Note 5 - Long-term Equity-based Compensation Plans

As of September 30, 2013, there were 8,722,865 common shares available for future grants under Kemper’s long-term equity-based compensation plan, of which 540,000 shares were reserved for future grants based on the achievement of performance goals under the terms of outstanding performance-based restricted stock awards. Equity-based compensation expense was $4.4 million and $4.8 million for the nine months ended September 30, 2013 and 2012, respectively. Total unamortized compensation expense related to nonvested awards at September 30, 2013 was $5.9 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 nine months ended September 30, 2013 and 2012 were as follows:



	Nine Months Ended
	Sep 30, 2013					Sep 30, 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		-	3.00		2.92		-	3.26
Weighted-Average Expected Life in Years
Employee Grants	4		-	7		1		-	7
Director Grants	6					6

Option and stock appreciation right activity for the nine months ended September 30, 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	283,750		33.20
Exercised	(190,000	)	24.77
Forfeited or Expired	(493,756	)	42.55
Outstanding at September 30, 2013	2,792,048		$	40.50	3.89	$	4.3
Vested and Expected to Vest at September 30, 2013	2,759,163		$	40.61	3.84	$	4.2
Exercisable at September 30, 2013	2,466,795		$	41.72	3.26	$	3.5

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

The weighted-average grant-date fair values of options granted during the nine months ended September 30, 2013 and 2012 were $10.20 per option and $9.40 per option, respectively. Total intrinsic value of stock options exercised was $1.8 million and $0.1 million for the nine months ended September 30, 2013 and 2012, respectively. The total tax benefit realized for tax deductions from option exercises was $0.6 million for the nine months ended September 30, 2013. The total tax benefit realized for tax deductions from option exercises was insignificant for the nine months ended September 30, 2012. Cash received from option exercises was $0.6 million for the nine months ended September 30, 2013. Cash received from option exercises were insignificant for the nine months ended September 30, 2012.

Information pertaining to options and stock appreciation rights outstanding at September 30, 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	26,750	$	13.55	5.35	26,750	$	13.55
15.01		-	20.00		8,000	16.48		5.60	8,000	16.48
20.01		-	25.00		116,250	23.58		6.34	111,250	23.63
25.01		-	30.00		475,250	28.74		7.68	322,062	28.61
30.01		-	35.00		262,750	33.17		9.37	95,685	32.67
35.01		-	40.00		326,000	37.22		4.11	326,000	37.22
40.01		-	45.00		360,618	43.58		0.86	360,618	43.58
45.01		-	50.00		979,722	48.64		2.07	979,722	48.64
50.01		-	55.00		236,708	50.51		0.61	236,708	50.51
10.00		-	55.00		2,792,048	40.50		3.89	2,466,795	41.72

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, 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	71,625		29.95
Vested	(57,990	)	25.03
Forfeited	(31,694	)	26.88
Nonvested Balance at End of Period	108,290		29.10

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 nine months ended September 30, 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	(24,632	)	38.95
Nonvested Balance at End of Period	180,000		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 62,600 common shares, 60,025 common shares and 57,375 common shares, respectively, at September 30, 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 nine months ended September 30, 2013 and the 2010 Additional Shares that were issued was $4.0 million and the tax benefits for tax deductions realized from such shares was $1.4 million. The total fair value of the shares of restricted stock that vested during the nine months ended September 30, 2012 and the additional shares that were issued in connection with the 2009 performance-based restricted stock awards was $4.0 million and the tax benefits for tax deductions realized from such shares was $1.4 million.

The compensation of each member of the Board of Directors who is not employed by the Company (“Non-employee Director”) includes equity-based compensation awards. Each new Non-employee Director receives an initial option to purchase 4,000 shares of Kemper common stock immediately upon becoming a director at an exercise price equal to the fair market value of Kemper’s common stock on the date of grant. Thereafter, on the date of each annual meeting of Kemper’s shareholders, Non-employee Directors automatically receive annual grants of options to purchase 4,000 shares of common stock. Prior to May 1, 2013, such options granted to Non-employee Directors were exercisable one year from the date of grant at an exercise price equal to the fair market value of Kemper’s common stock on the date of grant and would expire 10 years from the date of grant. Effective May 1, 2013, new grants of such options are fully vested and exercisable on the date of grant at an exercise price equal to the fair market value of Kemper’s common stock on the date of grant. In addition to the option awards, effective May 1, 2013, annual awards to each Non-employee Director include 500 deferred stock units (“DSUs”). DSUs give the recipient the right to receive one share of Kemper common stock for each DSU issued. The DSUs granted to Non-employee Directors are fully vested on the date of grant. Holders of DSUs are entitled to receive dividend equivalents in cash in the amount and at the time that dividends would have been payable if the DSUs were shares of Kemper common stock. Conversion of the DSUs into shares of Kemper’s common stock is deferred until the date a director’s board service terminates. On May 1, 2013, the Company issued 4,000 DSUs at a fair value of $31.50 per DSU.