Note 5 - Long-term Equity-based Compensation Plans

As of March 31, 2013, there were 8,745,753 common shares available for future grants under Kemper’s long-term equity-based compensation plan, of which 554,175 shares were reserved for future grants based upon the achievement of performance goals under the terms of outstanding performance-based restricted stock awards. Equity-based compensation expense was $0.8 million and $1.5 million for the three months ended March 31, 2013 and 2012, respectively. Total unamortized compensation expense related to nonvested awards at March 31, 2013 was $8.9 million, which is expected to be recognized over a weighted-average period of 1.5 years.

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 three months ended March 31, 2013 and 2012 were as follows:



	Three Months Ended
	Mar 31, 2013					Mar 31, 2012
Range of Valuation Assumptions
Expected Volatility	39.10	%	-	48.23	%	29.36	%	-	53.84	%
Risk-free Interest Rate	0.62		-	1.38		0.16		-	1.26
Expected Dividend Yield	2.83		-	2.83		3.17		-	3.26
Weighted-Average Expected Life in Years
Employee Grants	4		-	7		1		-	7

Option and stock appreciation right activity for the three months ended March 31, 2013 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	3,192,054		$	40.53
Granted	247,750		33.45
Exercised	(58,500	)	25.76
Forfeited or Expired	(451,188	)	42.27
Outstanding at March 31, 2013	2,930,116		$	39.95	4.43	$	4.6
Vested and Expected to Vest at March 31, 2013	2,886,465		$	40.10	4.36	$	4.5
Exercisable at March 31, 2013	2,358,551		$	42.32	3.36	$	3.1

Note 5 - Long-term Equity-based Compensation Plans (continued)

The weighted-average grant-date fair values of options granted during the three months ended March 31, 2013 and 2012 were $10.23 per option and $9.39 per option, respectively. Total intrinsic value of stock options exercised was $0.3 million and $0.1 million for the three months ended March 31, 2013 and 2012, respectively. The total tax benefit realized for tax deductions from option exercises was $0.1 million for the three months ended March 31, 2013. The total tax benefit realized for tax deductions from option exercises was insignificant for the three months ended March 31, 2012. Cash received from option exercises were insignificant for the three months ended March 31, 2013 and 2012.

Information pertaining to options and stock appreciation rights outstanding at March 31, 2013 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	35,000	$	13.55	5.85	35,000	$	13.55
15.01		-	20.00		8,000	16.48		6.10	8,000	16.48
20.01		-	25.00		207,500	23.61		6.84	150,062	23.64
25.01		-	30.00		507,250	28.76		8.19	219,873	28.44
30.01		-	35.00		226,750	33.43		9.84	—	—
35.01		-	40.00		336,750	37.25		4.61	336,750	37.25
40.01		-	45.00		366,252	43.57		1.35	366,252	43.57
45.01		-	50.00		999,722	48.64		2.60	999,722	48.64
50.01		-	55.00		242,892	50.52		1.14	242,892	50.52
10.00		-	55.00		2,930,116	39.95		4.43	2,358,551	42.32

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 three months ended March 31, 2013 was as follows:



	Time-Based Restricted Shares		Weighted- Average Grant-Date Fair Value Per Share
Nonvested Balance at Beginning of the Year	126,349		$	26.19
Granted	54,625		33.45
Vested	(17,000	)	15.24
Forfeited	(17,145	)	24.91
Nonvested Balance at End of Period	146,829		$	30.31

Note 5 - Long-term Equity-based Compensation Plans (continued)

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 three months ended March 31, 2013 was as follows:



	Performance-Based Restricted Shares		Weighted- Average Grant-Date Fair Value Per Share
Nonvested Balance at Beginning of the Year	187,075		$	36.70
Granted	70,675		42.12
Vested	(53,118	)	33.14
Forfeited	(19,907	)	38.78
Nonvested Balance at End of Period	184,725		$	39.57

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. 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 2013, 2012, and 2011 three-year performance periods was 64,975 common shares, 62,025 common shares and 57,725 common shares, respectively, at March 31, 2013. For the 2010 three-year performance period, the Company exceeded target performance levels with a payout percentage of 114%. Accordingly, an additional 6,996 shares of stock were issued to award recipients on February 2, 2013 (the “2010 Additional Shares”).

The total fair value of the shares of restricted stock that vested during the three months ended March 31, 2013 and the 2010 Additional Shares that were issued was $2.6 million and the tax benefits for tax deductions realized from such shares was $0.9 million. The total fair value of the shares of restricted stock that vested during the three months ended March 31, 2012 and the additional shares that were issued in connection with the 2009 performance-based restricted stock awards was $2.8 million and the tax benefits for tax deductions realized from such shares was $1.0 million.