Note 6 - Long-term Equity-based Compensation Plans

On May 4, 2011, Kemper’s shareholders approved the 2011 Omnibus Equity Plan (“Omnibus Plan”). The Omnibus Plan replaced the Company’s previous employee stock option plans, director stock option plan and restricted stock plan (collectively, the “Prior Plans”). Awards previously granted under the Prior Plans remain outstanding in accordance with their original terms. Beginning May 4, 2011, equity-based compensation awards may only be granted under the Omnibus Plan. A maximum number of 10,000,000 shares of Kemper common stock may be issued under the Omnibus Plan (the “Share Authorization”). As of September 30, 2012, there were 9,249,581 common shares available for future grants under the Omnibus Plan, of which 561,825 shares were reserved for future grants based upon the achievement of performance goals under the terms of outstanding performance-based restricted stock awards.

The design of the Omnibus Plan provides for fungible use of shares to determine the number of shares available for future grants, with a fungible conversion factor of three to one, such that the Share Authorization will be reduced at two different rates, depending on the type of award granted. Each share of Kemper common stock issuable upon the exercise of stock options or stock appreciation rights will reduce the number of shares available for future grant under the Share Authorization by one share, while each share of Kemper common stock issued pursuant to “full value awards” will reduce the number of shares available for future grant under the Share Authorization by three shares. “Full value awards” are awards, other than stock options or stock appreciation rights, that are settled by the issuance of shares of Kemper common stock and include restricted stock, restricted stock units, performance shares, performance units, if settled with stock, and other stock-based awards.

Outstanding awards under the Omnibus Plan and Prior Plans at September 30, 2012 consisted of stand-alone stock options, tandem stock option and stock appreciation rights, time-vested restricted stock and performance-based restricted stock. Recipients of restricted stock are entitled to full dividend and voting rights on the same basis as all other outstanding shares of Kemper common stock and all awards are subject to forfeiture until certain restrictions have lapsed. Equity-based compensation expense was $4.8 million and $4.4 million for the nine months ended September 30, 2012 and 2011, respectively. Total unamortized compensation expense related to nonvested awards at September 30, 2012 was $6.4 million, which is expected to be recognized over a weighted-average period of 1.4 years.

Note 6 - Long-term Equity-based Compensation Plans (continued)

The Company uses the Black-Scholes option pricing model to estimate the fair value of each option on the date of grant. The assumptions used in the Black-Scholes pricing model for options granted during the nine months ended September 30, 2012 and 2011 were as follows:



	Nine Months Ended
	Sep 30, 2012					Sep 30, 2011
Range of Valuation Assumptions
Expected Volatility	29.36	%	-	53.84	%	41.26	%	-	55.16	%
Risk-free Interest Rate	0.16		-	1.26		1.30		-	2.87
Expected Dividend Yield	2.92		-	3.26		3.15		-	3.38
Weighted-Average Expected Life in Years
Employee Grants	1		-	7		3.5		-	7
Director Grants	6					6

Option and stock appreciation right activity for the nine months ended September 30, 2012 is presented below:



	Shares Subject to Options		Weighted- Average Exercise Price Per Share ($)		Weighted- Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value ($ in Millions)
Outstanding at Beginning of the Year	3,632,398		$	40.70
Granted	265,451		29.81
Exercised	(15,199	)	22.08
Forfeited or Expired	(452,846	)	48.36
Outstanding at September 30, 2012	3,429,804		$	38.93	4.42	$	7.2
Vested and Expected to Vest at September 30, 2012	3,394,413		$	39.04	4.38	$	7.1
Exercisable at September 30, 2012	2,944,739		$	40.79	3.73	$	5.7

The weighted-average grant-date fair values of options granted during the nine months ended September 30, 2012 and 2011 were $9.40 per option and $9.11 per option, respectively. Total intrinsic value of stock options exercised was $0.1 million for both the nine months ended September 30, 2012 and 2011. Cash received from option exercises and the total tax benefits realized for tax deductions from option exercises were insignificant for both the nine months ended September 30, 2012 and 2011. Information pertaining to options and stock appreciation rights outstanding at September 30, 2012 is presented below:



					Outstanding				Exercisable
Range of Exercise Prices					Shares Subject to Options	Weighted- Average Exercise Price Per Share ($)		Weighted- Average Remaining Contractual Life (in Years)	Shares Subject to Options	Weighted- Average Exercise Price Per Share ($)
$	10.00	-	$	15.00	204,500	$	13.55	6.35	204,500	$	13.55
15.01		-	20.00		8,000	16.48		6.60	8,000	16.48
20.01		-	25.00		313,750	23.74		7.52	176,312	23.64
25.01		-	30.00		636,000	28.56		8.29	292,373	28.03
30.01		-	35.00		6,614	31.92		6.09	2,614	31.18
35.01		-	40.00		340,577	37.25		5.19	340,577	37.25
40.01		-	45.00		400,084	43.56		1.81	400,084	43.56
45.01		-	50.00		1,185,747	48.62		2.72	1,185,747	48.62
50.01		-	55.00		334,532	50.85		1.28	334,532	50.85
10.00		-	55.00		3,429,804	38.93		4.42	2,944,739	40.79

Note 6 - Long-term Equity-based Compensation Plans (continued)

The grant-date fair values of time-based restricted stock awards are determined using the closing price of Kemper common stock on the date of grant. Activity related to nonvested time-based restricted stock for the nine months ended September 30, 2012 was as follows:



	Time-Based Restricted Shares		Weighted- Average Grant-Date Fair Value Per Share
Nonvested Balance at Beginning of the Year	116,784		$	23.33
Granted	72,125		29.90
Vested	(42,824	)	24.41
Forfeited	(14,979	)	25.79
Nonvested Balance at End of Period	131,106		$	26.31

Prior to February 3, 2009, only awards of time-vested restricted stock had been granted. Beginning on February 3, 2009, in addition to time-vested restricted stock granted to certain employees and officers, the Company began awarding performance-based restricted stock to certain officers and employees. The initial number of shares awarded to each participant of a performance-based restricted stock award represents the shares that would vest if the performance goals were achieved at the “target” performance level. The final payout of these awards will be determined based on Kemper’s total shareholder return over a three-year performance period relative to a peer group comprised of all the companies in the S&P Supercomposite Insurance Index.

Performance-based restricted stock awards are earned over a three-year performance period. If, at the end of the performance period, the Company’s relative performance:


•	exceeds the “target” performance level, additional shares of stock will be issued to the award recipient;


•	is below the “target” performance level, only a portion of the shares of performance-based restricted stock originally issued to the award recipient will vest; or


•	is below a “minimum” performance level, none of the shares of performance-based restricted stock originally issued to the award recipient will vest.

The grant date fair values of the performance-based restricted stock awards are determined using the Monte Carlo simulation method. Activity related to nonvested performance-based restricted stock for the nine months ended September 30, 2012 was as follows:



	Performance-Based Restricted Shares		Weighted- Average Grant-Date Fair Value Per Share
Nonvested Balance at Beginning of the Year	172,875		$	29.86
Granted	68,575		36.65
Vested	(51,596	)	14.04
Forfeited	(2,579	)	30.68
Nonvested Balance at End of Period	187,275		$	36.70

Note 6 - Long-term Equity-based Compensation Plans (continued)

The number of additional shares that would be granted if the Company were to meet or exceed the maximum performance levels related to the outstanding performance-based shares was 187,275 shares (as “full value awards,” the equivalent of 561,825 shares under the Share Authorization) at September 30, 2012. The number of additional shares that would be granted if the Company were to meet or exceed the maximum performance levels related to the outstanding performance-based shares for the 2012, 2011, and 2010 three-year performance periods was 68,475 common shares, 63,725 common shares and 55,075 common shares, respectively, at September 30, 2012. For the 2009 three-year performance period, the Company exceeded target performance levels with a payout percentage of 183%. Accordingly, an additional 40,727 shares of stock were issued to award recipients on January 31, 2012 (the “2009 Additional Shares”). The preceding table excludes activity related to the 2009 Additional Shares.

The total fair value of restricted stock, including the 2009 Additional Shares, that vested during the nine months ended September 30, 2012 was $4.0 million and the tax benefits for tax deductions realized from the vesting on such restricted stock was $1.4 million. The total fair value of restricted stock that vested during the nine months ended September 30, 2011 was $1.4 million and the tax benefits for tax deductions realized from the vesting on such restricted stock was $0.5 million.