |  |   |           |  
|Net income                                                                |  | $                        | 139,478   |   |      | $ | 146,632   |  | $ | 115,971   |  
|                                                                          |  |                          |           |   |      |   |           |  |   |           |  

See the accompanying notes to the consolidated financial statements



F-3



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##### Table of Contents

Union Security Insurance Company

Consolidated Statements of Changes in Stockholders Equity

Years Ended December 31, 2007, 2006 and 2005







|                                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|------------------------------------------------------------ |  | -------------- | ----- | ------------------------ | - | ------- | ---------------- |  | - | ------------------------------------------ | - |  | ----- | ------- | - |  | - | --------- | -
|                                                             |  | CommonStock    |       | AdditionalPaid-inCapital |   |         | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | Total |        
|                                                             |  | (in thousands) |      
|Balance, January 1, 2005                                     |  | $              | 5,000 |                          | $ | 516,873 |                  |  | $ | 389,132                                    |   |  | $     | 172,675 |   |  | $ | 1,083,680 |  
|Dental mergers                                               |  |                |      |                          |   | 25,599  |                  |  |   | 9,825                                      |   |  |       | 34      |   |  |   | 35,458    |  
|Dividends                                                    |  |                |      |                          |   |        |                  |  |   | (180,000                                   | ) |  |       |        |   |  |   | (180,000  | )
|Comprehensive income:                                        |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Net income                                                   |  |                |      |                          |   |        |                  |  |   | 115,971                                    |   |  |       |        |   |  |   | 115,971   |  
|Other comprehensive income:                                  |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Net change in unrealized gains on securities, net of taxes   |  |                |      |                          |   |        |                  |  |   |                                           |   |  |       | (53,480 | ) |  |   | (53,480   | )
|Net change in foreign currency translation, net of taxes     |  |                |      |                          |   |        |                  |  |   |                                           |   |  |       | 300     |   |  |   | 300       |  
|                                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Total other comprehensive loss                               |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   | (53,180   | )
|                                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Total comprehensive income                                   |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   | 62,791    |  
|                                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Balance, December 31, 2005                                   |  |                | 5,000 |                          |   | 542,472 |                  |  |   | 334,928                                    |   |  |       | 119,529 |   |  |   | 1,001,929 |  
|Dividends                                                    |  |                |      |                          |   |        |                  |  |   | (210,000                                   | ) |  |       |        |   |  |   | (210,000  | )
|Transfer of Canadian operations                              |  |                |      |                          |   | 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   |  
|Other comprehensive income:                                  |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Net change in unrealized gains on securities, net of taxes   |  |                |      |                          |   |        |                  |  |   |                                           |   |  |       | (38,445 | ) |  |   | (38,445   | )
|Net change in foreign currency translation, net of taxes     |  |                |      |                          |   |        |                  |  |   |                                           |   |  |       | 151     |   |  |   | 151       |  
|                                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Total other comprehensive loss                               |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   | (38,294   | )
|                                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Total comprehensive income                                   |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   | 108,338   |  
|                                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Balance, December 31, 2006                                   |  |                | 5,000 |                          |   | 545,635 |                  |  |   | 286,350                                    |   |  |       | 62,279  |   |  |   | 899,264   |  
|Dividends                                                    |  |                |      |                          |   |        |                  |  |   | (197,000                                   | ) |  |       |        |   |  |   | (197,000  | )
|Cumulative effect of change in accounting principle (Note 2) |  |                |      |                          |   |        |                  |  |   | (4,118                                     | ) |  |       |        |   |  |   | (4,118    | )
|Comprehensive income:                                        |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Net income                                                   |  |                |      |                          |   |        |                  |  |   | 139,478                                    |   |  |       |        |   |  |   | 139,478   |  
|Other comprehensive income:                                  |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Net change in unrealized gains on securities, net of taxes   |  |                |      |                          |   |        |                  |  |   |                                           |   |  |       | (56,642 | ) |  |   | (56,642   | )
|Net change in foreign currency translation, net of taxes     |  |                |      |                          |   |        |                  |  |   |                                           |   |  |       | 59      |   |  |   | 59        |  
|                                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Total other comprehensive loss                               |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   | (56,583   | )
|                                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Total comprehensive income                                   |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   | 82,895    |  
|                                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  
|Balance, December 31, 2007                                   |  | $              | 5,000 |                          | $ | 545,635 |                  |  | $ | 224,710                                    |   |  | $     | 5,696   |   |  | $ | 781,041   |  
|                                                             |  |                |       |                          |   |         |                  |  |   |                                            |   |  |       |         |   |  |   |           |  

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, 2007, 2006 and 2005







|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                  |  | Years Ended December 31, |         
|                                                                                  |  | 2007                     |          |   | 2006 |   |          | 2005 | 
|                                                                                  |  | (in thousands)           |         
|Operating activities                                                              |  |                          |          |   |      |   |          |      |  |   |          |  
|Net income                                                                        |  | $                        | 139,478  |   |      | $ | 146,632  |      |  | $ | 115,971  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |          |   |      |   |          |      |  |   |          |  
|Change in reinsurance recoverables                                                |  |                          | (8,648   | ) |      |   | (42,590  | )    |  |   | (22,919  | )
|Change in premiums and accounts receivable                                        |  |                          | (2,976   | ) |      |   | (25,271  | )    |  |   | 2,370    |  
|Depreciation and amortization                                                     |  |                          | 2,124    |   |      |   | 1,519    |      |  |   | 2,293    |  
|Change in deferred acquisition costs and value of business acquired               |  |                          | 10,512   |   |      |   | 18,501   |      |  |   | (213     | )
|Change in accrued investment income                                               |  |                          | 3,980    |   |      |   | (476     | )    |  |   | 655      |  
|Change in insurance policy reserves and expenses                                  |  |                          | (73,896  | ) |      |   | (18,203  | )    |  |   | 162,000  |  
|Change in accounts payable and other liabilities                                  |  |                          | (13,212  | ) |      |   | (339     | )    |  |   | (11,301  | )
|Change in commissions payable                                                     |  |                          | (681     | ) |      |   | (3,393   | )    |  |   | 2,978    |  
|Change in reinsurance balances payable                                            |  |                          | (437     | ) |      |   | (7,386   | )    |  |   | 3,802    |  
|Change in funds held under reinsurance                                            |  |                          | 11       |   |      |   | 11       |      |  |   | 3        |  
|Amortization of deferred gains on disposal of businesses                          |  |                          | (23,548  | ) |      |   | (14,929  | )    |  |   | (33,098  | )
|Change in income taxes                                                            |  |                          | (47,888  | ) |      |   | 66,750   |      |  |   | 22,239   |  
|Net realized losses (gains) on investments                                        |  |                          | 28,219   |   |      |   | (8,490   | )    |  |   | 1,651    |  
|Other                                                                             |  |                          | 302      |   |      |   | 8,919    |      |  |   | 7,837    |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                         |  |                          | 13,340   |   |      |   | 121,255  |      |  |   | 254,268  |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Investing activities                                                              |  |                          |          |   |      |   |          |      |  |   |          |  
|Sales of:                                                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Fixed maturity securities available for sale                                      |  |                          | 382,557  |   |      |   | 670,674  |      |  |   | 499,575  |  
|Equity securities available for sale                                              |  |                          | 116,117  |   |      |   | 153,615  |      |  |   | 56,683   |  
|Property and equipment                                                            |  |                          |         |   |      |   | 26       |      |  |   |         |  
|Maturities, prepayments, and scheduled redemption of:                             |  |                          |          |   |      |   |          |      |  |   |          |  
|Fixed maturity securities available for sale                                      |  |                          | 208,303  |   |      |   | 158,376  |      |  |   | 253,806  |  
|Purchase of:                                                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Fixed maturity securities available for sale                                      |  |                          | (394,138 | ) |      |   | (702,666 | )    |  |   | (745,141 | )
|Equity securities available for sale                                              |  |                          | (116,049 | ) |      |   | (198,150 | )    |  |   | (74,251  | )
|Property and equipment                                                            |  |                          | (25      | ) |      |   |         |      |  |   | (22      | )
|Change in other investments                                                       |  |                          | 12,542   |   |      |   | (26,299  | )    |  |   | (12,004  | )
|Change in commercial mortgage loans on real estate                                |  |                          | (72,213  | ) |      |   | (8,312   | )    |  |   | (62,152  | )
|Change in short-term investments                                                  |  |                          | 4,049    |   |      |   | 31,206   |      |  |   | (15,324  | )
|Change in collateral held under securities lending                                |  |                          | (63,112  | ) |      |   | 207,204  |      |  |   | (51,865  | )
|Change in policy loans                                                            |  |                          | 116      |   |      |   | 562      |      |  |   | 225      |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                               |  | $                        | 78,147   |   |      | $ | 286,236  |      |  | $ | (150,470 | )
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  

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, 2007, 2006 and 2005







|                                                        |  |                          |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                        |  | Years Ended December 31, |         
|                                                        |  | 2007                     |          |   | 2006 |   |          | 2005 | 
|                                                        |  | (in thousands)           |         
|Financing activities                                    |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash received from transfer of Canadian operations  |  | $                        |         |   |      | $ | 65,894   |      |  | $ |         |  
|Dividends paid                                          |  |                          | (197,000 | ) |      |   | (210,000 | )    |  |   | (180,000 | )
|Change in obligation under securities lending           |  |                          | 63,112   |   |      |   | (207,204 | )    |  |   | 51,865   |  
|Contributed capital                                     |  |                          |         |   |      |   | 10       |      |  |   |         |  
|                                                        |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash (used in) financing activities                 |  | $                        | (133,888 | ) |      | $ | (351,300 | )    |  |   | (128,135 | )
|                                                        |  |                          |          |   |      |   |          |      |  |   |          |  
|Change in cash and cash equivalents                     |  |                          | (42,401  | ) |      |   | 56,191   |      |  |   | (24,337  | )
|Cash and cash equivalents at beginning of period        |  |                          | 75,233   |   |      |   | 19,042   |      |  |   | 43,379   |  
|                                                        |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of period              |  | $                        | 32,832   |   |      | $ | 75,233   |      |  | $ | 19,042   |  
|                                                        |  |                          |          |   |      |   |          |      |  |   |          |  
|                                                        |  |                          |         
|Supplemental information:                               |  |                          |          |   |      |   |          |      |  |   |          |  
|Income taxes paid (net of refunds)                      |  | $                        | 104,754  |   |      | $ | 39,446   |      |  | $ | 45,964   |  
|                                                        |  |                          |         
|Supplemental schedule of non-cash investing activities: |  |                          |          |   |      |   |          |      |  |   |          |  
|Non-cash activities:                                    |  |                          |          |   |      |   |          |      |  |   |          |  
|Foreign currency translation                            |  | $                        | 59       |   |      | $ | 151      |      |  | $ | 300      |  

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, 2007, 2006 and 2005

(In thousands except share
data)





|1. | Nature of Operations
|-- | --------------------

Union Security Insurance
Company (the Company) is a provider of life and health insurance products including group disability insurance, group dental insurance, group life insurance, small employer group health insurance and pre-funded funeral insurance
(preneed). 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.



|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). Amounts are presented in United States of America (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 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.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





Reclassifications

Certain prior period amounts have been reclassified to conform to the 2007 presentation.

Revenue Recognition

The Company recognizes 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 and losses net of
deferred income taxes have been reflected in accumulated other comprehensive income.

Investments

Fixed maturity 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 fixed maturity 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 loss analysis. A loan is considered individually impaired when it becomes probable that 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 on investments.

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.

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 and partnerships. The joint ventures and partnerships are valued according to the equity method of accounting.



F-8



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





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 watch-list, 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 write-down 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 are recognized on the specific identification basis.

Investment income is recorded as earned net of investment expenses. The interest method is used to recognize interest income on commercial mortgage
loans.

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 provided 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 records a receivable when revenue has been recognized but the cash has not
been collected. The Company maintains allowances for doubtful accounts, if necessary, 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 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, if necessary, on the basis of periodic evaluations of balances due from reinsurers, reinsurer solvency, managements experience, and current economic conditions.



F-9



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





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

Reinsurance balances payable include amounts related to ceded premiums and estimated amounts
related to assumed paid or incurred losses, which are reported based upon ceding entities estimations. 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 benefit 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.

The Company classifies net interest expense and any applicable penalties as a component of income tax
expense.

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.

Premium deficiency 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 preneed 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.



F-10



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





Acquisition costs relating to worksite group life and disability 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 preneed 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 all 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 as incurred. Expenditures for improvements are capitalized and
depreciated over the remaining useful life of the asset.

Property and equipment also includes capitalized software costs, which represent
costs directly related to obtaining, developing or upgrading internal use software. Such costs are capitalized and amortized using the straight-line method over their estimated useful lives.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





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 fair value of 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.

The Companys 2007 and 2006 impairment tests concluded that goodwill was 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, preneed 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 recorded in current earnings.

Other Assets

Other assets include prepaid items and intangible assets. Intangible assets that have finite lives, including customer relationships,
customer contracts and other intangible assets, are amortized over their estimated useful lives. Intangible assets deemed to have indefinite useful lives, primarily certain state licenses, are not amortized and are subject to annual impairment
tests. An impairment exists if the carrying amount of the indefinite-lived intangible asset exceeds its fair value. For other intangible assets subject to amortization, an impairment is recognized if the carrying amount is not recoverable and
exceeds the fair value of the intangible asset.

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 (with matching liabilities) 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 policy-holders, are excluded from the amounts reported in the accompanying consolidated statements of operations because the accounts are administered by the reinsurers.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





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 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 in 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. However, based on information currently available,
we believe our reserve estimates are adequate.

Long Duration Contracts

The Companys long duration contracts include preneed life insurance policies and annuity contracts, traditional life insurance contracts no longer
offered and FFG and LTC contracts disposed. 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.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





Future policy benefits and expense reserves for preneed 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 in 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 preneed 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 provisions for possible unfavorable deviations. 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.

For worksite group
disability, which typically has high front-end costs and is expected to remain in-force for an extended period of time, 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

The Companys short duration contracts include group term life contracts, group disability contracts, medical contracts, dental contracts and credit life and disability contracts. For short duration contracts,
claims and benefits payable reserves are recorded 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 recorded at an amount equal to
the net present value of the expected future claims 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 recorded as a charge or credit to policyholder benefits as
estimates are revised.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





Deferred Gains on Disposal of Businesses

The Company recorded a deferred gain on disposal of businesses utilizing reinsurance. On March 1, 2000, the Parent sold its LTC business using a
coinsurance contract. On April 2, 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 gain on these disposals was
deferred and reported as a liability. The liability is decreased and recognized as revenue over the estimated life of the contracts terms. The Company reviews and evaluates the estimates affecting the deferred gain 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 preneed life insurance, investment type annuities and worksite group disability and life insurance. The preneed life insurance policies include provisions for death benefit growth that is
either pegged to the changes in the Consumer Price Index or determined periodically at the discretion of management. For preneed life insurance policies, revenues are recognized when due from policyholders. For preneed investment-type annuity
contracts, revenues consist of charges assessed against policy balances. Revenues are recognized when earned on the worksite group disability and life insurance.

For universal life insurance contracts and investment-type annuity contracts previously sold by the preneed business but no longer offered, revenues consist of charges assessed against policy balances.

Premiums for LTC insurance and traditional life insurance contracts within FFG are recognized 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 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.

Fees and Other Income

The Company derives fee income primarily from providing administrative services. Fee income is recognized 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 recorded as incurred.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





Leases

The Company records 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 contingency loss is recorded 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 records an estimated reserve at the low end of the estimated range. Contingencies affecting the Company primarily relate to litigation matters which are
inherently difficult to evaluate and are subject to significant changes. The Company believes the contingent amounts recorded are adequate and reasonable.

Recent Accounting Pronouncements - Adopted

On January 1, 2007, the Company adopted
Statement of Position No. 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 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. Prior to the adoption of the SOP 05-1, certain internal replacements were accounted for as continuations of the replaced contract. Therefore, the accounting policy for certain
internal replacements has changed as a result of the adoption of SOP 05-1. At adoption, the Company recognized a $6,335 decrease to deferred acquisition costs, which was accounted for as a $4,118 (after-tax) reduction to the January 1, 2007 balance
of retained earnings.

On January 1, 2007, the Company adopted Statement of Financial Accounting Standards (FAS)
No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140(FAS 155). This statement resolves issues addressed in FAS 133 Implementation Issue No. D1, Application
of Statement 133 to Beneficial Interest in Securitized Financial Assets. FAS 155 (a) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation;
(b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of FAS 133; (c) establishes a requirement to evaluate beneficial interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and
(e) eliminates restrictions on a qualifying special-purpose entitys ability to hold passive derivative financial instruments that pertain to beneficial interests that are or contain a derivative financial instrument. FAS 155 also requires
presentation within the financial statements that identifies those hybrid financial instruments for which the fair value election has been applied and information on the statement of operations impact of the changes in fair value of those
instruments. The adoption of FAS 155 did not have a material impact on the Companys financial position or results of operations.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





On January 1, 2007, the Company adopted the provisions of Financial Accounting Statements Board
(FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109(FIN 48). There was no impact as a result of adoption on the Companys
January 1, 2007 retained earnings. See Note 4 for further information regarding the adoption of FIN 48.

Recent Accounting
Pronouncements  Not Yet Adopted

In September 2006, the FASB issued FAS No. 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. The Company is required to adopt FAS 157 on January 1, 2008. FAS 157 will
be applied prospectively as of January 1, 2008 except for certain financial instruments that were measured at fair value using a transaction price. For these financial instruments, FAS 157 requires limited retrospective adoption and thus the
difference between carrying amounts and the fair values of the relevant financial instruments will be shown as a cumulative-effect adjustment to January 1, 2008 retained earnings. Adoption of FAS 157, including the limited retrospective
adoption, will not have a material impact on the Companys financial position or results of operations.

In February 2007, the FASB
issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities(FAS 159). FAS 159 provides a choice to measure many financial instruments and certain other items at fair value on specified election
dates and requires disclosures about the election of the fair value option. 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. The Company is required to adopt FAS 159 on January 1, 2008. The Company has chosen not to elect the fair value option for any financial or non-financial instruments as of the adoption date thus the adoption of FAS 159
will not have an impact on the Companys financial position or results of operations.

In December 2007, the FASB issued FAS
No. 141R, Business Combinations(FAS 141R). FAS 141R replaces FASB Statement No. 141, Business Combinations(FAS 141).FAS 141R retains the fundamental requirements in FAS 141 that the purchase
method of accounting be used for all business combinations, that an acquirer be identified for each business combination and for goodwill to be recognized and measured as a residual. FAS 141R expands the definition of transactions and events that
qualify as business combinations to all transactions and other events in which one entity obtains control over one or more other businesses. FAS 141R broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and
interests transferred as a result of business combinations. FAS 141R also increases the disclosure requirements for business combinations in the financial statements. FAS 141R is effective for fiscal periods beginning after December 15, 2008.
Therefore, the Company is required to adopt FAS 141R on January 1, 2009. The Company is currently evaluating the requirements of FAS 141R and the potential impact on the Companys financial position and results of operations.

In December 2007, the FASB issued FAS No. 160, Non-controlling Interest in Consolidated Financial Statementsan amendment of ARB
No. 51(FAS 160). FAS 160 requires that a non-controlling



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





interest in a subsidiary be separately reported within equity and the amount of consolidated net income attributable to the non-controlling interest be
presented in the statement of operations. FAS 160 also calls for consistency in reporting changes in the parents ownership interest in a subsidiary and necessitates fair value measurement of any non-controlling equity investment retained in a
deconsolidation. FAS 160 is effective for fiscal periods beginning after December 15, 2008. Therefore, the Company is required to adopt FAS 160 on January 1, 2009. The Company is currently evaluating the requirements of FAS 160 and the
potential impact on the Companys financial position and results of operations.

In February 2008, the FASB issued
Financial Statement of Position FAS 157-2 (FSP FAS 157-2). FSP FAS 157-2 defers the effective date of FAS 157 for all non-financial assets and non-financial liabilities measured on a non-recurring basis to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. Therefore, the Company is required to adopt the FAS 157 requirements for its non-financial assets and non-financial liabilities measured on a non-recurring basis on
January 1, 2009. The Company is currently evaluating the requirements of FAS 157 for its non-financial assets and non-financial liabilities measured on a non-recurring basis and the potential impact on the Companys financial position and
results of operations.



|3. | Investments
|-- | -----------

The cost or amortized cost, gross
unrealized gains and losses and fair value of fixed maturity and equity securities at December 31, 2007 are as follows:



|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|---------------------------------------------------------------- |  | -------------------- | --------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | ---------
|                                                                 |  | Cost orAmortizedCost |           | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Fixed maturity securities:                                       |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|United States Government and government agencies and authorities |  | $                    | 13,039    |                      | $ | 2,342                 |  | $ | (1         | ) |  | $ | 15,380   
|States, municipalities and political subdivisions                |  |                      | 46,799    |                      |   | 1,271                 |  |   | (45        | ) |  |   | 48,025   
|Foreign governments                                              |  |                      | 82,810    |                      |   | 8,562                 |  |   | (243       | ) |  |   | 91,129   
|Public utilities                                                 |  |                      | 417,408   |                      |   | 12,700                |  |   | (4,554     | ) |  |   | 425,554  
|Mortgage-backed securities                                       |  |                      | 174,815   |                      |   | 1,576                 |  |   | (1,071     | ) |  |   | 175,320  
|All other corporate                                              |  |                      | 1,876,205 |                      |   | 62,729                |  |   | (39,373    | ) |  |   | 1,899,561
|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Total fixed maturities                                           |  | $                    | 2,611,076 |                      | $ | 89,180                |  | $ | (45,287    | ) |  | $ | 2,654,969
|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Equity securities:                                               |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Non-sinking fund preferred stocks                                |  | $                    | 303,785   |                      | $ | 1,184                 |  | $ | (36,297    | ) |  | $ | 268,672  
|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





The cost or amortized cost, gross unrealized gains and losses and fair value of fixed maturity and
equity securities at December 31, 2006 are as follows:



|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|---------------------------------------------------------------- |  | -------------------- | --------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | ---------
|                                                                 |  | Cost orAmortizedCost |           | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Fixed maturity securities:                                       |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|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  
|Mortgage-backed securities                                       |  |                      | 268,242   |                      |   | 1,071                 |  |   | (3,471     | ) |  |   | 265,842  
|All other corporate                                              |  |                      | 1,907,149 |                      |   | 84,770                |  |   | (14,722    | ) |  |   | 1,977,197
|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Total fixed maturities                                           |  | $                    | 2,823,347 |                      | $ | 114,728               |  | $ | (22,729    | ) |  | $ | 2,915,346
|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Equity securities:                                               |  |                      |           |                      |   |                       |  |   |            |   |  |   |          
|Non-sinking fund preferred stocks                                |  | $                    | 316,087   |                      | $ | 6,387                 |  | $ | (2,464     | ) |  | $ | 320,010  
|                                                                 |  |                      |           |                      |   |                       |  |   |            |   |  |   |          

The cost or amortized cost and fair value of fixed maturity securities at December 31, 2007
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.



|                                       |  |                      |           |            |   |          
|-------------------------------------- |  | -------------------- | --------- | ---------- | - | ---------
|                                       |  | Cost orAmortizedCost |           | Fair Value
|Due in one year or less                |  | $                    | 31,241    |            | $ | 31,636   
|Due after one year through five years  |  |                      | 361,804   |            |   | 372,392  
|Due after five years through ten years |  |                      | 441,506   |            |   | 443,470  
|Due after ten years                    |  |                      | 1,601,710 |            |   | 1,632,151
|                                       |  |                      |           |            |   |          
|Total                                  |  |                      | 2,436,261 |            |   | 2,479,649
|Mortgage-backed securities             |  |                      | 174,815   |            |   | 175,320  
|                                       |  |                      |           |            |   |          
|Total                                  |  | $                    | 2,611,076 |            | $ | 2,654,969
|                                       |  |                      |           |            |   |          



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





Major categories of net investment income are as follows:



|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|---------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                         |  | Years Ended December 31, |        
|                                         |  | 2007                     |         |   | 2006 |   |         | 2005 | 
|Fixed maturity securities                |  | $                        | 177,108 |   |      | $ | 191,823 |      |  | $ | 208,916 |  
|Equity securities                        |  |                          | 20,997  |   |      |   | 21,877  |      |  |   | 21,012  |  
|Commercial mortgage loans on real estate |  |                          | 52,990  |   |      |   | 55,112  |      |  |   | 54,563  |  
|Policy loans                             |  |                          | 459     |   |      |   | 497     |      |  |   | 555     |  
|Short-term investments                   |  |                          | 4,060   |   |      |   | 2,769   |      |  |   | 2,037   |  
|Other investments                        |  |                          | 38,140  |   |      |   | 23,886  |      |  |   | 15,704  |  
|Cash and cash equivalents                |  |                          | 1,928   |   |      |   | 687     |      |  |   | 613     |  
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Investment income                        |  |                          | 295,682 |   |      |   | 296,651 |      |  |   | 303,400 |  
|Investment expenses                      |  |                          | (9,447  | ) |      |   | (9,677  | )    |  |   | (9,490  | )
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Net investment income                    |  | $                        | 286,235 |   |      | $ | 286,974 |      |  | $ | 293,910 |  
|                                         |  |                          |         |   |      |   |         |      |  |   |         |  

The net realized (losses) gains recorded in income for 2007, 2006 and 2005 are summarized as
follows:



|                            |  |                          |         |   |      |   |        |      |  |   |        |  
|--------------------------- |  | ------------------------ | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                            |  | Years Ended December 31, |        
|                            |  | 2007                     |         |   | 2006 |   |        | 2005 | 
|Fixed maturity securities   |  | $                        | (16,252 | ) |      | $ | 848    |      |  | $ | (373   | )
|Equity securities           |  |                          | (11,840 | ) |      |   | (2,129 | )    |  |   | (1,468 | )
|                            |  |                          |         |   |      |   |        |      |  |   |        |  
|Total marketable securities |  |                          | (28,092 | ) |      |   | (1,281 | )    |  |   | (1,841 | )
|Other                       |  |                          | (127    | ) |      |   | 9,771  |      |  |   | 190    |  
|                            |  |                          |         |   |      |   |        |      |  |   |        |  
|Total                       |  | $                        | (28,219 | ) |      | $ | 8,490  |      |  | $ | (1,651 | )
|                            |  |                          |         |   |      |   |        |      |  |   |        |  

Proceeds from sales of available for sale securities were $490,403, $829,365, and $559,833 during
2007, 2006 and 2005, respectively. Gross gains of $11,155, $13,077 and $13,824 and gross losses of $18,121, $14,010 and $15,399 were realized on dispositions in 2007, 2006 and 2005, respectively. For securities sold at a loss during 2007, the
average period of time these securities were trading continuously below book value was approximately 13 months.

The Company recorded
$21,126, $348 and $266 of realized losses in 2007, 2006 and 2005, respectively, associated with other-than-temporary declines in value of available for sale securities.

Over the last six months of 2007, the fixed maturity security and equity security markets have experienced significant volatility. This volatility has primarily been due to declines in the housing market, credit
availability, as well as a general economic slowdown. As a result, certain securities directly exposed to these factors have had market declines.

In connection with this volatility, we recorded $3,314 and $17,933 of pre-tax other-than-temporary impairments during the three months ended September 30, 2007 and December 31, 2007, respectively. Included in these amounts are
$12,846, $3,346, $1,100 and $554 related to banks and financial institutions, real estate investment trusts, paper/forestry companies and home builders, respectively.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





The investment category and duration of the Companys gross unrealized losses on fixed maturity
and equity securities at December 31, 2007 are as follows:



|                                                                 |  |                     |         |                  |                   |         |            |       |                  |         |  |            |         |                  |  |   |           |  |   |         |  
|---------------------------------------------------------------- |  | ------------------- | ------- | ---------------- | ----------------- | ------- | ---------- | ----- | ---------------- | ------- |  | ---------- | ------- | ---------------- |  | - | --------- |  | - | ------- | -
|                                                                 |  | Less than 12 months |         |                  | 12 Months or More |         |            | Total |                 
|                                                                 |  | Fair Value          |         | UnrealizedLosses |                   |         | Fair Value |       | UnrealizedLosses |         |  | Fair Value |         | UnrealizedLosses | 
|Fixed maturity securities:                                       |  |                     |         |                  |                   |         |            |       |                  |         |  |            |         |                  |  |   |           |  |   |         |  
|United States Government and government agencies and authorities |  | $                   | 110     |                  | $                 | (1      | )          |       | $                |        |  | $          |        |                  |  | $ | 110       |  | $ | (1      | )
|States, municipalities and political subdivisions                |  |                     | 12,203  |                  |                   | (45     | )          |       |                  |        |  |            |        |                  |  |   | 12,203    |  |   | (45     | )
|Foreign governments                                              |  |                     | 16,719  |                  |                   | (241    | )          |       |                  | 248     |  |            | (2      | )                |  |   | 16,967    |  |   | (243    | )
|Public utilities                                                 |  |                     | 112,590 |                  |                   | (2,693  | )          |       |                  | 48,193  |  |            | (1,861  | )                |  |   | 160,783   |  |   | (4,554  | )
|Mortgage-backed securities                                       |  |                     | 15,660  |                  |                   | (310    | )          |       |                  | 63,225  |  |            | (761    | )                |  |   | 78,885    |  |   | (1,071  | )
|All other corporate bonds                                        |  |                     | 585,113 |                  |                   | (28,681 | )          |       |                  | 194,650 |  |            | (10,692 | )                |  |   | 779,763   |  |   | (39,373 | )
|                                                                 |  |                     |         |                  |                   |         |            |       |                  |         |  |            |         |                  |  |   |           |  |   |         |  
|Total fixed maturities                                           |  | $                   | 742,395 |                  | $                 | (31,971 | )          |       | $                | 306,316 |  | $          | (13,316 | )                |  | $ | 1,048,711 |  | $ | (45,287 | )
|                                                                 |  |                     |         |                  |                   |         |            |       |                  |         |  |            |         |                  |  |   |           |  |   |         |  
|Equity securities:                                               |  |                     |         |                  |                   |         |            |       |                  |         |  |            |         |                  |  |   |           |  |   |         |  
|Non-sinking fund preferred stocks                                |  | $                   | 191,960 |                  | $                 | (31,970 | )          |       | $                | 35,791  |  | $          | (4,327  | )                |  | $ | 227,751   |  | $ | (36,297 | )
|                                                                 |  |                     |         |                  |                   |         |            |       |                  |         |  |            |         |                  |  |   |           |  |   |         |  

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



|                                                                 |  |                        |         |                  |                      |        |            |       |                  |         |  |            |         |                  |  |   |           |  |   |         |  
|---------------------------------------------------------------- |  | ---------------------- | ------- | ---------------- | -------------------- | ------ | ---------- | ----- | ---------------- | ------- |  | ---------- | ------- | ---------------- |  | - | --------- |  | - | ------- | -
|                                                                 |  | Less than 12 months(1) |         |                  | 12 Months or More(1) |        |            | Total |                 
|                                                                 |  | Fair Value             |         | UnrealizedLosses |                      |        | Fair Value |       | UnrealizedLosses |         |  | Fair Value |         | UnrealizedLosses | 
|Fixed maturity securities:                                       |  |                        |         |                  |                      |        |            |       |                  |         |  |            |         |                  |  |   |           |  |   |         |  
|United States Government and government agencies and authorities |  | $                      | 32,170  |                  | $                    | (48    | )          |       | $                | 1,010   |  | $          | (19     | )                |  | $ | 33,180    |  | $ | (67     | )
|States, municipalities and political subdivisions                |  |                        | 3,739   |                  |                      | (50    | )          |       |                  | 1,013   |  |            | (13     | )                |  |   | 4,752     |  |   | (63     | )
|Foreign governments                                              |  |                        | 4,599   |                  |                      | (122   | )          |       |                  | 244     |  |            | (6      | )                |  |   | 4,843     |  |   | (128    | )
|Public utilities                                                 |  |                        | 92,740  |                  |                      | (1,789 | )          |       |                  | 64,224  |  |            | (2,489  | )                |  |   | 156,964   |  |   | (4,278  | )
|Mortgage-backed securities                                       |  |                        | 60,076  |                  |                      | (565   | )          |       |                  | 134,193 |  |            | (2,906  | )                |  |   | 194,269   |  |   | (3,471  | )
|All other corporate bonds                                        |  |                        | 429,755 |                  |                      | (7,140 | )          |       |                  | 221,434 |  |            | (7,582  | )                |  |   | 651,189   |  |   | (14,722 | )
|                                                                 |  |                        |         |                  |                      |        |            |       |                  |         |  |            |         |                  |  |   |           |  |   |         |  
|Total fixed maturities                                           |  | $                      | 623,079 |                  | $                    | (9,714 | )          |       | $                | 422,118 |  | $          | (13,015 | )                |  | $ | 1,045,197 |  | $ | (22,729 | )
|                                                                 |  |                        |         |                  |                      |        |            |       |                  |         |  |            |         |                  |  |   |           |  |   |         |  
|Equity securities:                                               |  |                        |         |                  |                      |        |            |       |                  |         |  |            |         |                  |  |   |           |  |   |         |  
|Non-sinking fund preferred stocks                                |  | $                      | 65,091  |                  | $                    | (920   | )          |       | $                | 48,503  |  | $          | (1,544  | )                |  | $ | 113,594   |  | $ | (2,464  | )
|                                                                 |  |                        |         |                  |                      |        |            |       |                  |         |  |            |         |                  |  |   |           |  |   |         |  



|(1) | Certain unrealized losses, which were previously classified in less than 12 months, have been appropriately classified as 12 months or more in 2007 with conforming changes in 2006.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The total unrealized losses represent less than 7% and 3% of the aggregate fair value of the related securities at
December 31, 2007 and 2006, respectively. Approximately 78% and 42% of these unrealized losses have been in a continuous loss position for less than twelve months in 2007 and 2006, respectively. The total unrealized losses on securities that
were in a continuous unrealized loss position



F-21



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





for greater than six months but less than 12 months were approximately $44,684 and $5,330 in 2007 and 2006, respectively. There were no securities with an
unrealized loss of greater than $200 having a market value below 67% and 90% of book value at December 31, 2007 and 2006, respectively. At December 31, 2007, approximately 26% of the unrealized losses for fixed maturity and equity
securities were concentrated in the banking industry with no exposure to any single issuer in the banking industry in excess of 4% of total unrealized losses.

The cost or amortized cost and fair value of available for sale fixed maturity securities in an unrealized loss position at December 31, 2007, by contractual maturity, is shown below:



|                                       |  |                      |           |            |   |          
|-------------------------------------- |  | -------------------- | --------- | ---------- | - | ---------
|                                       |  | Cost orAmortizedCost |           | Fair Value
|Due in one year or less                |  | $                    | 3,032     |            | $ | 3,022    
|Due after one year through five years  |  |                      | 76,372    |            |   | 74,645   
|Due after five years through ten years |  |                      | 207,801   |            |   | 200,080  
|Due after ten years                    |  |                      | 726,837   |            |   | 692,079  
|                                       |  |                      |           |            |   |          
|Total                                  |  | $                    | 1,014,042 |            | $ | 969,826  
|Mortgage-backed securities             |  |                      | 79,956    |            |   | 78,885   
|                                       |  |                      |           |            |   |          
|Total                                  |  | $                    | 1,093,998 |            | $ | 1,048,711
|                                       |  |                      |           |            |   |          

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 $21,126, $348 and $266 of additional other-than-temporary impairments as of December 31, 2007, 2006 and 2005, 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, 2007 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 ability and intent to hold these
assets until the date of recovery.



F-22



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





The following table represents our exposure to sub-prime and related mortgages within our fixed
maturity portfolio as well as the current net unrealized loss position at December 31, 2007.



|                                                                  |  |                |        |                        |      |   |                           |   |      |  
|----------------------------------------------------------------- |  | -------------- | ------ | ---------------------- | ---- | - | ------------------------- | - | ---- | -
|                                                                  |  | Market Value   |        | Percentage ofPortfolio |      |   | Net Unrealized(Loss) Gain |  
|                                                                  |  | (in thousands) |       
|Fixed maturity portfolio:                                         |  |                |        |                        |      |   |                           |   |      |  
|Sub-prime first lien mortgages                                    |  | $              | 8,242  |                        | 0.31 | % |                           | $ | (246 | )
|Second lien mortgages (including sub-prime second lien mortgages) |  |                | 2,604  |                        | 0.10 | % |                           |   | 14   |  
|                                                                  |  |                |        |                        |      |   |                           |   |      |  
|Total exposure to sub-prime collateral                            |  | $              | 10,846 |                        | 0.41 | % |                           | $ | (232 | )
|                                                                  |  |                |        |                        |      |   |                           |   |      |  

The following table represents our exposure to sub-prime and related mortgages within our fixed
maturity portfolio as well as the current net unrealized loss position at December 31, 2006.



|                                                                  |  |                |        |                        |      |   |                      |   |     |  
|----------------------------------------------------------------- |  | -------------- | ------ | ---------------------- | ---- | - | -------------------- | - | --- | -
|                                                                  |  | Market Value   |        | Percentage ofPortfolio |      |   | Net Unrealized(Loss) |  
|                                                                  |  | (in thousands) |       
|Fixed maturity portfolio:                                         |  |                |        |                        |      |   |                      |   |     |  
|Sub-prime first lien mortgages                                    |  | $              | 9,888  |                        | 0.34 | % |                      | $ | (28 | )
|Second lien mortgages (including sub-prime second lien mortgages) |  |                | 3,479  |                        | 0.12 | % |                      |   | (20 | )
|                                                                  |  |                |        |                        |      |   |                      |   |     |  
|Total exposure to sub-prime collateral                            |  | $              | 13,367 |                        | 0.46 | % |                      | $ | (48 | )
|                                                                  |  |                |        |                        |      |   |                      |   |     |  

Approximately 6% and 5% of the mortgage-backed securities had exposure to sub-prime mortgage
collateral at December 31, 2007 and 2006, respectively. This represents less than 1% of the total fixed maturity portfolio and less than 1% of the total unrealized loss position of the fixed maturity portfolio at December 31, 2007 and
2006. Of the securities with sub-prime exposure, all are investment grade rated. The Company has no sub-prime exposure to collateralized debt obligations as of December 31, 2007 or 2006. All mortgage-backed securities, including those with
sub-prime exposure, are reviewed as part of the ongoing other-than-temporary impairment monitoring process.

The Company has made
commercial mortgage loans, collateralized by the underlying real estate, on properties located throughout the U.S. At December 31, 2007, approximately 41% of the outstanding 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 $10 to $13,360 at December 31, 2007 and from $62 to $13,664 at December 31, 2006. The mortgage loan balance valuation allowance for losses was $3,018 and $2,705 at December 31, 2007 and 2006,
respectively.

At December 31, 2007, loan commitments outstanding totaled approximately $20,600. Furthermore, at December 31,
2007, the Company is committed to fund additional capital contributions of $5,000 to joint ventures and to certain investments in limited partnerships.

The Company has short term investments and fixed maturity securities carried at $4,755 and $4,740 at December 31, 2007 and 2006, respectively, on deposit with various governmental authorities as required by law.



F-23



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





Securities Lending

The Company engages in transactions in which fixed maturity securities, especially bonds issued by the United States Government, Government Agencies and
Authorities, 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, 2007 and 2006, securities with a fair value of $234,138 and $172,528, respectively, were on loan to select brokers/dealers and are included in the Companys available for sale investment. At
December 31, 2007 and 2006, collateral with a fair value of $240,049 and $176,937, respectively, is included in the Companys assets with offsetting liabilities.



|4. | Income Taxes
|-- | ------------

The Company is subject to U.S. tax
and files a consolidated federal income tax return with its parent, Assurant, Inc. Prior to 2007, the Company had international operations that were subject to income taxes imposed by the foreign jurisdictions in which it operated. Information about
the Companys current and deferred tax expense follows:



|                           |  |                          |        |      |   |         |  |   |        |  
|-------------------------- |  | ------------------------ | ------ | ---- | - | ------- |  | - | ------ | -
|                           |  | Years Ended December 31, |       
|                           |  | 2007                     |        | 2006 |   | 2005    | 
|Current expense:           |  |                          |        |      |   |         |  |   |        |  
|Federal                    |  | $                        | 39,405 |      | $ | 94,368  |  | $ | 43,766 |  
|Foreign                    |  |                          |       |      |   | 274     |  |   | 788    |  
|                           |  |                          |        |      |   |         |  |   |        |  
|Total current expense      |  |                          | 39,405 |      |   | 94,642  |  |   | 44,554 |  
|Deferred expense (benefit) |  |                          |        |      |   |         |  |   |        |  
|Federal                    |  |                          | 17,716 |      |   | 11,934  |  |   | 24,968 |  
|Foreign                    |  |                          |       |      |   |        |  |   | (730   | )
|                           |  |                          |        |      |   |         |  |   |        |  
|Total deferred expense     |  |                          | 17,716 |      |   | 11,934  |  |   | 24,238 |  
|                           |  |                          |        |      |   |         |  |   |        |  
|Total income tax expense   |  | $                        | 57,121 |      | $ | 106,576 |  | $ | 68,792 |  
|                           |  |                          |        |      |   |         |  |   |        |  

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



|                                       |  |              |   |  |      |   |  |      |  
|-------------------------------------- |  | ------------ | - |  | ---- | - |  | ---- | -
|                                       |  | December 31, |  
|                                       |  | 2007         |   |  | 2006 |   |  | 2005 |  
|Federal income tax rate                |  | 35.0         | % |  | 35.0 | % |  | 35.0 | %
|Reconciling items:                     |  |              |   |  |      |   |  |      |  
|Tax exempt interest                    |  | (0.1         | ) |  | (2.1 | ) |  | (2.9 | )
|Dividends received deduction           |  | (1.7         | ) |  | (0.3 | ) |  | 0.2  |  
|Permanent nondeductible expenses       |  | 0.2          |   |  |     |   |  |     |  
|Change in reserve for prior year taxes |  | (5.0         | ) |  | 9.5  |   |  | 4.8  |  
|Goodwill                               |  |             |   |  |     |   |  | 0.1  |  
|Other                                  |  | 0.7          |   |  |     |   |  |     |  
|                                       |  |              |   |  |      |   |  |      |  
|Effective income tax rate              |  | 29.1         | % |  | 42.1 | % |  | 37.2 | %
|                                       |  |              |   |  |      |   |  |      |  



F-24



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





The Company adopted the provisions of FIN 48, on January 1, 2007. The adoption of this
interpretation had no impact on the Companys consolidated financial statements. A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, follows:



|                                                             |  |   |         |  
|------------------------------------------------------------ |  | - | ------- | -
|Balance at January 1, 2007                                   |  | $ | (42,296 | )
|Additions based on tax positions related to the current year |  |   | (1,507  | )
|Additions for tax positions of prior years                   |  |   | (400    | )
|Reductions for tax positions of prior years                  |  |   | 9,934   |  
|Settlements                                                  |  |   | 26,998  |  
|                                                             |  |   |         |  
|Balance at December 31, 2007                                 |  | $ | (7,271  | )
|                                                             |  |   |         |  

Of the total unrecognized tax benefit, $8,249, which includes interest if recognized, would impact
the Companys consolidated effective tax rate.

The Companys continuing practice is to recognize interest expense related to
income tax matters in income tax expense. During the year ended December 31, 2007, the Company recognized approximately $4,880 of interest income related to income tax matters. The Company had approximately $7,360 accrued at December 31,
2007, for the payment of interest.

The Company files income tax returns in the U.S. and various state jurisdictions. Prior to 2007, the
Company also filed income tax returns with various foreign jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2004. Substantially all state, local and non-U.S. income tax matters have been
concluded for the years through 2001.

The tax effects of temporary differences that result in significant deferred tax assets and deferred
tax liabilities follow:



|                                                  |  |              |        |      |   |       
|------------------------------------------------- |  | ------------ | ------ | ---- | - | ------
|                                                  |  | December 31,
|                                                  |  | 2007         |        | 2006
|Deferred tax assets:                              |  |              |        |      |   |       
|Policyholder and separate account reserves        |  | $            |       |      | $ | 923   
|Accrued liabilities                               |  |              | 7,713  |      |   | 11,881
|Investment adjustments                            |  |              | 7,957  |      |   | 131   
|Deferred acquisition costs                        |  |              | 24,866 |      |   | 26,794
|Deferred gains on reinsurance                     |  |              | 47,628 |      |   | 55,354
|                                                  |  |              |        |      |   |       
|Gross deferred tax assets                         |  |              | 88,164 |      |   | 95,083
|                                                  |  |              |        |      |   |       
|Deferred tax liabilities:                         |  |              |        |      |   |       
|Policyholder and separate account reserves        |  |              | 7,037  |      |   |      
|Unrealized gains on fixed maturities and equities |  |              | 2,788  |      |   | 33,132
|Other liabilities                                 |  |              | 17,715 |      |   | 20,684
|                                                  |  |              |        |      |   |       
|Gross deferred tax liabilities                    |  |              | 27,540 |      |   | 53,816
|                                                  |  |              |        |      |   |       
|Net deferred income tax asset                     |  | $            | 60,624 |      | $ | 41,267
|                                                  |  |              |        |      |   |       



F-25



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





At December 31, 2007, the Company had no operating or 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:



|                                  |  |              |         |   |      |   |        |  
|--------------------------------- |  | ------------ | ------- | - | ---- | - | ------ | -
|                                  |  | December 31, |        
|                                  |  | 2007         |         |   | 2006 |  
|Insurance premiums receivable     |  | $            | 70,222  |   |      | $ | 77,187 |  
|Other receivables                 |  |              | 41,629  |   |      |   | 28,023 |  
|Allowance for uncollectible items |  |              | (5,622  | ) |      |   | (6,612 | )
|                                  |  |              |         |   |      |   |        |  
|Total                             |  | $            | 106,229 |   |      | $ | 98,598 |  
|                                  |  |              |         |   |      |   |        |  



|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 $5.00 per share. All the shares are issued and outstanding as of December 31, 2007 and 2006. All the outstanding shares at December 31, 2007 are owned by
the Parent (see Note 1). The Company paid dividends of $197,000, $210,000 and $180,000 at December 31, 2007, 2006 and 2005, 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 atDecember
31,
|                              |  | 2007                           |         | 2006 |   |         | 2005
|Statutory Net Income          |  | $                              | 138,496 |      | $ | 212,898 | (1)  |  | $ | 127,094
|                              |  |                                |         |      |   |         |      |  |   |        
|                              | 
|                              |  | At December 31,               
|                              |  | 2007                           |         | 2006 |   |         |     
|Statutory Capital and Surplus |  | $                              | 438,924 |      | $ | 515,105 |      |  |   |        
|                              |  |                                |         |      |   |         |      |  |   |        



| | 
| | 

| | (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 2007, the Company declared and paid dividends of $197,000, of which $30,442 was ordinary and $166,558
was extraordinary. In 2006, the Company declared and paid dividends of $210,000, of which all was extraordinary. The Company has the ability, under state regulatory requirements, to dividend up to $84,587 to its parent in 2008 without permission
from Iowa regulators.



F-26



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)







|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:



|                                                |  |              |           |      |   |          
|----------------------------------------------- |  | ------------ | --------- | ---- | - | ---------
|                                                |  | December 31,
|                                                |  | 2007         |           | 2006
|Ceded future policyholder benefits and expenses |  | $            | 1,216,757 |      | $ | 1,212,991
|Ceded unearned premium                          |  |              | 19,383    |      |   | 19,579   
|Ceded claims and benefits payable               |  |              | 65,619    |      |   | 56,427   
|Ceded paid losses                               |  |              | 10,509    |      |   | 14,623   
|                                                |  |              |           |      |   |          
|Total                                           |  | $            | 1,312,268 |      | $ | 1,303,620
|                                                |  |              |           |      |   |          



F-27



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





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



|                                             |  |                          |          |   |               |   |           |       |  |   |              |   |  |               |          |   |       |   |           |              |  |   |               |   |  |       |          |   |  |   |           |   |  |   |           |  
|-------------------------------------------- |  | ------------------------ | -------- | - | ------------- | - | --------- | ----- |  | - | ------------ | - |  | ------------- | -------- | - | ----- | - | --------- | ------------ |  | - | ------------- | - |  | ----- | -------- | - |  | - | --------- | - |  | - | --------- | -
|                                             |  | Years Ended December 31, |         
|                                             |  | 2007                     |          |   | 2006          |   |           | 2005  | 
|                                             |  | LongDuration             |          |   | ShortDuration |   |           | Total |  |   | LongDuration |   |  | ShortDuration |          |   | Total |   |           | LongDuration |  |   | ShortDuration |   |  | Total |         
|Direct                                       |  |                          |          |   |               |   |           |       |  |   |              |   |  |               |          |   |       |   |           |              |  |   |               |   |  |       |          |   |  |   |           |   |  |   |           |  
|Premiums and other considerations            |  | $                        | 293,346  |   |               | $ | 1,003,971 |       |  | $ | 1,297,317    |   |  | $             | 384,626  |   |       | $ | 1,089,002 |              |  | $ | 1,473,628     |   |  | $     | 475,081  |   |  | $ | 1,360,420 |   |  | $ | 1,835,501 |  
|Premiums assumed                             |  |                          | 9,732    |   |               |   | 179,395   |       |  |   | 189,127      |   |  |               | 11,655   |   |       |   | 180,522   |              |  |   | 192,177       |   |  |       | 14,513   |   |  |   | 153,412   |   |  |   | 167,925   |  
|Premiums ceded                               |  |                          | (219,490 | ) |               |   | (7,024    | )     |  |   | (226,514     | ) |  |               | (291,700 | ) |       |   | (7,285    | )            |  |   | (298,985      | ) |  |       | (276,240 | ) |  |   | (16,415   | ) |  |   | (292,655  | )
|                                             |  |                          |          |   |               |   |           |       |  |   |              |   |  |               |          |   |       |   |           |              |  |   |               |   |  |       |          |   |  |   |           |   |  |   |           |  
|Net earned premiums and other considerations |  | $                        | 83,588   |   |               | $ | 1,176,342 |       |  | $ | 1,259,930    |   |  | $             | 104,581  |   |       | $ | 1,262,239 |              |  | $ | 1,366,820     |   |  | $     | 213,354  |   |  | $ | 1,497,417 |   |  | $ | 1,710,771 |  
|                                             |  |                          |          |   |               |   |           |       |  |   |              |   |  |               |          |   |       |   |           |              |  |   |               |   |  |       |          |   |  |   |           |   |  |   |           |  
|Direct policyholder                          |  |                          |          |   |               |   |           |       |  |   |              |   |  |               |          |   |       |   |           |              |  |   |               |   |  |       |          |   |  |   |           |   |  |   |           |  
|Benefits                                     |  | $                        | 756,784  |   |               | $ | 643,161   |       |  | $ | 1,399,945    |   |  | $             | 851,688  |   |       | $ | 707,463   |              |  | $ | 1,559,151     |   |  | $     | 877,175  |   |  | $ | 904,063   |   |  | $ | 1,781,238 |  
|Benefits assumed                             |  |                          | 31,002   |   |               |   | 177,909   |       |  |   | 208,911      |   |  |               | 36,405   |   |       |   | 179,652   |              |  |   | 216,057       |   |  |       | 39,758   |   |  |   | 159,283   |   |  |   | 199,041   |  
|Benefits ceded                               |  |                          | (671,497 | ) |               |   | (2,750    | )     |  |   | (674,247     | ) |  |               | (748,887 | ) |       |   | (2,694    | )            |  |   | (751,581      | ) |  |       | (682,240 | ) |  |   | (6,655    | ) |  |   | (688,895  | )
|                                             |  |                          |          |   |               |   |           |       |  |   |              |   |  |               |          |   |       |   |           |              |  |   |               |   |  |       |          |   |  |   |           |   |  |   |           |  
|Net policyholder benefits                    |  | $                        | 116,289  |   |               | $ | 818,320   |       |  | $ | 934,609      |   |  | $             | 139,206  |   |       | $ | 884,421   |              |  | $ | 1,023,627     |   |  | $     | 234,693  |   |  | $ | 1,056,691 |   |  | $ | 1,291,384 |  
|                                             |  |                          |          |   |               |   |           |       |  |   |              |   |  |               |          |   |       |   |           |              |  |   |               |   |  |       |          |   |  |   |           |   |  |   |           |  

The Company had $215,012 and $127,789 of assets held in trusts as of December 31, 2007 and
2006, 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.

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. The selection of reinsurance companies is based on criteria related to solvency and reliability and, to a lesser
degree, diversification as well as developing strong relationships with the Companys reinsurance partners for the sharing of risks. A.M. Best ratings for The Hartford and John Hancock, the reinsurers we have the most exposure to, are A+ and
A++, respectively. The majority of our remaining reinsurance exposure has been ceded to companies rated A or better by A.M. Best.

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 U.S. via
independent funeral homes and funeral homes 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 reinsurance
recoverable from The Hartford was $700,483 and $752,377 as of December 31,



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





2007 and 2006, respectively. The Company would be responsible to administer this business in the event of a default by the Hartford. 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 Company divested its
LTC operations to John Hancock Life Insurance Company (John Hancock). Reinsurance recoverable from John Hancock was $489,865 and $423,889 as of December 31, 2007 and 2006, respectively.



|9. | Reserves
|-- | --------

The following table provides reserve
information by major lines of business as of December 31, 2007 and 2006:



|                                                                      |  |                                  |           |                   |   |             |  |                                 |           |                                  |   |                  |  |              |           |                                 |   |        |  |   |           |  |   |        
|--------------------------------------------------------------------- |  | -------------------------------- | --------- | ----------------- | - | ----------- |  | ------------------------------- | --------- | -------------------------------- | - | ---------------- |  | ------------ | --------- | ------------------------------- | - | ------ |  | - | --------- |  | - | -------
|                                                                      |  | December 31, 2007                |           | December 31, 2006
|                                                                      |  | FuturePolicyBenefits andExpenses |           | UnearnedPremiums  |   | CaseReserve |  | IncurredBut NotReportedReserves |           | FuturePolicyBenefits andExpenses |   | UnearnedPremiums |  | CaseReserves |           | IncurredBut NotReportedReserves
|Long Duration Contracts:                                              |  |                                  |           |                   |   |             |  |                                 |           |                                  |   |                  |  |              |           |                                 |   |        |  |   |           |  |   |        
|Preneed life insurance policies and investment-type annuity contracts |  | $                                | 1,293,369 |                   | $ | 1,404       |  | $                               | 3,563     |                                  | $ | 973              |  | $            | 1,354,105 |                                 | $ | 1,554  |  | $ | 4,643     |  | $ | 899    
|Life insurance no longer offered                                      |  |                                  | 271,937   |                   |   | 634         |  |                                 | 853       |                                  |   | 27               |  |              | 278,578   |                                 |   | 655    |  |   | 730       |  |   | 26     
|FFG and LTC disposed businesses                                       |  |                                  | 1,105,628 |                   |   | 18,861      |  |                                 | 50,228    |                                  |   | 6,119            |  |              | 1,098,647 |                                 |   | 18,632 |  |   | 41,838    |  |   | 5,280  
|All other                                                             |  |                                  | 4,429     |                   |   | 316         |  |                                 | 16,503    |                                  |   | 6,443            |  |              | 4,185     |                                 |   | 514    |  |   | 14,019    |  |   | 7,439  
|Short Duration Contracts:                                             |  |                                  |           |                   |   |             |  |                                 |           |                                  |   |                  |  |              |           |                                 |   |        |  |   |           |  |   |        
|Group term life                                                       |  |                                  |          |                   |   | 6,317       |  |                                 | 214,430   |                                  |   | 47,711           |  |              |          |                                 |   | 6,448  |  |   | 225,717   |  |   | 51,278 
|Group disability                                                      |  |                                  |          |                   |   | 2,549       |  |                                 | 1,295,878 |                                  |   | 153,265          |  |              |          |                                 |   | 1,926  |  |   | 1,298,627 |  |   | 149,944
|Medical                                                               |  |                                  |          |                   |   | 5,765       |  |                                 | 9,182     |                                  |   | 14,686           |  |              |          |                                 |   | 6,002  |  |   | 10,451    |  |   | 16,901 
|Dental                                                                |  |                                  |          |                   |   | 4,296       |  |                                 | 2,285     |                                  |   | 16,307           |  |              |          |                                 |   | 3,208  |  |   | 3,331     |  |   | 18,392 
|Credit life and disability                                            |  |                                  |          |                   |   | 5           |  |                                 |          |                                  |   | 1,900            |  |              |          |                                 |   | 6      |  |   | 1,505     |  |   | 4,279  
|                                                                      |  |                                  |           |                   |   |             |  |                                 |           |                                  |   |                  |  |              |           |                                 |   |        |  |   |           |  |   |        
|Total                                                                 |  | $                                | 2,675,363 |                   | $ | 40,147      |  | $                               | 1,592,922 |                                  | $ | 247,431          |  | $            | 2,735,515 |                                 | $ | 38,945 |  | $ | 1,600,861 |  | $ | 254,438
|                                                                      |  |                                  |           |                   |   |             |  |                                 |           |                                  |   |                  |  |              |           |                                 |   |        |  |   |           |  |   |        

The following table provides a roll forward of the Companys product lines with the most
significant short duration claims and benefits payable balances; group term life and group disability lines of business. Claims and benefits payable is comprised of case and IBNR reserves.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





|                                                      |  |                |         |   |                  |   |           |  
|----------------------------------------------------- |  | -------------- | ------- | - | ---------------- | - | --------- | -
|                                                      |  | Group TermLife |         |   | Group Disability |  
|                                                      |  |                |         |   |                  |   |           |  
|Balance as of January 1, 2005, gross of reinsurance   |  | $              | 296,682 |   |                  | $ | 1,368,820 |  
|Less: Reinsurance ceded and other (1)                 |  |                | (36     | ) |                  |   | (13,909   | )
|                                                      |  |                |         |   |                  |   |           |  
|Balance as of January 1, 2005, net of reinsurance     |  |                | 296,646 |   |                  |   | 1,354,911 |  
|Incurred losses related to:                           |  |                |         |   |                  |   |           |  
|Current year                                          |  |                | 197,510 |   |                  |   | 370,700   |  
|Prior years interest                                 |  |                | 9,948   |   |                  |   | 61,415    |  
|Prior year(s)                                         |  |                | (51,734 | ) |                  |   | (37,384   | )
|                                                      |  |                |         |   |                  |   |           |  
|Total incurred losses                                 |  |                | 155,724 |   |                  |   | 394,731   |  
|Paid losses related to:                               |  |                |         |   |                  |   |           |  
|Current year                                          |  |                | 121,059 |   |                  |   | 69,114    |  
|Prior year(s)                                         |  |                | 39,557  |   |                  |   | 263,098   |  
|                                                      |  |                |         |   |                  |   |           |  
|Total paid losses                                     |  |                | 160,616 |   |                  |   | 332,212   |  
|Balance as of December 31, 2005, net of reinsurance   |  |                | 291,755 |   |                  |   | 1,417,430 |  
|Plus: Reinsurance ceded and other (1)                 |  |                | 256     |   |                  |   | 14,303    |  
|                                                      |  |                |         |   |                  |   |           |  
|Balance as of December 31, 2005, gross of reinsurance |  | $              | 292,011 |   |                  | $ | 1,431,733 |  
|Less: Reinsurance ceded and other (1)                 |  |                | (256    | ) |                  |   | (14,303   | )
|                                                      |  |                |         |   |                  |   |           |  
|Balance as of January 1, 2006, net of reinsurance     |  |                | 291,755 |   |                  |   | 1,417,430 |  
|Incurred losses related to:                           |  |                |         |   |                  |   |           |  
|Current year                                          |  |                | 185,501 |   |                  |   | 373,609   |  
|Prior years interest                                 |  |                | 9,575   |   |                  |   | 62,270    |  
|Prior year(s)                                         |  |                | (54,438 | ) |                  |   | (78,352   | )
|                                                      |  |                |         |   |                  |   |           |  
|Total incurred losses                                 |  |                | 140,638 |   |                  |   | 357,527   |  
|Paid losses related to:                               |  |                |         |   |                  |   |           |  
|Current year                                          |  |                | 117,626 |   |                  |   | 64,914    |  
|Prior year(s)                                         |  |                | 38,239  |   |                  |   | 271,526   |  
|                                                      |  |                |         |   |                  |   |           |  
|Total paid losses                                     |  |                | 155,865 |   |                  |   | 336,440   |  
|Balance as of December 31, 2006, net of reinsurance   |  |                | 276,583 |   |                  |   | 1,438,517 |  
|Plus: Reinsurance ceded and other (1)                 |  |                | 412     |   |                  |   | 10,054    |  
|                                                      |  |                |         |   |                  |   |           |  
|Balance as of December 31, 2006, gross of reinsurance |  | $              | 276,995 |   |                  | $ | 1,448,571 |  
|Less: Reinsurance ceded and other (1)                 |  |                | (412    | ) |                  |   | (10,054   | )
|                                                      |  |                |         |   |                  |   |           |  
|Balance as of January 1, 2007, net of reinsurance     |  |                | 276,583 |   |                  |   | 1,438,517 |  
|Incurred losses related to:                           |  |                |         |   |                  |   |           |  
|Current year                                          |  |                | 168,613 |   |                  |   | 367,871   |  
|Prior years interest                                 |  |                | 9,150   |   |                  |   | 62,073    |  
|Prior year(s)                                         |  |                | (51,190 | ) |                  |   | (93,096   | )
|                                                      |  |                |         |   |                  |   |           |  
|Total incurred losses                                 |  |                | 126,573 |   |                  |   | 336,848   |  
|Paid losses related to:                               |  |                |         |   |                  |   |           |  
|Current year                                          |  |                | 107,361 |   |                  |   | 71,413    |  
|Prior year(s)                                         |  |                | 34,609  |   |                  |   | 289,046   |  
|                                                      |  |                |         |   |                  |   |           |  
|Total paid losses                                     |  |                | 141,970 |   |                  |   | 360,459   |  
|Balance as of December 31, 2007, net of reinsurance   |  |                | 261,186 |   |                  |   | 1,414,906 |  
|Plus: Reinsurance ceded and other (1)                 |  |                | 955     |   |                  |   | 34,237    |  
|                                                      |  |                |         |   |                  |   |           |  
|Balance as of December 31, 2007, gross of reinsurance |  | $              | 262,141 |   |                  | $ | 1,449,143 |  
|                                                      |  |                |         |   |                  |   |           |  



|(1) | Reinsurance ceded and other includes claims and benefits payable balances 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





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).

Case and IBNR reserves 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 case and IBNR reserves
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 case and IBNR reserves 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 case and IBNR
reserves show redundancies in all years due to actual claim recovery rates exceeding those assumed in prior year reserves. During the three-year period, recoveries and terminations due to death increased in 2007 and 2006 leading to a higher reserve
redundancy in those years.

The Companys short duration group disability category includes short and long term disability products.
Case and IBNR reserves for long-term disability have been discounted at 5.25%. The December 31, 2007 and 2006 liabilities include $1,384,970 and $1,410,711, respectively, of such reserves. The amount of discounts deducted from outstanding
reserves as of December 31, 2007 and 2006 are $486,492 and $445,004, respectively.

Long Duration Contracts

The Companys long duration contracts are comprised of preneed 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 preneed insurance are level, vary by year of issuance and product, and ranged from 4.7% to 7.3% in 2007 and 2006 before provisions for adverse deviation, which ranged from 0.2% to 0.5%
in both 2007 and 2006.

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 2007 and 2006 with the exception of a block of pre-1980 business which had a level 8.8% discount rate in both 2007 and 2006.

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 preneed life insurance policies ranged from 1.0% to 7.0% in 2007 and
2006. 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 2007 and 2006 with the exception of most
policies issued in 2005 and later where the assumption was 2.3%.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(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 1.5% to 5.5% in 2007 and 2006. Withdrawal charges, if any, generally range from 7.0% to 0.0% and grade to zero over a period of seven years for business issued in the U.S.
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. The Company maintains an offsetting reinsurance recoverable related to these
reserves (see note 8).



|10. | Fair Value Disclosures
|--- | ----------------------

FAS 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. 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 from being disclosed.

Fair values for fixed maturity securities, equity securities, collateral held
and obligations under securities lending and separate account assets (with matching liabilities) are obtained from an independent pricing service which uses observable market information. In the measurement of the fair value of certain financial
instruments, other valuation techniques were utilized if quoted market prices were not available.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





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
include both public and 144A securities, is primarily based on matrix pricing models or, in the case of private placements, excluding 144A securities, is 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 preferred stocks is primarily
based on matrix pricing models.

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 consolidated 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.

Other assets: a derivative instrument, which the Company purchased to hedge inflation risk inherent in some of our preneed insurance policies with payments tied to the Consumer Price Index, is recorded in other
assets. The fair value of this derivative is based on quoted market prices.

Collateral and obligations under securities lending:
the carrying amount reported approximates fair value because of the short duration of the investments.

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

Separate account assets and liabilities: separate account assets (with matching liabilities) are reported at their estimated fair values, which are primarily based on quoted market prices.

Funds held under reinsurance: the carrying amount reported approximates fair value due to the short maturity of the instruments.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





|                                                                                                                |  |                   |           |                   |   |                |  |            |           |  |   |          
|--------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | ----------------- | - | -------------- |  | ---------- | --------- |  | - | ---------
|                                                                                                                |  | December 31, 2007 |           | December 31, 2006
|                                                                                                                |  | Carrying Value    |           | Fair Value        |   | Carrying Value |  | Fair Value
|Financial assets                                                                                                |  |                   |           |                   |   |                |  |            |           |  |   |          
|Cash and cash equivalents                                                                                       |  | $                 | 32,832    |                   | $ | 32,832         |  | $          | 75,233    |  | $ | 75,233   
|Fixed maturity securities                                                                                       |  |                   | 2,654,969 |                   |   | 2,654,969      |  |            | 2,915,346 |  |   | 2,915,346
|Equity securities                                                                                               |  |                   | 268,672   |                   |   | 268,672        |  |            | 320,010   |  |   | 320,010  
|Commercial mortgage loans on real estate                                                                        |  |                   | 822,184   |                   |   | 851,124        |  |            | 750,283   |  |   | 774,030  
|Policy loans                                                                                                    |  |                   | 7,724     |                   |   | 7,724          |  |            | 7,840     |  |   | 7,840    
|Short-term investments                                                                                          |  |                   | 44,092    |                   |   | 44,092         |  |            | 48,141    |  |   | 48,141   
|Collateral held under securities lending                                                                        |  |                   | 240,049   |                   |   | 240,049        |  |            | 176,937   |  |   | 176,937  
|Other investments                                                                                               |  |                   | 74,781    |                   |   | 74,781         |  |            | 87,323    |  |   | 87,323   
|Other assets                                                                                                    |  |                   | 6,635     |                   |   | 6,635          |  |            | 6,451     |  |   | 6,451    
|Assets held in separate accounts                                                                                |  |                   | 2,867,617 |                   |   | 2,867,617      |  |            | 3,020,811 |  |   | 3,020,811
|Financial liabilities                                                                                           |  |                   |           |                   |   |                |  |            |           |  |   |          
|Policy reserves under investment products (Individual and group annuities, subject to discretionary withdrawal) |  | $                 | 304,882   |                   | $ | 302,275        |  | $          | 355,178   |  | $ | 352,809  
|Funds held under reinsurance                                                                                    |  |                   | 118       |                   |   | 118            |  |            | 107       |  |   | 107      
|Obligations under securities lending                                                                            |  |                   | 240,049   |                   |   | 240,049        |  |            | 176,937   |  |   | 176,937  
|Liabilities related to separate accounts                                                                        |  |                   | 2,867,617 |                   |   | 2,867,617      |  |            | 3,020,811 |  |   | 3,020,811

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.



|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 consolidated 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 costs allocated to the Company were $6,902, $8,240 and
$7,881 for 2007, 2006 and 2005, respectively.

The Company participates in a contributory profit sharing plan, sponsored by our 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 $5,853, $5,688 and $5,656 for 2007, 2006 and 2005, 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 $1,108, $0 and $0 in 2007, 2006 and 2005, respectively, as claims were incurred. During 2007, 2006 and 2005 the Company incurred expenses related to retirement benefits of $1,522, $1,532 and
$1,505, respectively.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





|12. | Deferred Acquisition Costs
|--- | --------------------------

Information about
deferred acquisition costs follows:



|                                                                           |  |              |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                           |  | December 31, |        
|                                                                           |  | 2007         |         |   | 2006 |   |         | 2005 | 
|Beginning balance                                                          |  | $            | 63,571  |   |      | $ | 123,222 |      |  | $ | 116,060 |  
|Transfer of Canadian business                                              |  |              |        |   |      |   | (45,690 | )    |  |   |        |  
|Costs deferred                                                             |  |              | 33,063  |   |      |   | 27,874  |      |  |   | 78,432  |  
|Amortization                                                               |  |              | (39,724 | ) |      |   | (41,772 | )    |  |   | (72,726 | )
|Foreign currency translation                                               |  |              |        |   |      |   | (63     | )    |  |   | 1,456   |  
|Cumulative effect of change in accounting principle for SOP 05-01 (Note 2) |  |              | (6,335  | ) |      |   |        |      |  |   |        |  
|                                                                           |  |              |         |   |      |   |         |      |  |   |         |  
|Ending balance                                                             |  | $            | 50,575  |   |      | $ | 63,571  |      |  | $ | 123,222 |  
|                                                                           |  |              |         |   |      |   |         |      |  |   |         |  



|13. | Goodwill, VOBA and Intangibles
|--- | ------------------------------

Information about
goodwill VOBA and intangibles are as follows:



|                                      |  |                                         |         |      |                                     |         |      |                                            |   |         |   |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |   |  |   |        |  
|------------------------------------- |  | --------------------------------------- | ------- | ---- | ----------------------------------- | ------- | ---- | ------------------------------------------ | - | ------- | - |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                      |  | Goodwill for the Year EndedDecember 31, |         |      | VOBA for the Year EndedDecember 31, |         |      | Intangibles for the Year EndedDecember 31, |  
|                                      |  | 2007                                    |         | 2006 |                                     |         | 2005 |                                            |   | 2007    |   |  | 2006 |        |   | 2005 |   |        | 2007 |  |   | 2006   |   |  | 2005 |       
|Beginning balance                     |  | $                                       | 156,817 |      | $                                   | 164,643 |      |                                            | $ | 156,143 |   |  | $    | 26,667 |   |      | $ | 33,965 |      |  | $ | 39,413 |   |  | $    | 29,061 |   |  | $ | 30,622 |   |  | $ | 25,892 |  
|Transfer of Canadian business         |  |                                         |        |      |                                     | (7,817  | )    |                                            |   |        |   |  |      |       |   |      |   | (2,692 | )    |  |   |       |   |  |      |       |   |  |   |       |   |  |   |       |  
|Dental mergers                        |  |                                         |        |      |                                     |        |      |                                            |   | 8,594   |   |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   | 218    |   |  |   | 7,632  |  
|Additions (deletions)                 |  |                                         |        |      |                                     |        |      |                                            |   | (340    | ) |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |   |  |   |       |  
|Amortization, net of interest accrued |  |                                         |        |      |                                     |        |      |                                            |   |        |   |  |      | (3,851 | ) |      |   | (4,603 | )    |  |   | (5,532 | ) |  |      | (1,788 | ) |  |   | (1,779 | ) |  |   | (2,902 | )
|Foreign currency translation          |  |                                         |        |      |                                     | (9      | )    |                                            |   | 246     |   |  |      |       |   |      |   | (3     | )    |  |   | 84     |   |  |      |       |   |  |   |       |   |  |   |       |  
|                                      |  |                                         |         |      |                                     |         |      |                                            |   |         |   |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |   |  |   |        |  
|Ending balance                        |  | $                                       | 156,817 |      | $                                   | 156,817 |      |                                            | $ | 164,643 |   |  | $    | 22,816 |   |      | $ | 26,667 |      |  | $ | 33,965 |   |  | $    | 27,273 |   |  | $ | 29,061 |   |  | $ | 30,622 |  
|                                      |  |                                         |         |      |                                     |         |      |                                            |   |         |   |  |      |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |   |  |   |        |  

As of December 31, 2007, the majority of the outstanding balance of VOBA relates to the
Companys preneed insurance business. VOBA in this segment assumes an interest rate ranging from 5.4% to 7.5%.

At December 31,
2007 the estimated amortization of VOBA for the next five years and thereafter is as follows:



|           |  |        |       
|---------- |  | ------ | ------
|Year       |  | Amount
|2008       |  | $      | 3,051 
|2009       |  |        | 2,272 
|2010       |  |        | 1,799 
|2011       |  |        | 1,638 
|2012       |  |        | 1,513 
|Thereafter |  |        | 12,543
|           |  |        |       
|Total      |  | $      | 22,816
|           |  |        |       

Intangible assets that have finite lives, including customer relationships, customer contracts and
other intangible assets are amortized over their estimated useful lives. At December 31, 2007, the estimated amortization of intangibles with finite lives for the next five years is as follows:





|     |  |        |      
|---- |  | ------ | -----
|Year |  | Amount
|2008 |  | $      | 1,788
|2009 |  |        | 1,788
|2010 |  |        | 1,788
|2011 |  |        | 1,788
|2012 |  |        | 1,788



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





|14. | Other Comprehensive Income
|--- | --------------------------

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



|                              |  |                                      |        |   |                                       |   |         |                                      |  |   |         |  
|----------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------- | - | ------- | ------------------------------------ |  | - | ------- | -
|                              |  | ForeignCurrencyTranslationAdjustment |        |   | Unrealized Gains(Losses) onSecurities |   |         | Accumulated OtherComprehensiveIncome | 
|Balance at December 31, 2004  |  | $                                    | 6,717  |   |                                       | $ | 165,958 |                                      |  | $ | 172,675 |  
|Dental merger                 |  |                                      |       |   |                                       |   | 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  |  
|                              |  |                                      |        |   |                                       |   |         |                                      |  |   |         |  
|Activity in 2007              |  |                                      | 59     |   |                                       |   | (56,642 | )                                    |  |   | (56,583 | )
|                              |  |                                      |        |   |                                       |   |         |                                      |  |   |         |  
|Balance at December 31, 2007  |  | $                                    |       |   |                                       | $ | 5,696   |                                      |  | $ | 5,696   |  
|                              |  |                                      |        |   |                                       |   |         |                                      |  |   |         |  



|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, 2007, 2006 and 2005, were $27,581, $27,803 and $27,647, respectively. Net expenses paid to affiliates were $26,714, $33,245 and $38,846, for the years ended December 31,
2007, 2006 and 2005. Information technology expenses were $43,369, $44,470 and $56,866 for years ended December 31, 2007, 2006 and 2005, 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 preneed business from its affiliate, United Family Life Insurance Company (UFL). The Company has assumed premium from UFL
of $8,146, $9,838 and $12,215 in 2007, 2006 and 2005, respectively. The Company assumed $520,904 and $548,472 of reserves in 2007 and 2006, respectively, from UFL.

The Company assumes group disability business from its affiliate, Union Security Life Insurance Company of New York (USLICONY). The Company assumed $6,813, $6,916 and $6,588 of premium from USLICONY in
2007, 2006 and 2005, respectively. The Company assumed $29,569 and $29,151 of reserves in 2007 and 2006, respectively, from USLICONY.



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##### Table of Contents

Union Security Insurance Company

Notes to Consolidated Financial Statements

December 31, 2007, 2006 and 2005

(In thousands except share data)





|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, 2007, the aggregate future minimum
lease payment under operating lease agreements that have initial or non-cancelable terms in excess of one year are:



|                                    |  |   |       
|----------------------------------- |  | - | ------
|2008                                |  | $ | 7,917 
|2009                                |  |   | 7,093 
|2010                                |  |   | 6,619 
|2011                                |  |   | 5,494 
|2012                                |  |   | 1,019 
|Thereafter                          |  |   | 48    
|                                    |  |   |       
|Total minimum future lease payments |  | $ | 28,190
|                                    |  |   |       

Rent expense was $8,277, $8,713 and $9,699 for 2007, 2006 and 2005, 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-37