Note 5 - Long-term Equity-based Compensation Plans

As of March 31, 2016, there were 7,125,311 common shares available for future grants under Kemper’s long-term equity-based compensation plan, of which 710,955 shares were reserved for future grants based on the performance level attained under the terms of outstanding performance-based restricted stock and performance-based restricted stock unit (“RSU”) awards. Equity-based compensation expense was $1.0 million and $2.2 million for the three months ended March 31, 2016 and 2015, respectively. Total unamortized compensation expense related to nonvested awards at March 31, 2016 was $9.1 million, which is expected to be recognized over a weighted-average period of 2.2 years.

Outstanding equity-based compensation awards at March 31, 2016 consisted of tandem stock option and stock appreciation rights (“Tandem Awards”), time-vested restricted stock, time-vested RSUs, performance-based RSUs and deferred stock units (“DSUs”). Recipients of restricted stock receive full dividend and voting rights on the same basis as all other outstanding shares of Kemper common stock. Recipients of RSUs and DSUs receive full dividend equivalents on the same basis as all other outstanding shares of Kemper common stock, but do not receive voting rights until such shares are issued.

Except for equity-based compensation awards granted to each member of the Board of Directors who is not employed by the Company (“Non-employee Directors”), all outstanding awards are subject to forfeiture until certain restrictions have lapsed.

The Company uses the Black-Scholes option pricing model to estimate the fair value of each Tandem Award on the date of grant. The assumptions used in the Black-Scholes pricing model for Tandem Awards granted during the three months ended March 31, 2016 and 2015 were as follows:



	Three Months Ended
	Mar 31, 2016					Mar 31, 2015
Range of Valuation Assumptions
Expected Volatility	25.85	%	-	27.82	%	22.49	%	-	41.65	%
Risk-free Interest Rate	1.15		-	1.55		1.08		-	1.63
Expected Dividend Yield	3.41		-	3.41		2.62		-	2.62
Weighted-Average Expected Life in Years
Employee Grants	4		-	6.5		4		-	7
Director Grants	N/A					5.5

No Tandem Awards were granted to Non-employee Directors during the three months ended March 31, 2016.

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

Tandem Award activity for the three months ended March 31, 2016 is presented below.



	Shares Subject to Awards		Weighted- average Exercise Price Per Share ($)		Weighted- average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value ($ in Millions)
Outstanding at Beginning of the Year	1,428,157		$	39.75
Granted	300,827		27.71
Exercised	—		—
Forfeited or Expired	(257,000	)	46.45
Outstanding at March 31, 2016	1,471,984		$	36.12	6.70	$	0.8
Vested and Expected to Vest at March 31, 2016	1,415,681		$	36.25	6.60	$	0.7
Exercisable at March 31, 2016	751,437		$	38.96	4.30	$	—

The weighted-average grant-date fair values of Tandem Awards granted during the three months ended March 31, 2016 and 2015 were $4.50 per option and $8.06 per option, respectively. No Tandem Awards were exercised during the three months ended March 31, 2016. Total intrinsic value of Tandem Awards exercised was $2.3 million for the three months ended March 31, 2015. The total tax benefit realized for tax deductions from exercises of Tandem Awards was $0.8 million for the three months ended March 31, 2015. Total cash received from exercises of Tandem Awards was $1.6 million for the three months ended March 31, 2015. Information pertaining to Tandem Awards outstanding at March 31, 2016 is presented below.



					Outstanding				Exercisable
Range of Exercise Prices Per Share ($)					Shares Subject to Tandem Awards	Weighted- average Exercise Price Per Share ($)		Weighted- average Remaining Contractual Life (in Years)	Shares Subject to Tandem Awards	Weighted- average Exercise Price Per Share ($)
$	15.01	-	$	20.00	4,000	$	16.48	3.10	4,000	$	16.48
20.01		-	25.00		14,500	23.47		3.82	14,500	23.47
25.01		-	30.00		376,577	27.90		8.97	75,750	28.67
30.01		-	35.00		168,625	33.19		6.27	131,998	33.12
35.01		-	40.00		575,000	36.56		7.22	290,187	36.83
40.01		-	45.00		103,782	40.70		9.64	5,502	40.70
45.01		-	50.00		229,500	49.73		0.84	229,500	49.73
15.01		-	50.00		1,471,984	36.12		6.69	751,437	38.96

The grant-date fair values of time-based restricted stock and time-based RSU awards are determined using the closing price of Kemper common stock on the date of grant. Activity related to nonvested time-based restricted stock and nonvested time-based RSUs for the three months ended March 31, 2016 was as follows:



	Time-based Restricted Stock Awards				Time-based RSU Awards
	Number of Shares		Weighted- average Grant-date Fair Value Per Share		Number of RSUs		Weighted- average Grant-date Fair Value Per RSU
Nonvested Balance at Beginning of the Year	29,448		$	33.77	85,048		$	36.84
Granted	—		—		40,201		27.71
Vested	(1,500	)	29.95		—		—
Forfeited	(1,275	)	35.89		(16,150	)	36.18
Nonvested Balance at End of Period	26,673		33.88		109,099		33.57

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

Activity related to nonvested performance-based restricted stock and nonvested performance-based RSUs for the three months ended March 31, 2016 is presented below.



	Performance-based Restricted Stock Awards				Performance-based RSU Awards
	Number of Shares		Weighted- average Grant-date Fair Value Per Share		Number of RSUs		Weighted- average Grant-date Fair Value Per RSU
Nonvested Balance at Beginning of the Year	51,400		$	42.12	128,100		$	41.85
Granted	—		—		118,435		27.74
Vested	—		—		—		—
Forfeited	(51,400	)	42.12		(9,550	)	41.76
Nonvested Balance at End of Period	—		—		236,985		34.80

The initial number of shares or RSUs awarded to each participant of a performance-based award represents the shares that would vest, or, in the case of an RSU, that would vest and would be issued, if the performance level attained were to be at the “target” performance level. For performance above the target level, each participant would receive a grant of additional shares of stock up to a maximum of 100% of the initial number of shares or RSUs awarded to the participant. 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 awards for the 2016, 2015 and 2014 three-year performance periods is 118,435 common shares, 62,925 common shares and 55,625 common shares, respectively, at March 31, 2016.

For awards outstanding on January 1, 2016, the final payout of these awards, and any forfeitures of shares for performance below the “target” performance level, are determined based on Kemper’s total shareholder return, relative to a peer group comprised of all the companies in the S&P Supercomposite Insurance Index, over the respective three-year performance period ending on the last day of such period. Compensation cost for these awards is recognized ratably over the requisite service period. In the event that the market performance condition is not satisfied, previously recognized compensation cost would not reverse, but it would reverse if the requisite service period is not met.

Half of the performance-based RSUs granted in 2016 are measured using a market performance condition. Fair value for these awards was estimated using the Monte Carlo simulation method. Final payout for these awards, and any forfeitures of shares for performance below the “target” performance level, will be based on Kemper’s total shareholder return, relative to a peer group comprised of all the companies in the S&P Supercomposite Insurance Index, over a three-year performance period ending on February 28, 2019. Compensation cost for these awards is recognized ratably over the requisite service period. In the event that the market performance condition is not satisfied, previously recognized compensation cost would not reverse, but it would reverse if the requisite service period is not met.

Half of the performance-based RSUs granted in 2016 are measured solely using a Company-specific metric. Final payout for these awards, and any forfeitures of shares for performance below the “target” performance level, will be determined based on Kemper’s adjusted return on equity over a three-year performance period ending on December 31, 2018. Fair value for these awards was determined using the closing price of Kemper common stock on the date of grant. Accruals of compensation cost for these awards are estimated based on the probable outcome of the performance condition.