NOTE 16. INCOME TAXES

Current and Deferred Income Tax Assets at December 31, 2012 and 2011 were:



DOLLARS IN MILLIONS	2012			2011
Current Income Tax Assets	$	5.4		$	2.5
Deferred Income Tax Assets	6.6			10.7
Valuation Allowance for State Income Taxes	(6.6		)	(6.8		)
Current and Deferred Income Tax Assets	$	5.4		$	6.4

The components of Liabilities for Income Taxes at December 31, 2012 and 2011 were:



DOLLARS IN MILLIONS	2012		2011
Deferred Income Tax Liabilities	$	15.1	$	—
Unrecognized Tax Benefits	6.4		6.2
Liabilities for Income Taxes	$	21.5	$	6.2

NOTE 16. INCOME TAXES (Continued)

The tax effects of temporary differences that give rise to significant portions of the Company’s Net Deferred Income Tax Assets (Liabilities) at December 31, 2012 and 2011 were:



DOLLARS IN MILLIONS	2012			2011
Deferred Income Tax Assets:
Insurance Reserves	$	79.3		$	76.8
Unearned Premium Reserves	44.1			45.0
Tax Capitalization of Policy Acquisition Costs	73.6			73.5
Net Operating Loss Carryforward	100.7			98.1
Payroll and Employee Benefit Accruals	79.9			67.8
Other	10.7			11.7
Total Deferred Income Tax Assets	388.3			372.9
Deferred Income Tax Liabilities:
Deferred Policy Acquisition Costs	104.1			102.9
Value of Insurance in Force Acquired	25.2			25.9
Investments	208.4			182.3
Depreciable Assets	29.3			22.5
Goodwill and Licenses	23.5			22.9
Other	6.3			5.7
Total Deferred Income Tax Liabilities	396.8			362.2
Valuation Allowance for State Income Taxes	6.6			6.8
Net Deferred Income Tax Assets (Liabilities)	$	(15.1	)	$	3.9

Deferred Income Tax Assets include Net Operating Loss (“NOL”) Carryforwards of $100.7 million and $98.1 million at December 31, 2012 and 2011, respectively, which include federal net operating loss carryforwards of $94.4 million and $91.2 million, respectively, and state net operating loss carryforwards of $6.3 million and $6.9 million, respectively. The expiration of the federal net operating loss carryforwards and the related deferred income tax assets is presented below by year of expiration.



DOLLARS IN MILLIONS	NOL Carryforwards		Deferred Tax Asset
Expiring in:
2017 through 2020	$	109.0	$	38.2
2021 through 2025	53.6		18.8
2026 through 2030	32.1		11.2
2031 through 2032	74.9		26.2
Total All Years	$	269.6	$	94.4

Except for the net operating losses scheduled to expire in 2031 through 2032, all of the federal net operating loss carryforwards were acquired in connection with business acquisitions made in prior years and are subject to annual usage limitations under the Internal Revenue Code. The Company expects to fully utilize these federal net operating loss carryforwards. The state net operating loss carryforwards relate to Fireside, the majority of which are scheduled to expire in 2029. Deferred tax asset valuation allowances of $6.6 million and $6.8 million were required at December 31, 2012 and 2011, respectively, and relate to state income taxes for Fireside.

Income taxes paid were $52.2 million in 2012. Income taxes refunded, net of income tax paid of $57.1 million, were $4.1 million in 2011, and income taxes paid were $65.1 million in 2010, respectively.

The Company has not provided Federal income taxes on $14.7 million of Mutual Savings Life’s income earned prior to 1984 which is not subject to income taxes under certain circumstances. Federal income taxes of $5.1 million would be paid on such income if it is distributed to shareholders in the future or if it does not continue to meet certain limitations.

NOTE 16. INCOME TAXES (Continued)

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010 is as follows:



DOLLARS IN MILLIONS	2012		2011			2010
Balance at Beginning of Year	$	6.2	$	7.8		$	11.7
Reductions for Tax Positions of Current Period	—		(1.8		)	(1.7		)
Additions for Tax Positions of Prior Years	0.2		0.2			26.6
Reduction for Expiration of Federal Statute of Limitations	—		—			(28.8		)
Balance at End of Year	$	6.4	$	6.2		$	7.8

The statute of limitations related to Kemper and its eligible subsidiaries’ consolidated Federal income tax returns is closed for all tax years up to and including 2006. The expiration of the statute of limitations related to the various state income tax returns that Kemper and its subsidiaries file varies by state.

During the first quarter of 2012, the Internal Revenue Service (“IRS”) began an audit of the Company’s 2009 and 2010 federal income tax returns. The Company reported a capital loss and a net operating loss in its 2009 federal income tax return and a net operating loss in its 2010 federal income tax return. The Company has carried these losses back to earlier tax years. Even though the Company has already received the refunds from carrying these losses back to such earlier tax years, approval by the Joint Committee on Taxation (“JCT”) is still required by law. The JCT has requested that the IRS perform an audit of these years before approving the refunds. In connection with the audit, the Company extended the federal statute of limitations related to the 2007 and 2008 tax years until December 31, 2013. The Company does not anticipate a material modification to the filed returns or the refunds that were received.

During the third quarter of 2012, the Illinois Department of Revenue began an audit of the 2009 and 2010 tax years. The Company does not anticipate a material modification to the filed returns.

Included in the balance of unrecognized tax benefits at December 31, 2012, 2011 and 2010 are tax positions of $3.5 million, $3.7 million and $5.7 million, respectively, for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred income tax accounting, other than for interest and penalties, the disallowance of the shorter deductibility period would not affect the effective income tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The liability for unrecognized tax benefits included accrued interest of $2.9 million, $2.5 million and $2.1 million at December 31, 2012, 2011 and 2010, respectively. Tax expense for the year ended December 31, 2012 includes interest expense of $0.4 million related to unrecognized tax benefits for prior years. Tax expense for the year ended December 31, 2011 includes interest expense of $0.4 million related to unrecognized tax benefits for prior years. Tax expense for the year ended December 31, 2010 includes a net interest benefit of $2.1 million, which is comprised of an interest benefit of $2.8 million resulting from the expiration of the statutes of limitations referred to above, and interest expense of $0.7 million on unrecognized tax benefits for prior years.

The components of Income Tax Expense from Continuing Operations for the years ended December 31, 2012, 2011 and 2010 were:



DOLLARS IN MILLIONS	2012			2011			2010
Current Income Tax Expense	$	(43.3	)	$	(43.4	)	$	(42.6	)
Deferred Income Tax Benefit (Expense)	12.9			35.2			(25.1		)
Unrecognized Tax Benefit	(0.2		)	1.6			3.9
Income Tax Expense	$	(30.6	)	$	(6.6	)	$	(63.8	)

NOTE 16. INCOME TAXES (Continued)

A reconciliation of the Statutory Federal Income Tax Expense and Rate to the Company’s Effective Income Tax Expense and Rate from Continuing Operations for the years ended December 31, 2012, 2011 and 2010 was:



DOLLARS IN MILLIONS	2012					2011					2010
DOLLARS IN MILLIONS	Amount			Rate		Amount			Rate		Amount			Rate
Statutory Federal Income Tax Expense	$	(42.8	)	35.0	%	$	(23.9	)	35.0	%	$	(79.3	)	35.0	%
Tax-exempt Income and Dividends Received Deduction	13.9			(11.4	)	17.7			(26.0	)	19.0			(8.4	)
State Income Taxes	(0.8		)	0.7		(1.0		)	1.5		(1.0		)	0.4
Nondeductible Goodwill	—			—		—			—		(5.2		)	2.3
Other, Net	(0.9		)	0.7		0.6			(1.0	)	2.7			(1.1	)
Effective Income Tax Expense	$	(30.6	)	25.0	%	$	(6.6	)	9.5	%	$	(63.8	)	28.2	%

Comprehensive Income Tax Expense included in the Consolidated Financial Statements for the years ended December 31, 2012, 2011 and 2010 was:



DOLLARS IN MILLIONS	2012			2011			2010
Income Tax Expense:
Continuing Operations	$	(30.6	)	$	(6.6	)	$	(63.8	)
Discontinued Operations	(7.3		)	(6.7		)	(10.3		)
Equity in:
Net Loss of Former Investee	—			—			0.1
Other Comprehensive (Income) Loss of Former Investee	—			—			(1.0		)
Unrealized Appreciation on Securities	(34.4		)	(71.6		)	(62.6		)
Foreign Currency Translation Adjustments on Investments	(0.6		)	(0.1		)	0.2
Tax Effects from Postretirement Benefit Plans	4.6			15.9			9.3
Tax Effects from Long-Term Equity-based Compensation included in Paid-in Capital	(0.1		)	(1.0		)	(2.0		)
Comprehensive Income Tax Expense	$	(68.4	)	$	(70.1	)	$	(130.1	)