NOTE 15. INCOME TAXES

Current and Deferred Income Tax Assets at December 31, 2013 and 2012 were:



DOLLARS IN MILLIONS	2013		2012
Current Income Tax Assets	$	—	$	5.4
Deferred Income Tax Assets	31.8		6.6
Valuation Allowance for State Income Taxes	—		(6.6		)
Current and Deferred Income Tax Assets	$	31.8	$	5.4

The components of Liabilities for Income Taxes at December 31, 2013 and 2012 were:



DOLLARS IN MILLIONS	2013		2012
Current Income Tax Liabilities	$	1.5	$	—
Deferred Income Tax Liabilities	—		15.1
Unrecognized Tax Benefits	6.8		6.4
Liabilities for Income Taxes	$	8.3	$	21.5

The tax effects of temporary differences that give rise to significant portions of the Company’s Net Deferred Income Tax Assets and Deferred Income Tax Liabilities at December 31, 2013 and 2012 were:



DOLLARS IN MILLIONS	2013		2012
Deferred Income Tax Assets:
Insurance Reserves	$	76.4	$	79.3
Unearned Premium Reserves	40.2		44.1
Tax Capitalization of Policy Acquisition Costs	73.3		73.6
Payroll and Employee Benefit Accruals	38.8		79.9
Net Operating Loss Carryforwards	53.3		100.7
Other	12.6		10.7
Total Deferred Income Tax Assets	294.6		388.3
Deferred Income Tax Liabilities:
Investments	80.0		208.4
Deferred Policy Acquisition Costs	106.0		104.1
Life VIF and P&C Customer Relationships	20.2		25.2
Goodwill and Licenses	26.8		23.5
Depreciable Assets	26.0		29.3
Other	3.8		6.3
Total Deferred Income Tax Liabilities	262.8		396.8
Valuation Allowance for State Income Taxes	—		6.6
Net Deferred Income Tax Assets (Liabilities)	$	31.8	$	(15.1	)

NOTE 15. INCOME TAXES (Continued)

Deferred Income Tax Assets include net operating loss (“NOL”) carryforwards of $53.3 million and $100.7 million at December 31, 2013 and 2012, respectively, which include federal NOL carryforwards of $53.3 million and $94.4 million, respectively, and a state NOL carryforwards of $6.3 million at December 31, 2012. The state NOL carryforwards relate to FAF, the majority of which are scheduled to expire in 2029. Deferred tax asset valuation allowances of $6.6 million were required at December 31, 2012 related to these state NOL carryforwards and other deferred state income tax assets. In 2013, the Company wrote off $6.6 million of deferred state income tax assets that had been previously reserved for in the valuation allowance.

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:
2020	$	19.0	$	6.7
2021 through 2025	32.9		11.5
2026 through 2030	30.0		10.5
2031 through 2032	70.4		24.6
Total All Years	$	152.3	$	53.3

Except for the federal NOL carryforwards scheduled to expire in 2031 through 2032, all of the federal NOL 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 NOL carryforwards.

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.

A reconciliation of the beginning and ending amount of Unrecognized Tax Benefits for the years ended December 31, 2013, 2012 and 2011 is as follows:



DOLLARS IN MILLIONS	2013		2012		2011
Balance at Beginning of Year	$	6.4	$	6.2	$	7.8
Additions (Reductions) for Tax Positions of Current Period	0.1		—		(1.8		)
Additions for Tax Positions of Prior Years	0.3		0.2		0.2
Balance at End of Year	$	6.8	$	6.4	$	6.2

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. During the second quarter of 2013, the Company extended the federal statute of limitations related to its 2007 through 2010 tax years to December 31, 2014. The extension was requested by the IRS to provide additional time for the IRS to finish processing its audit of the Company’s 2009 and 2010 federal income tax returns and related refund claims and for the IRS to prepare the necessary documentation for the JCT’s review required by statute. The Company does not anticipate a material modification to the filed returns or the related refunds that have been received.

NOTE 15. INCOME TAXES (Continued)

During 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.

Unrecognized Tax Benefits at December 31, 2013, 2012 and 2011 include $3.4 million, $3.5 million and $3.7 million, respectively, for tax positions 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 $3.4 million, $2.9 million and $2.5 million at December 31, 2013, 2012 and 2011, respectively. Tax expense includes interest expense of $0.4 million related to unrecognized tax benefits for each of the years ended December 31, 2013, 2012 and 2011.

The components of Income Tax Expense from Continuing Operations for the years ended December 31, 2013, 2012 and 2011 were:



DOLLARS IN MILLIONS	2013			2012			2011
Current Income Tax Expense	$	(49.4	)	$	(43.3	)	$	(43.4	)
Deferred Income Tax Benefit (Expense)	(50.1		)	12.9			35.2
Decrease (Increase) Unrecognized Tax Benefits	(0.4		)	(0.2		)	1.6
Income Tax Expense	$	(99.9	)	$	(30.6	)	$	(6.6	)

Net income taxes paid were $42.4 million and $52.2 million in 2013 and 2012, respectively. Income taxes refunded, net of income tax paid of $57.1 million, were $4.1 million in 2011.

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, 2013, 2012 and 2011 was:



DOLLARS IN MILLIONS	2013					2012					2011
DOLLARS IN MILLIONS	Amount			Rate		Amount			Rate		Amount			Rate
Statutory Federal Income Tax Expense	$	(110.0	)	35.0	%	$	(42.8	)	35.0	%	$	(23.9	)	35.0	%
Tax-exempt Income and Dividends Received Deduction	10.6			(3.4	)	13.9			(11.4	)	17.7			(26.0	)
State Income Taxes	(0.2		)	0.1		(0.8		)	0.7		(1.0		)	1.5
Other, Net	(0.3		)	0.1		(0.9		)	0.7		0.6			(1.0	)
Effective Income Tax Expense from Continuing Operations	$	(99.9	)	31.8	%	$	(30.6	)	25.0	%	$	(6.6	)	9.5	%

Comprehensive Income Tax Expense included in the Consolidated Financial Statements for the years ended December 31, 2013, 2012 and 2011 was:



DOLLARS IN MILLIONS	2013			2012			2011
Income Tax Expense:
Continuing Operations	$	(99.9	)	$	(30.6	)	$	(6.6	)
Discontinued Operations	(1.7		)	(7.3		)	(6.7		)
Unrealized Depreciation (Appreciation) on Securities	129.1			(34.4		)	(71.6		)
Foreign Currency Translation Adjustments on Investments	(0.1		)	(0.6		)	(0.1		)
Tax Effects from Postretirement Benefit Plans	(30.4		)	4.6			15.9
Tax Effects from Long-Term Equity-based Compensation included in Paid-in Capital	0.2			(0.1		)	(1.0		)
Comprehensive Income Tax Expense	$	(2.8	)	$	(68.4	)	$	(70.1	)