UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________________
FORM 10-Q
______________________________________________________
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For Quarterly Period Ended March 31, 2016
OR
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from              to             
Commission file number 001-18298
______________________________________________________
 Kemper Corporation
(Exact name of registrant as specified in its charter)
______________________________________________________
Delaware
95-4255452
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
One East Wacker Drive, Chicago, Illinois
60601
(Address of principal executive offices)
(Zip Code)
(312) 661-4600
(Registrant’s telephone number, including area code)

______________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x       No ¨  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company. See definition of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
x
  
Accelerated filer
¨
 
Non-accelerated filer
¨
  
Smaller Reporting Company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
51,132,723 shares of common stock, $0.10 par value, were outstanding as of April 30, 2016 .



KEMPER CORPORATION
INDEX
 
 
 
 
Page
 
 
 
 
 
PART I.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
Exhibit Index
 




Caution Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including, but not limited to, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), Quantitative and Qualitative Disclosures About Market Risk, Risk Factors and the accompanying unaudited Condensed Consolidated Financial Statements (including the notes thereto) of Kemper Corporation (“Kemper”) and its subsidiaries (individually and collectively referred to herein as the “Company”) may contain or incorporate by reference information that includes or is based on forward-looking statements within the meaning of the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements give expectations or forecasts of future events. The reader can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “believe(s),” “goal(s),” “target(s),” “estimate(s),” “anticipate(s),” “forecast(s),” “project(s),” “plan(s),” “intend(s),” “expect(s),” “might,” “may,” “could” and other terms of similar meaning. Forward-looking statements, in particular, include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results.
Any or all forward-looking statements may turn out to be wrong, and, accordingly, Kemper cautions readers not to place undue reliance on such statements. Kemper bases these statements on current expectations and the current economic environment as of the date of this Quarterly Report on Form 10-Q. They involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance; actual results could differ materially from those expressed or implied in the forward-looking statements. Forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties that may be important in determining the Company’s actual future results and financial condition.
In addition to those factors discussed under Item 1A., “Risk Factors,” of Part I of Kemper’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”), for the year ended December 31, 2015 (the “ 2015 Annual Report”) as updated by Item 1A. of Part II of subsequently-filed Quarterly Reports on Form 10-Q, including this Quarterly Report on Form 10-Q, the reader should consider the following list of general factors that, among others, could cause the Company’s actual results and financial condition to differ materially from estimated results and financial condition.
Factors related to the legal and regulatory environment in which Kemper and its subsidiaries operate
•
Outcomes of state initiatives that could result in significant changes to, or interpretations of, unclaimed property laws or significant changes in claims handling practices with respect to life insurance policies, particularly any that involve retroactive application of new requirements to existing life insurance policy contracts;
•
Adverse outcomes in litigation or other legal or regulatory proceedings involving Kemper or its subsidiaries or affiliates;
•
Governmental actions, including, but not limited to, implementation of new federal and state laws and regulations, and court decisions interpreting existing laws and regulations or policy provisions;
•
Uncertainties related to regulatory approval of insurance rates, policy forms, insurance products, license applications, dividends from insurance subsidiaries, acquisitions of businesses and other matters within the purview of state insurance regulators;
Factors relating to insurance claims and related reserves in the Company’s insurance businesses
•
The incidence, frequency and severity of catastrophes occurring in any particular reporting period or geographic area, including natural disasters, pandemics and terrorist attacks or other man-made events;
•
The number and severity of insurance claims (including those associated with catastrophe losses);
•
Changes in facts and circumstances affecting assumptions used in determining loss and loss adjustment expenses (“LAE”) reserves, including, but not limited to, the number and severity of insurance claims and development patterns;
•
The impact of inflation on insurance claims, including, but not limited to, the effects on personal injury claims of increasing medical costs and the effects on property claims attributed to scarcity of resources available to rebuild damaged structures, including labor and materials and the amount of salvage value recovered for damaged property;
•
Developments related to insurance policy claims and coverage issues, including, but not limited to, interpretations or decisions by courts or regulators that may govern or influence losses incurred in connection with hurricanes and other catastrophes;
•
Orders, interpretations or other actions by regulators that impact the reporting, adjustment and payment of claims;

1


•
Changes in the pricing or availability of reinsurance, or in the financial condition of reinsurers and amounts recoverable therefrom;
Factors related to the Company’s ability to compete
•
Changes in the ratings by rating agencies of Kemper and/or its insurance company subsidiaries with regard to credit, financial strength, claims paying ability and other areas on which the Company is rated;
•
The level of success and costs incurred in realizing or maintaining economies of scale, implementing significant business consolidations, reorganizations and technology initiatives and integrating acquired businesses;
•
Absolute and relative performance of the Company’s products or services, including, but not limited to, the level of success achieved in designing and introducing new insurance products;
•
The ability of the Company to maintain the availability of critical systems and manage technology initiatives cost-effectively to address insurance industry developments and regulatory requirements;
•
Heightened competition, including, with respect to pricing, entry of new competitors and alternate distribution channels, introduction of new technologies, emergence of telematics, refinements of existing products and development of new products by current or future competitors;
Factors relating to the business environment in which Kemper and its subsidiaries operate
•
Changes in general economic conditions, including, but not limited to, performance of financial markets, interest rates, inflation, unemployment rates and fluctuating values of particular investments held by the Company;
•
Absolute and relative performance of investments held by the Company;
•
Changes in insurance industry trends and significant industry developments;
•
Changes in consumer trends and significant consumer or product developments;
•
Changes in capital requirements, including the calculations thereof, used by regulators and rating agencies;
•
Regulatory, accounting or tax changes that may affect the cost of, or demand for, the Company’s products or services or after-tax returns from the Company’s investments;
•
The impact of required participation in windpools and joint underwriting associations, residual market assessments and assessments for insurance industry insolvencies;
•
Changes in distribution channels, methods or costs resulting from changes in laws or regulations, lawsuits or market forces;
•
Increased costs and risks related to cybersecurity and information technology, including, but not limited to, identity theft, data breaches and system disruptions affecting services and actions taken to minimize the risks thereof; and
Other risks and uncertainties described from time to time in Kemper’s filings with the SEC .
Kemper cannot provide any assurances that the results contemplated in any forward-looking statements will be achieved or will be achieved in any particular timetable or that future events or developments will not cause such statements to be inaccurate. Kemper assumes no obligation to correct or update any forward-looking statements publicly for any changes in events or developments or in the Company’s expectations or results subsequent to the date of this Quarterly Report on Form 10-Q. Kemper advises the reader, however, to consult any further disclosures Kemper makes on related subjects in its filings with the SEC.

2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KEMPER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
 
Mar 31,
2016
 
Mar 31,
2015
Revenues:
 
 
 
 
Earned Premiums
 
$
546.0

 
$
431.3

Net Investment Income
 
67.0

 
70.6

Other Income
 
0.8

 
0.9

Net Realized Gains on Sales of Investments
 
6.8

 
3.4

Other-than-temporary Impairment Losses:
 
 
 
 
Total Other-than-temporary Impairment Losses
 
(9.6
)
 
(7.0
)
Portion of Losses Recognized in Other Comprehensive Income
 
0.3

 
—

Net Impairment Losses Recognized in Earnings
 
(9.3
)
 
(7.0
)
Total Revenues
 
611.3

 
499.2

 
 
 
 
 
Expenses:
 
 
 
 
Policyholders’ Benefits and Incurred Losses and Loss Adjustment Expenses
 
436.2

 
297.7

Insurance Expenses
 
159.3

 
144.9

Loss from Early Extinguishment of Debt
 
—

 
9.1

Interest and Other Expenses
 
22.3

 
29.7

Total Expenses
 
617.8

 
481.4

Income (Loss) from Continuing Operations before Income Taxes
 
(6.5
)
 
17.8

Income Tax Benefit (Expense)
 
4.3

 
(4.3
)
Income (Loss) from Continuing Operations
 
(2.2
)
 
13.5

Income from Discontinued Operations
 
0.1

 
—

Net Income (Loss)
 
$
(2.1
)
 
$
13.5

Income (Loss) from Continuing Operations Per Unrestricted Share:
 
 
 
 
Basic
 
$
(0.04
)
 
$
0.26

Diluted
 
$
(0.04
)
 
$
0.26

Net Income (Loss) Per Unrestricted Share:
 
 
 
 
Basic
 
$
(0.04
)
 
$
0.26

Diluted
 
$
(0.04
)
 
$
0.26

Dividends Paid to Shareholders Per Share
 
$
0.24

 
$
0.24


The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.

3


KEMPER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
(Unaudited)

 
 
Three Months Ended
 
 
Mar 31,
2016
 
Mar 31,
2015
Net Income (Loss)
 
$
(2.1
)
 
$
13.5

 
 
 
 
 
Other Comprehensive Income Before Income Taxes:
 
 
 
 
Unrealized Holding Gains
 
100.7

 
53.3

Foreign Currency Translation Adjustments
 
0.1

 
(0.9
)
Decrease in Net Unrecognized Postretirement Benefit Costs
 
1.8

 
5.4

Other Comprehensive Income Before Income Taxes
 
102.6

 
57.8

Other Comprehensive Income Tax Expense
 
(36.2
)
 
(20.2
)
Other Comprehensive Income
 
66.4

 
37.6

Total Comprehensive Income
 
$
64.3

 
$
51.1


The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.


4


KEMPER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)
 
Mar 31,
2016
 
Dec 31,
2015
Assets:
(Unaudited)
 
 
Investments:
 
 
 
Fixed Maturities at Fair Value (Amortized Cost: 2016 - $4,527.1; 2015 - $4,560.7)
$
4,917.4

 
$
4,852.3

Equity Securities at Fair Value (Cost: 2016 - $462.9; 2015 - $486.9)
501.3

 
523.2

Equity Method Limited Liability Investments at Cost Plus Cumulative Undistributed Earnings
190.5

 
190.6

Fair Value Option Investments
161.9

 
164.5

Short-term Investments at Cost which Approximates Fair Value
367.4

 
255.7

Other Investments
443.8

 
443.2

Total Investments
6,582.3

 
6,429.5

Cash
160.4

 
161.7

Receivables from Policyholders
341.1

 
332.4

Other Receivables
193.9

 
193.2

Deferred Policy Acquisition Costs
319.3

 
316.4

Goodwill
323.0

 
323.0

Current and Deferred Income Tax Assets
15.5

 
41.4

Other Assets
234.2

 
238.5

Total Assets
$
8,169.7

 
$
8,036.1

Liabilities and Shareholders’ Equity:
 
 
 
Insurance Reserves:
 
 
 
Life and Health
$
3,358.4

 
$
3,341.0

Property and Casualty
900.4

 
862.8

Total Insurance Reserves
4,258.8

 
4,203.8

Unearned Premiums
621.6

 
613.1

Liabilities for Income Taxes
10.2

 
3.8

Debt at Amortized Cost (Fair Value: 2016 - $786.0; 2015 - $781.3)
750.9

 
750.6

Accrued Expenses and Other Liabilities
487.1

 
472.4

Total Liabilities
6,128.6

 
6,043.7

Shareholders’ Equity:
 
 
 
Common Stock, $0.10 Par Value, 100 Million Shares Authorized; 51,133,252 Shares Issued and Outstanding at March 31, 2016 and 51,326,751 Shares Issued and Outstanding at December 31, 2015
5.1

 
5.1

Paid-in Capital
652.6

 
654.0

Retained Earnings
1,192.7

 
1,209.0

Accumulated Other Comprehensive Income
190.7

 
124.3

Total Shareholders’ Equity
2,041.1

 
1,992.4

Total Liabilities and Shareholders’ Equity
$
8,169.7

 
$
8,036.1

The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.

5


KEMPER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
 
Three Months Ended
 
Mar 31,
2016
 
Mar 31,
2015
Operating Activities:
 
 
 
Net Income (Loss)
$
(2.1
)
 
$
13.5

Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:
 
 
 
Increase in Deferred Policy Acquisition Costs
(2.9
)
 
(2.3
)
Amortization of Intangible Assets Acquired
1.6

 
1.6

Equity in Losses of Equity Method Limited Liability Investments
4.3

 
0.7

Distribution of Accumulated Earnings of Equity Method Limited Liability Investments
5.4

 
0.4

Decrease (Increase) in Value of Fair Value Option Investments Reported in Investment Income
2.6

 
(0.9
)
Amortization of Investment Securities and Depreciation of Investment Real Estate
4.3

 
2.7

Net Realized Gains on Sales of Investments
(6.8
)
 
(3.4
)
Net Impairment Losses Recognized in Earnings
9.3

 
7.0

Loss from Early Extinguishment of Debt
—

 
9.1

Depreciation of Property and Equipment
4.0

 
3.2

Increase in Receivables
(10.1
)
 
(8.4
)
Increase in Insurance Reserves
54.6

 
11.5

Increase (Decrease) in Unearned Premiums
8.5

 
(6.9
)
Change in Income Taxes
(4.6
)
 
(10.5
)
Increase in Accrued Expenses and Other Liabilities
5.1

 
1.9

Other, Net
4.0

 
9.8

Net Cash Provided by Operating Activities
77.2

 
29.0

Investing Activities:
 
 
 
Sales, Paydowns and Maturities of Fixed Maturities
142.0

 
121.7

Purchases of Fixed Maturities
(102.7
)
 
(92.3
)
Sales of Equity Securities
41.6

 
18.7

Purchases of Equity Securities
(19.0
)
 
(11.7
)
Return of Investment of Equity Method Limited Liability Investments
5.5

 
16.3

Acquisitions of Equity Method Limited Liability Investments
(15.0
)
 
(4.7
)
Increase in Short-term Investments
(111.7
)
 
(15.2
)
Improvements of Investment Real Estate
(0.9
)
 
(0.6
)
Increase in Other Investments
(1.0
)
 
(1.1
)
Acquisition of Software
(1.3
)
 
(2.9
)
Other, Net
(0.5
)
 
(0.5
)
Net Cash Provided (Used) by Investing Activities
(63.0
)
 
27.7

Financing Activities:
 
 
 
Net Proceeds from Issuances of Debt
10.0

 
267.8

Repayments of Debt
(10.0
)
 
(279.3
)
Common Stock Repurchases
(3.8
)
 
(23.4
)
Dividends and Dividend Equivalents Paid
(12.2
)
 
(12.3
)
Cash Exercise of Stock Options
—

 
1.6

Other, Net
0.5

 
0.5

Net Cash Used by Financing Activities
(15.5
)
 
(45.1
)
Increase (Decrease) in Cash
(1.3
)
 
11.6

Cash, Beginning of Year
161.7

 
76.1

Cash, End of Period
$
160.4

 
$
87.7

The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.

6

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the SEC and include the accounts of Kemper Corporation (“Kemper”) and its subsidiaries (individually and collectively referred to herein as the “Company”) and are unaudited. All significant intercompany accounts and transactions have been eliminated.
On April 30, 2015 , Kemper acquired 100% of the outstanding common stock of Alliance United Group and its wholly-owned subsidiaries, Alliance United Insurance Company and Alliance United Insurance Services, (individually and collectively referred to herein as “Alliance United”) in a cash transaction. The results of Alliance United are included in the Condensed Consolidated Financial Statements from the date of acquisition and are reported in the Company’s Property & Casualty Insurance segment.
Effective in 2016, the Company changed its method for estimating the interest and service cost components of expense recognized for its pension and other postretirement employee benefit plans. As a result, the Company elected to use a full yield curve approach to estimate these components of benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. Prior to 2016, the interest and service cost components were estimated using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation or accumulated postretirement benefit obligation, as relevant, at the beginning of the period. The change provides a more precise measurement of interest and service costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. The Company has accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and, accordingly, recognized the effect prospectively in 2016. The change in method for estimating the interest and service cost components decreased pension expense for the three months ended March 31, 2016 by approximately $1.4 million in 2016, but will have no impact on the measurement of benefit obligations.
Certain financial information that is normally included in annual financial statements, including certain financial statement footnote disclosures, prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) is not required by the rules and regulations of the SEC for interim financial reporting and has been condensed or omitted. In the opinion of the Company’s management, the Condensed Consolidated Financial Statements include all adjustments necessary for a fair presentation. The preparation of interim financial statements relies heavily on estimates. This factor and other factors, such as the seasonal nature of some portions of the insurance business, as well as market conditions, call for caution in drawing specific conclusions from interim results. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Consolidated Financial Statements and related notes included in the 2015 Annual Report.
Adoption of New Accounting Guidance
In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The amendments in ASU 2015-02 affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities while also eliminating the presumption that a general partner should consolidate a limited partnership. ASU 2015-02 may also affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. The Company's adoption and initial application as of January 1, 2016 resulted in no changes to the legal entities that the Company consolidates.
In May 2015, the FASB issued ASU 2015-07 Fair Value Measurement (Topic 820), Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The Company adopted ASU 2015-07 in the first quarter of 2016 and applied its provisions on a retrospective basis. Except for the change in disclosure requirements, adoption of ASU 2015-07 did not impact the Company’s financial statements.The presentation of certain prior year amounts and disclosures have been reclassified to conform to the presentation for the current year.


7

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 1 - Basis of Presentation (continued)
In May 2015, the FASB issued ASU 2015-09, Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts . ASU 2015-09 requires insurers to provide additional disclosures about short-duration insurance contracts, focusing particularly on the liability for unpaid claims and claim adjustment expenses. Insurers will be required to disclose tables showing incurred and paid claims development information by accident year for the number of years that claims typically remain outstanding, although not to exceed ten years, as well as a reconciliation of this information to the balance sheet. Additional disclosures will also be required on the total of incurred-but-not-reported liabilities plus expected development on reported claims, reserving methodologies, quantitative information about claim frequency, qualitative description of the methodologies used for determining claim frequency and average annual percentage payout of incurred claims by age. ASU 2015-09 is effective for annual periods beginning after December 31, 2015 and interim periods within annual periods beginning after December 15, 2016. Except for the additional disclosure requirements, adoption of ASU 2015-09 will not impact the Company’s financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Most significantly, ASU 2016-01 requires companies to measure equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily-determinable fair values at cost minus impairment, if any, plus or minus
changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. ASU 2016-01 also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.
ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company currently records its Investments in Equity Securities at fair value with net unrealized appreciation or depreciation reported in Accumulated Other Comprehensive Income (“AOCI”) in Shareholders’ Equity. The Company’s Investments in Equity Securities include securities with readily-determinable fair values and securities without readily-determinable fair values. The Company will not be able to determine the cumulative-effect adjustment to its balance sheet until it adopts ASU 2016-01 and makes its elections for Investments in Equity Securities that do not have readily determinable fair values. Subsequent to adoption, ASU 2016-01 is expected to cause increased volatility in the Company’s consolidated statement of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842 ), by amending the Accounting Standards
Codification and creating a new topic on accounting for leases. ASU 2016-02 introduces a lessee model that requires most leases to be reported on the balance sheet of a lessee. ASU 2016-02 also aligns many of the underlying principles of the new lessor model with those in ASC 606, the FASB’s new revenue recognition standard (e.g., those related to evaluating when profit can be recognized). Furthermore, ASU 2016-02 addresses other concerns related to the current leases model. For example, ASU 2016-02 eliminates the requirement in current U.S. GAAP for an entity to use bright-line tests in determining lease classification. ASU 2016-02 also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those years with early adoption permitted. The Company is currently evaluating the impact of this guidance on its financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718) , which simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well asclassification in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods with early adoption permitted. The Company is currently evaluating the impact of this guidance on its financial statements.
The Company has adopted all other recently issued accounting pronouncements with effective dates prior to April 1, 2016. There were no adoptions of such accounting pronouncements in 2015 or during the three months ended March 31, 2016 that had a material impact on the Company’s Condensed Consolidated Financial Statements. With the possible exceptions of ASU 2015-09, Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts, ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities , and ASU 2016-02, Leases (Topic 842 ), the Company does not expect the adoption of all other recently issued accounting

8

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 1 - Basis of Presentation (continued)
pronouncements with effective dates after March 31, 2016 to have a material impact on the Company’s financial statements and/or disclosures.
Note 2 - Investments
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at March 31, 2016 were:
 
 
Amortized
Cost
 
Gross Unrealized
 
Fair Value
(Dollars in Millions)
 
Gains
 
Losses
 
U.S. Government and Government Agencies and Authorities
 
$
290.1

 
$
31.5

 
$
(0.4
)
 
$
321.2

States and Political Subdivisions
 
1,473.2

 
137.4

 
(0.6
)
 
1,610.0

Corporate Securities:
 
 
 
 
 
 
 
 
Bonds and Notes
 
2,665.6

 
254.2

 
(25.0
)
 
2,894.8

Redeemable Preferred Stocks
 
3.3

 
—

 
—

 
3.3

Collateralized Loan Obligations
 
91.2

 
—

 
(8.0
)
 
83.2

Other Mortgage- and Asset-backed
 
3.7

 
1.2

 
—

 
4.9

Investments in Fixed Maturities
 
$
4,527.1

 
$
424.3

 
$
(34.0
)
 
$
4,917.4

The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at December 31, 2015 were:
 
 
Amortized
Cost
 
Gross Unrealized
 
Fair Value
(Dollars in Millions)
 
Gains
 
Losses
 
U.S. Government and Government Agencies and Authorities
 
$
298.0

 
$
26.2

 
$
(3.6
)
 
$
320.6

States and Political Subdivisions
 
1,513.7

 
111.6

 
(2.7
)
 
1,622.6

Corporate Securities:
 
 
 
 
 
 
 
 
Bonds and Notes
 
2,651.5

 
202.0

 
(40.7
)
 
2,812.8

Redeemable Preferred Stocks
 
3.7

 
0.1

 
—

 
3.8

Collateralized Loan Obligations
 
90.0

 
0.3

 
(3.0
)
 
87.3

Other Mortgage- and Asset-backed
 
3.8

 
1.4

 
—

 
5.2

Investments in Fixed Maturities
 
$
4,560.7

 
$
341.6

 
$
(50.0
)
 
$
4,852.3

There were no unsettled sales of Investments in Fixed Maturities at either March 31, 2016 or December 31, 2015 . Accrued Expenses and Other Liabilities included unsettled purchases of Investments in Fixed Maturities of $14.8 million at March 31, 2016 . There were $5.6 million unsettled purchases of Investments in Fixed Maturities at December 31, 2015 .
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at March 31, 2016 by contractual maturity were:
(Dollars in Millions)
 
Amortized Cost
 
Fair Value
Due in One Year or Less
 
$
43.5

 
$
44.1

Due after One Year to Five Years
 
852.0

 
888.8

Due after Five Years to Ten Years
 
1,479.2

 
1,551.6

Due after Ten Years
 
1,939.4

 
2,218.4

Mortgage- and Asset-backed Securities Not Due at a Single Maturity Date
 
213.0

 
214.5

Investments in Fixed Maturities
 
$
4,527.1

 
$
4,917.4

The expected maturities of the Company’s Investments in Fixed Maturities may differ from the contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Investments in Mortgage- and Asset-backed Securities Not Due at a Single Maturity Date at March 31, 2016 consisted of securities issued by the Government National Mortgage Association with a fair value of $103.3 million , securities issued by the

9

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 2 - Investments (continued)
Federal National Mortgage Association with a fair value of $17.3 million , securities issued by the Federal Home Loan Mortgage Corporation with a fair value of $5.8 million and securities of other non-governmental issuers with a fair value of $88.1 million .
Gross unrealized gains and gross unrealized losses on the Company’s Investments in Equity Securities at March 31, 2016 were:
 
 
 
 
Gross Unrealized
 
 
(Dollars in Millions)
 
Cost
 
Gains
 
Losses
 
Fair Value
Preferred Stocks:
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
$
81.1

 
$
4.1

 
$
(0.9
)
 
$
84.3

Other Industries
 
16.0

 
3.2

 
(0.3
)
 
18.9

Common Stocks:
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
24.9

 
5.8

 
(1.3
)
 
29.4

Other Industries
 
9.4

 
4.9

 
(0.2
)
 
14.1

Other Equity Interests:
 
 
 
 
 
 
 
 
Exchange Traded Funds
 
153.4

 
1.0

 
(3.2
)
 
151.2

Limited Liability Companies and Limited Partnerships
 
178.1

 
28.6

 
(3.3
)
 
203.4

Investments in Equity Securities
 
$
462.9

 
$
47.6

 
$
(9.2
)
 
$
501.3

Gross unrealized gains and gross unrealized losses on the Company’s Investments in Equity Securities at December 31, 2015 were:
 
 
 
 
Gross Unrealized
 
 
(Dollars in Millions)
 
Cost
 
Gains
 
Losses
 
Fair Value
Preferred Stocks:
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
$
80.8

 
$
4.9

 
$
(0.8
)
 
$
84.9

Other Industries
 
17.1

 
2.7

 
(0.8
)
 
19.0

Common Stocks:
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
18.9

 
5.3

 
(1.0
)
 
23.2

Other Industries
 
9.4

 
4.3

 
(0.2
)
 
13.5

Other Equity Interests:
 
 
 
 
 
 
 
 
Exchange Traded Funds
 
179.7

 
1.1

 
(3.7
)
 
177.1

Limited Liability Companies and Limited Partnerships
 
181.0

 
25.0

 
(0.5
)
 
205.5

Investments in Equity Securities
 
$
486.9

 
$
43.3

 
$
(7.0
)
 
$
523.2

There were no unsettled purchases or sales of Investments in Equity Securities at either March 31, 2016 or December 31, 2015 .

10

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 2 - Investments (continued)
An aging of unrealized losses on the Company’s Investments in Fixed Maturities and Equity Securities at March 31, 2016 is presented below.
 
 
Less Than 12 Months
 
12 Months or Longer
 
Total
(Dollars in Millions)
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Fixed Maturities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and Government Agencies and Authorities
 
$
29.0

 
$
(0.1
)
 
$
25.3

 
$
(0.3
)
 
$
54.3

 
$
(0.4
)
States and Political Subdivisions
 
9.8

 
(0.4
)
 
8.9

 
(0.2
)
 
18.7

 
(0.6
)
Corporate Securities:
 
 
 
 
 
 
 
 
 
 
 
 
Bonds and Notes
 
310.2

 
(12.7
)
 
211.2

 
(12.3
)
 
521.4

 
(25.0
)
Collateralized Loan Obligations
 
77.2

 
(7.8
)
 
0.8

 
(0.2
)
 
78.0

 
(8.0
)
Other Mortgage- and Asset-backed
 
—

 
—

 
0.3

 
—

 
0.3

 
—

Total Fixed Maturities
 
426.2

 
(21.0
)
 
246.5

 
(13.0
)
 
672.7

 
(34.0
)
Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stocks:
 
 
 
 
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
12.6

 
(0.1
)
 
12.4

 
(0.8
)
 
25.0

 
(0.9
)
Other Industries
 
8.5

 
(0.3
)
 
—

 
—

 
8.5

 
(0.3
)
Common Stocks:
 
 
 
 
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
16.1

 
(1.3
)
 
—

 
—

 
16.1

 
(1.3
)
Other Industries
 
2.1

 
(0.2
)
 
0.5

 
—

 
2.6

 
(0.2
)
Other Equity Interests:
 
 
 
 
 
 
 
 
 
 
 
 
Exchange Traded Funds
 
135.8

 
(3.2
)
 
—

 
—

 
135.8

 
(3.2
)
Limited Liability Companies and Limited Partnerships
 
66.3

 
(3.3
)
 
—

 
—

 
66.3

 
(3.3
)
Total Equity Securities
 
241.4

 
(8.4
)
 
12.9

 
(0.8
)
 
254.3

 
(9.2
)
Total
 
$
667.6

 
$
(29.4
)
 
$
259.4

 
$
(13.8
)
 
$
927.0

 
$
(43.2
)
The Company regularly reviews its investment portfolio for factors that may indicate that a decline in fair value of an investment is other than temporary. The portions of the declines in the fair values of investments that are determined to be other than temporary are reported as losses in the Condensed Consolidated Statements of Operations in the periods when such determinations are made.
Unrealized losses on fixed maturities, which the Company has determined to be temporary at March 31, 2016 , were $34.0 million , of which $13.0 million was related to fixed maturities that were in an unrealized loss position for 12 months or longer. There were $0.3 million of unrealized losses at March 31, 2016 related to securities for which the Company has recognized credit losses in earnings in the preceding table under the heading “Less Than 12 Months. ” There were no unrealized losses at March 31, 2016 related to securities for which the Company has recognized credit losses in earnings in the preceding table under the heading“12 Months or Longer.” Investment-grade fixed maturity investments comprised $13.0 million , and below-investment-grade fixed maturity investments comprised $21.0 million of the unrealized losses on investments in fixed maturities at March 31, 2016 . For below-investment-grade fixed maturity investments in an unrealized loss position, the unrealized loss amount, on average, was approximately 7% of the amortized cost basis of the investment. At March 31, 2016 , the Company did not have the intent to sell these investments and it was not more likely than not that the Company would be required to sell these investments before it recovered the amortized cost of such investments, which may be at maturity. Based on the Company’s evaluation at March 31, 2016 of the prospects of the issuers, including, but not limited to, the credit ratings of the issuers of the investments in the fixed maturities, and the Company’s intention to not sell and its determination that it would not be required to sell before it recovered the amortized cost of such investments, the Company concluded that the declines in the fair values of the Company’s investments in fixed maturities presented in the preceding table were temporary at the evaluation date.

11

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 2 - Investments (continued)
For equity securities, the Company considers various factors when determining whether a decline in the fair value is other than temporary, including, but not limited to:
•
The financial condition and prospects of the issuer;
•
The length of time and magnitude of the unrealized loss;
•
The volatility of the investment;
•
Analysts’ recommendations and near-term price targets;
•
Opinions of the Company’s external investment managers;
•
Market liquidity;
•
Debt-like characteristics of perpetual preferred stocks and issuer ratings; and
•
The Company’s intentions to sell or ability to hold the investments until recovery.
With respect to Investments in Equity Securities, the Company concluded that the unrealized losses on its investments in preferred and common stocks at March 31, 2016 were temporary based on various factors, including the relative short length and magnitude of the losses and overall market volatility. The Company’s investments in other equity interests include investments in limited liability companies and limited partnerships that primarily invest in mezzanine debt, distressed debt and secondary transactions. By the nature of their underlying investments, the Company believes that some of its investments in the limited liability companies and limited partnerships exhibit debt-like characteristics which, among other factors, the Company also considers when evaluating these investments for impairment. Based on evaluations of the factors in the preceding paragraph, the Company concluded that the declines in the fair values of the Company’s investments in equity securities presented in the preceding table were temporary at March 31, 2016 .
An aging of unrealized losses on the Company’s Investments in Fixed Maturities and Equity Securities at December 31, 2015 is presented below.
 
 
Less Than 12 Months
 
12 Months or Longer
 
Total
(Dollars in Millions)
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Fixed Maturities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and Government Agencies and Authorities
 
$
56.6

 
$
(1.6
)
 
$
24.1

 
$
(2.0
)
 
$
80.7

 
$
(3.6
)
States and Political Subdivisions
 
131.0

 
(2.6
)
 
0.9

 
(0.1
)
 
131.9

 
(2.7
)
Corporate Securities:
 
 
 
 
 
 
 
 
 
 
 
 
Bonds and Notes
 
783.8

 
(26.0
)
 
133.6

 
(14.7
)
 
917.4

 
(40.7
)
Collateralized Loan Obligations
 
57.4

 
(2.9
)
 
0.8

 
(0.1
)
 
58.2

 
(3.0
)
Other Mortgage- and Asset-backed
 
—

 
—

 
0.3

 
—

 
0.3

 
—

Total Fixed Maturities
 
1,028.8

 
(33.1
)
 
159.7

 
(16.9
)
 
1,188.5

 
(50.0
)
Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stocks:
 
 
 
 
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
2.7

 
—

 
12.3

 
(0.8
)
 
15.0

 
(0.8
)
Other Industries
 
7.3

 
(0.8
)
 
—

 
—

 
7.3

 
(0.8
)
Common Stocks:
 
 
 
 
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
16.3

 
(1.0
)
 
—

 
—

 
16.3

 
(1.0
)
Other Industries
 
2.8

 
(0.2
)
 
—

 
—

 
2.8

 
(0.2
)
Other Equity Interests:
 
 
 
 
 
 
 
 
 
 
 
 
Exchange Traded Funds
 
135.2

 
(3.7
)
 
—

 
—

 
135.2

 
(3.7
)
Limited Liability Companies and Limited Partnerships
 
2.7

 
(0.5
)
 
—

 
—

 
2.7

 
(0.5
)
Total Equity Securities
 
167.0

 
(6.2
)
 
12.3

 
(0.8
)
 
179.3

 
(7.0
)
Total
 
$
1,195.8

 
$
(39.3
)
 
$
172.0

 
$
(17.7
)
 
$
1,367.8

 
$
(57.0
)

12

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 2 - Investments (continued)
Unrealized losses on fixed maturities, which the Company has determined to be temporary at December 31, 2015 , were $50.0 million , of which $16.9 million was related to fixed maturities that were in an unrealized loss position for 12 months or longer. There were $0.2 million unrealized losses at December 31, 2015 related to securities for which the Company has recognized credit losses in earnings in the preceding table under the heading “Less Than 12 Months.” There were no unrealized losses at December 31, 2015 related to securities for which the Company has recognized credit losses in earnings in the preceding table under the heading “12 Months or Longer.” Investment-grade fixed maturity investments comprised $33.5 million and below-investment-grade fixed maturity investments comprised $16.5 million of the unrealized losses on investments in fixed maturities at December 31, 2015 . For below-investment-grade fixed maturity investments in an unrealized loss position, the unrealized loss amount, on average, was approximately 8% of the amortized cost basis of the investment. At December 31, 2015 , the Company did not have the intent to sell these investments and it was not more likely than not that the Company would be required to sell these investments before recovery of its amortized cost basis, which may be at maturity. Based on the Company’s evaluation at December 31, 2015 of the prospects of the issuers, including, but not limited to, the credit ratings of the issuers of the investments in the fixed maturities, and the Company’s intention to not sell and its determination that it would not be required to sell before recovery of the amortized cost of such investments, the Company concluded that the declines in the fair values of the Company’s investments in fixed maturities presented in the preceding table were temporary at the evaluation date.
With respect to Investments in Equity Securities, the Company concluded that the unrealized losses on its investments at December 31, 2015 were temporary based on various factors, including the relative short length and magnitude of the losses and overall market volatility, as well as, the debt-like characteristics of investments in certain other equity interests.
The following table sets forth the pre-tax amount of other than temporary impairment (“OTTI”) credit losses recognized in Retained Earnings for Investments in Fixed Maturities held by the Company as of the beginning and end of the periods presented for which a portion of the OTTI loss related to factors other than credit has been recognized in AOCI, and the corresponding changes in such amounts.
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Cumulative Balance of Pre-tax Credit Losses Recognized in Retained Earnings at Beginning of Period
 
$
5.1

 
$
5.3

Pre-tax Credit Losses on Fixed Maturities without Pre-tax Credit Losses Included in Cumulative Balance at Beginning of Period
 
2.7

 
—

Reductions for Change in Impairment Status:
 
 
 
 
From Status of Credit Loss to Status of Intent-to-sell or Required-to-sell
 
(3.6
)
 
—

Cumulative Balance of Pre-tax Credit Losses Recognized in Retained Earnings at End of Period
 
$
4.2

 
$
5.3

Gross gains and losses on sales of investments in fixed maturities and equity securities for the three months ended March 31, 2016 and 2015 were:
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Fixed Maturities:
 
 
 
 
Gains on Sales
 
$
7.1

 
$
2.0

Losses on Sales
 
(0.3
)
 
(0.1
)
Equity Securities:
 
 
 
 
Gains on Sales
 
—

 
1.5

Losses on Sales
 
—

 
—


13

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 2 - Investments (continued)
Equity Method Limited Liability Investments include investments in limited liability investment companies and limited partnerships in which the Company’s interests are not deemed minor and are accounted for under the equity method of accounting. The Company’s investments in Equity Method Limited Liability Investments are generally of a passive nature in that the Company does not take an active role in the management of the investment entity. The Company’s maximum exposure to loss at March 31, 2016 is limited to the total carrying value of $190.5 million . In addition, the Company had outstanding commitments totaling approximately $72.1 million to fund Equity Method Limited Liability Investments at March 31, 2016 .
The carrying values of the Company’s Other Investments at March 31, 2016 and December 31, 2015 were:
(Dollars in Millions)
 
Mar 31,
2016
 
Dec 31,
2015
Loans to Policyholders at Unpaid Principal
 
$
289.4

 
$
288.4

Real Estate at Depreciated Cost
 
149.4

 
149.8

Trading Securities at Fair Value
 
4.7

 
4.7

Other
 
0.3

 
0.3

Total
 
$
443.8

 
$
443.2

Note 3 - Property and Casualty Insurance Reserves
Property and casualty insurance reserve activity for the three months ended March 31, 2016 and 2015 was:
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Property and Casualty Insurance Reserves:
 
 
 
 
Gross of Reinsurance at Beginning of Year
 
$
862.8

 
$
733.9

Less Reinsurance and Indemnification Recoverables at Beginning of Year
 
52.0

 
54.9

Property and Casualty Insurance Reserves - Net of Reinsurance at Beginning of Year
 
810.8

 
679.0

Incurred Losses and LAE Related to:
 
 
 
 
Current Year:
 
 
 
 
Continuing Operations
 
341.7

 
214.2

Prior Years:
 
 
 
 
Continuing Operations
 
2.7

 
(7.4
)
Discontinued Operations
 
(0.1
)
 
—

Total Incurred Losses and LAE Related to Prior Years
 
2.6

 
(7.4
)
Total Incurred Losses and LAE
 
344.3

 
206.8

Paid Losses and LAE Related to:
 
 
 
 
Current Year:
 
 
 
 
Continuing Operations
 
120.1

 
91.1

Prior Years:
 
 
 
 
Continuing Operations
 
180.8

 
126.0

Discontinued Operations
 
3.1

 
1.8

Total Paid Losses and LAE Related to Prior Years
 
183.9

 
127.8

Total Paid Losses and LAE
 
304.0

 
218.9

Property and Casualty Insurance Reserves - Net of Reinsurance and Indemnification at End of Period
 
851.1

 
666.9

Plus Reinsurance and Indemnification Recoverables at End of Period
 
49.3

 
53.2

Property and Casualty Insurance Reserves - Gross of Reinsurance at End of Period
 
$
900.4

 
$
720.1


14

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 3 - Property and Casualty Insurance Reserves (continued)
Property and casualty insurance reserves are estimated based on historical experience patterns and current economic trends. Actual loss experience and loss trends are likely to differ from these historical experience patterns and economic conditions. Loss experience and loss trends emerge over several years from the dates of loss inception. The Company monitors such emerging loss trends on a quarterly basis. Changes in such estimates are included in the Condensed Consolidated Statements of Operations in the period of change.
For the three months ended March 31, 2016 , the Company increased its property and casualty insurance reserves by $2.6 million to recognize adverse development of loss and LAE reserves from prior accident years. Personal lines insurance loss and LAE reserves developed adversely by $5.1 million , and commercial lines insurance loss and LAE reserves developed favorably by $2.5 million . The commercial lines insurance loss and LAE reserve development included favorable development of $2.4 million from continuing operations and favorable development of $0.1 million from discontinued operations. Personal automobile insurance loss and LAE reserves developed adversely by $9.6 million , homeowners insurance loss and LAE reserves developed favorably by $5.1 million , including $2.4 million of favorable development on catastrophes, and other personal lines loss and LAE reserves developed adversely by $0.6 million . Personal lines insurance loss and LAE reserves developed adversely due primarily to the emergence of worse than expected loss patterns for the 2015 and 2014 accident years, partially offset by the emergence of more favorable loss patterns than expected for the 2013 and prior accident years.
For the three months ended March 31, 2015 , the Company reduced its property and casualty insurance reserves by $7.4 million to recognize favorable development of loss and LAE reserves from prior accident years. Personal lines insurance loss and LAE reserves developed favorably by $7.2 million , and commercial lines insurance loss and LAE reserves developed favorably by $0.2 million . Personal automobile insurance loss and LAE reserves developed favorably by $5.1 million , homeowners insurance loss and LAE reserves developed favorably by $2.6 million , and other personal lines loss and LAE reserves developed adversely by $0.5 million . Personal lines insurance loss and LAE reserves developed favorably due primarily to the emergence of more favorable loss patterns than expected for the 2013 and 2012 accident years, partially offset by the emergence of worse loss patterns than expected for the 2014 accident year.
The Company cannot predict whether loss and LAE reserves will develop favorably or unfavorably from the amounts reported in the Company’s Condensed Consolidated Financial Statements. The Company believes that any such development will not have a material effect on the Company’s consolidated shareholders’ equity, but could have a material effect on the Company’s consolidated financial results for a given period.

15

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 4 - Debt
The amortized cost of debt outstanding at March 31, 2016 and December 31, 2015 was:
(Dollars in Millions)
 
Mar 31,
2016
 
Dec 31,
2015
Senior Notes:
 
 
 
 
6.00% Senior Notes due May 15, 2017
 
$
359.3

 
$
359.1

4.35% Senior Notes due February 15, 2025
 
247.5

 
247.4

7.375% Subordinated Debentures due February 27, 2054
 
144.1

 
144.1

Total Debt Outstanding
 
$
750.9

 
$
750.6

There were no outstanding borrowings under Kemper’s $225.0 million , unsecured, revolving credit agreement which expires June 2, 2020 at either March 31, 2016 or December 31, 2015 .
Kemper’s subsidiaries, Trinity Universal Insurance Company (“Trinity”) and United Insurance Company of America (“United Insurance”), are members of the Federal Home Loan Bank (“FHLB”) of Dallas and Chicago, respectively. During the first three months of 2016 and 2015 , Trinity borrowed and repaid $10.0 million and $20.5 million , respectively, under its agreement with the FHLB of Dallas. There were no advances from the FHLB of Dallas or Chicago outstanding at either March 31, 2016 or December 31, 2015 .
Interest Expense, including facility fees, accretion of discount and amortization of issuance costs, for the three months ended March 31, 2016 and 2015 was:
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Notes Payable under Revolving Credit Agreement
 
$
0.2

 
$
0.2

Federal Home Loan Bank of Dallas
 
—

 
—

Federal Home Loan Bank of Chicago
 
—

 
—

Senior Notes Payable:
 
 
 
 
6.00% Senior Notes due November 30, 2015
 
—

 
3.7

6.00% Senior Notes due May 15, 2017
 
5.6

 
5.6

4.35% Senior Notes due February 15, 2025
 
2.8

 
1.1

7.375% Subordinated Debentures due February 27, 2054
 
2.8

 
2.8

Interest Expense before Capitalization of Interest
 
11.4

 
13.4

Capitalization of Interest
 
(0.2
)
 
(0.2
)
Total Interest Expense
 
$
11.2

 
$
13.2


16

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 4 - Debt (Continued)
Interest paid, including facility fees, for the three months ended March 31, 2016 and 2015 was:
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Notes Payable under Revolving Credit Agreement
 
$
0.1

 
$
0.2

Federal Home Loan Bank of Dallas
 
—

 
—

Federal Home Loan Bank of Chicago
 
—

 
—

Senior Notes Payable:
 
 
 
 
6.00% Senior Notes due November 30, 2015
 
—

 
4.8

6.00% Senior Notes due May 15, 2017
 
—

 
—

4.35% Senior Notes due February 15, 2025
 
5.4

 
—

7.375% Subordinated Debentures due February 27, 2054
 
2.8

 
2.8

Total Interest Paid
 
$
8.3

 
$
7.8

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 .

17

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


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



18

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


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.

19

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 6 - Income (Loss) from Continuing Operations Per Unrestricted Share
The Company’s awards of restricted stock contain rights to receive non-forfeitable dividends and participate in the undistributed earnings with common shareholders. The Company’s awards of RSUs and DSUs also contain rights to receive non-forfeitable dividend equivalents and participate in the undistributed earnings with common shareholders. Accordingly, the Company is required to apply the two-class method of computing basic and diluted earnings per share. A reconciliation of the numerator and denominator used in the calculation of Basic Income (Loss) from Continuing Operations Per Unrestricted Share and Diluted Income (Loss) from Continuing Operations Per Unrestricted Share for the three months ended March 31, 2016 and 2015 is presented below.
 
 
Three Months Ended
 
 
Mar 31,
2016
 
Mar 31,
2015
(Dollars in Millions)
 
 
 
 
Income (Loss) from Continuing Operations
 
$
(2.2
)
 
$
13.5

Less Income from Continuing Operations Attributed to Participating Awards
 
(0.2
)
 
(0.1
)
Income (Loss) from Continuing Operations Attributed to Unrestricted Shares
 
(2.0
)
 
13.6

Dilutive Effect on Income of Equity-based Compensation Equivalent Shares
 
—

 
—

Diluted Income (Loss) from Continuing Operations Attributed to Unrestricted Shares
 
$
(2.0
)
 
$
13.6

(Number of Shares in Thousands)
 
 
 
 
Weighted-average Unrestricted Shares Outstanding
 
51,191.5

 
51,872.8

Equity-based Compensation Equivalent Shares
 
—

 
96.5

Weighted-average Unrestricted Shares and Equivalent Shares Outstanding Assuming Dilution
 
51,191.5

 
51,969.3

(Per Unrestricted Share in Whole Dollars)
 
 
 
 
Basic Income (Loss) from Continuing Operations Per Unrestricted Share
 
$
(0.04
)
 
$
0.26

Diluted Income (Loss) from Continuing Operations Per Unrestricted Share
 
$
(0.04
)
 
$
0.26

The number of shares of Kemper common stock that were excluded from the calculations of Equity-based Compensation Equivalent Shares and Weighted-average Unrestricted Shares and Equivalent Shares Outstanding Assuming Dilution for the three months ended March 31, 2016 and 2015 because the effect of inclusion would be anti-dilutive is presented below.
 
 
Three Months Ended
(Number of Shares in Thousands)
 
Mar 31,
2016
 
Mar 31,
2015
Equity-based Compensation Equivalent Shares
 
1,187.3

 
1,244.1

Weighted-average Unrestricted Shares and Equivalent Shares Outstanding Assuming Dilution
 
1,187.3

 
1,244.1


20

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 7 - Other Comprehensive Income and Accumulated Other Comprehensive Income
The components of Other Comprehensive Income Before Income Taxes for the three months ended March 31, 2016 and 2015 were:
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Other Comprehensive Income Before Income Taxes:
 
 
 
 
Unrealized Holding Gains (Losses) Arising During the Period Before Reclassification Adjustment
 
$
98.2

 
$
49.7

Reclassification Adjustment for Amounts Included in Net Income
 
2.5

 
3.6

Unrealized Holding Gains (Losses)
 
100.7

 
53.3

Foreign Currency Translation Adjustments
 
0.1

 
(0.9
)
Net Unrecognized Postretirement Benefit Costs Arising During the Year
 
(0.8
)
 
—

Amortization of Net Unrecognized Postretirement Benefit Costs
 
2.6

 
5.4

Net Unrecognized Postretirement Benefit Costs
 
1.8

 
5.4

Other Comprehensive Income Before Income Taxes
 
$
102.6

 
$
57.8

The components of Other Comprehensive Income Tax Benefit (Expense) for the three months ended March 31, 2016 and 2015 were:
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Other Comprehensive Income Tax Benefit (Expense):
 
 
 
 
Unrealized Holding Gains and Losses Arising During the Period Before Reclassification Adjustment
 
$
(34.6
)
 
$
(17.5
)
Reclassification Adjustment for Amounts Included in Net Income
 
(0.9
)
 
(1.3
)
Unrealized Holding Gains and Losses
 
(35.5
)
 
(18.8
)
Foreign Currency Translation Adjustments
 
—

 
0.3

Net Unrecognized Postretirement Benefit Costs Arising During the Year
 
0.3

 
—

Amortization of Net Unrecognized Postretirement Benefit Costs
 
(1.0
)
 
(1.7
)
Net Unrecognized Postretirement Benefit Costs
 
(0.7
)
 
(1.7
)
Other Comprehensive Income Tax Benefit (Expense)
 
$
(36.2
)
 
$
(20.2
)
The components of AOCI at March 31, 2016 and December 31, 2015 were:
(Dollars in Millions)
 
Mar 31,
2016
 
Dec 31,
2015
Net Unrealized Gains on Investments, Net of Income Taxes:
 
 
 
 
Available for Sale Fixed Maturities with Portion of OTTI Recognized in Earnings
 
$
(0.2
)
 
$
1.4

Other Net Unrealized Gains on Investments
 
278.5

 
211.7

Foreign Currency Translation Adjustments, Net of Income Taxes
 
(0.6
)
 
(0.7
)
Net Unrecognized Postretirement Benefit Costs, Net of Income Taxes
 
(87.0
)
 
(88.1
)
Accumulated Other Comprehensive Income
 
$
190.7

 
$
124.3


21

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 7 - Other Comprehensive Income and Accumulated Other Comprehensive Income (continued)
Components of AOCI were reclassified to the following lines of the Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015 :
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Reclassification of AOCI from Net Unrealized Gains on Investments to:
 
 
 
 
Net Realized Gains on Sales of Investments
 
$
6.8

 
$
3.4

Net Impairment Losses Recognized in Earnings
 
(9.3
)
 
(7.0
)
Total Before Income Taxes
 
(2.5
)
 
(3.6
)
Income Tax Benefit
 
0.9

 
1.3

Reclassification from AOCI, Net of Income Taxes
 
(1.6
)
 
(2.3
)
Reclassification of AOCI from Amortization of Net Unrecognized Postretirement Benefit Costs to:
 
 
 
 
Interest and Other Expenses
 
(2.6
)
 
(5.4
)
Income Tax Benefit
 
1.0

 
1.7

Reclassification from AOCI, Net of Income Taxes
 
(1.6
)
 
(3.7
)
Total Reclassification from AOCI to Net Income
 
$
(3.2
)
 
$
(6.0
)
Note 8 - Changes in Shareholders’ Equity
Changes in Shareholders’ Equity for the three months ended March 31, 2016 were:
(Dollars in Millions, Except Per Share Amounts)
 
Total
Shareholders’
Equity
Shareholders’ Equity at Beginning of Year
 
$
1,992.4

Net Loss
 
(2.1
)
Other Comprehensive Income
 
66.4

Cash Dividends and Dividend Equivalents to Shareholders ($0.24 per share)
 
(12.2
)
Repurchases of Common Stock
 
(3.8
)
Equity-based Compensation Cost
 
1.0

Equity-based Awards, Net of Shares Exchanged
 
(0.6
)
Shareholders’ Equity at End of Period
 
$
2,041.1


Note 9 - Income Taxes
Current and Deferred Income Tax Assets at March 31, 2016 and December 31, 2015 were:
(Dollars in Millions)
 
Mar 31,
2016
 
Dec 31,
2015
Current Income Tax Assets
 
$
15.5

 
$
9.5

Deferred Income Tax Assets
 
—

 
31.9

Current and Deferred Income Tax Assets
 
$
15.5

 
$
41.4


22

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 9 - Income Taxes (Continued)
The components of Liabilities for Income Taxes at March 31, 2016 and December 31, 2015 were:
(Dollars in Millions)
 
Mar 31,
2016
 
Dec 31,
2015
Deferred Income Tax Liabilities
 
$
6.5

 
$
—

Unrecognized Tax Benefits
 
3.7

 
3.8

Liabilities for Income Taxes
 
$
10.2

 
$
3.8

Included in the balance of Unrecognized Tax Benefits at March 31, 2016 and December 31, 2015 are tax positions of $3.2 million and $3.3 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 $0.5 million at both March 31, 2016 and December 31, 2015 , respectively.
Income taxes paid were $0.3 million and $14.6 million for the three months ended March 31, 2016 and 2015 , respectively.
Note 10 - Pension Benefits and Postretirement Benefits Other Than Pensions
The Company sponsors a qualified defined benefit pension plan (the “Pension Plan”). The Pension Plan covers approximately 9,200 participants and beneficiaries, of which 1,800 are active employees. The Pension Plan is closed to new employees hired after January 1, 2006. The components of Pension Expense for the Pension Plan for the three months ended March 31, 2016 and 2015 were:
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Service Cost Earned
 
$
2.2

 
$
2.6

Interest Cost on Projected Benefit Obligation
 
5.4

 
6.4

Expected Return on Plan Assets
 
(8.2
)
 
(8.8
)
Amortization of Accumulated Net Unrecognized Pension Costs
 
3.0

 
5.8

Total Pension Expense Recognized
 
$
2.4

 
$
6.0

On May 4, 2016, the Board of Directors authorized the Company to amend the Pension Plan to freeze benefit accruals, effective June 30, 2016, for substantially all of the participants under the plan. Accordingly, plan assets and liabilities will be re-measured in the second quarter of 2016, and the resultant cumulative actuarial loss will be amortized over approximately 25 years, the remaining estimated life expectancy of participants. Prior to the amendment, the cumulative actuarial loss was amortized over approximately 5 years, the remaining average service lives of active participants. Except for recording a loss of approximately $1.0 million for the three months ended June 30, 2016 to immediately recognize the remaining net unamortized prior service costs, no additional curtailment gain or loss is anticipated.
In addition to the Pension Plan, the Company also sponsors a non-qualified supplemental defined benefit pension plan and several defined contribution pension plans.

23

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 10 - Pension Benefits and Postretirement Benefits Other Than Pensions (continued)
The Company also sponsors an other than pension postretirement employee benefit plan (“OPEB”) that provides medical, dental and/or life insurance benefits to approximately 500 retired and 225 active employees (the “OPEB Plan”). The components of Postretirement Benefits Other than Pensions Expense (Benefit) for the OPEB Plan for the three months ended March 31, 2016 and 2015 were:
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Service Cost Earned
 
$
—

 
$
—

Interest Cost on Projected Benefit Obligation
 
0.2

 
0.3

Amortization of Accumulated Net Unrecognized Gain
 
(0.3
)
 
(0.4
)
Total Postretirement Benefits Other than Pensions Expense (Benefit)
 
$
(0.1
)
 
$
(0.1
)
Note 11 - Business Segments
The Company is engaged, through its subsidiaries, in the property and casualty insurance and life and health insurance businesses. The Company conducts its operations through two operating segments: Property & Casualty Insurance and Life & Health Insurance.
The Property & Casualty Insurance segment’s principal products are personal automobile insurance, both preferred and nonstandard risk, homeowners insurance, other personal insurance and commercial automobile insurance. These products are distributed primarily through independent agents and brokers. The Life & Health Insurance segment’s principal products are individual life, accident, supplemental health and property insurance. These products are distributed by career agents employed by the Company and independent agents and brokers.
Earned Premiums by product line for the three months ended March 31, 2016 and 2015 were:
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Personal Automobile
 
$
303.3

 
$
189.8

Homeowners
 
68.1

 
72.6

Other Personal Property and Casualty Insurance
 
29.8

 
30.6

Commercial Automobile
 
13.5

 
13.5

Life
 
94.4

 
88.0

Accident and Health
 
36.9

 
36.8

Total Earned Premiums
 
$
546.0

 
$
431.3


24

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 11 - Business Segments (continued)
Segment Revenues, including a reconciliation to Total Revenues, for the three months ended March 31, 2016 and 2015 were:
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Revenues:
 
 
 
 
Property & Casualty Insurance:
 
 
 
 
Earned Premiums
 
$
396.2

 
$
287.6

Net Investment Income
 
11.9

 
14.8

Other Income
 
0.2

 
0.3

Total Property & Casualty Insurance
 
408.3

 
302.7

Life & Health Insurance:
 
 
 
 
Earned Premiums
 
149.8

 
143.7

Net Investment Income
 
55.0

 
50.4

Other Income
 
0.6

 
0.8

Total Life & Health Insurance
 
205.4

 
194.9

Total Segment Revenues
 
613.7

 
497.6

Net Realized Gains on Sales of Investments
 
6.8

 
3.4

Net Impairment Losses Recognized in Earnings
 
(9.3
)
 
(7.0
)
Other
 
0.1

 
5.2

Total Revenues
 
$
611.3

 
$
499.2


25

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 11 - Business Segments (continued)
Segment Operating Profit (Loss), including a reconciliation to Income (Loss) from Continuing Operations before Income Taxes, for the three months ended March 31, 2016 and 2015 was:
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Segment Operating Profit (Loss):
 
 
 
 
Property & Casualty Insurance
 
$
(22.8
)
 
$
18.0

Life & Health Insurance
 
31.0

 
24.8

Total Segment Operating Profit
 
8.2

 
42.8

Corporate and Other Operating Loss
 
(12.2
)
 
(12.3
)
Total Operating Profit (Loss)
 
(4.0
)
 
30.5

Net Realized Gains on Sales of Investments
 
6.8

 
3.4

Net Impairment Losses Recognized in Earnings
 
(9.3
)
 
(7.0
)
Loss from Early Extinguishment of Debt
 
—

 
(9.1
)
Income (Loss) from Continuing Operations before Income Taxes
 
$
(6.5
)
 
$
17.8

Segment Net Operating Income, including a reconciliation to Income (Loss) from Continuing Operations, for the three months ended March 31, 2016 and 2015 was:
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Segment Net Operating Income (Loss):
 
 
 
 
Property & Casualty Insurance
 
$
(13.1
)
 
$
13.4

Life & Health Insurance
 
20.3

 
16.1

Total Segment Net Operating Income
 
7.2

 
29.5

Corporate and Other Net Operating Loss
 
(7.8
)
 
(7.7
)
Consolidated Net Operating Income (Loss)
 
(0.6
)
 
21.8

Net Income (Loss) From:
 
 
 
 
Net Realized Gains on Sales of Investments
 
4.4

 
2.2

Net Impairment Losses Recognized in Earnings
 
(6.0
)
 
(4.6
)
Loss from Early Extinguishment of Debt
 
—

 
(5.9
)
Income (Loss) from Continuing Operations
 
$
(2.2
)
 
$
13.5


26

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 12 - Fair Value Measurements
The Company classifies its investments in Fixed Maturities and Equity Securities as available for sale and reports these investments at fair value. The Company has elected the fair value option method of accounting for investments in certain hedge funds and, accordingly, reports these investments at fair value. The Company classifies certain investments in mutual funds included in Other Investments as trading securities and reports these investments at fair value. The Company has no material liabilities that are measured and reported at fair value.
Certain investments that are measured at fair value using the net asset value practical expedient are not required to be classified using the fair value hierarchy, but are presented in the following two tables to permit reconciliation of the fair value hierarchy to the amounts presented in the Condensed Consolidated Balance Sheet. The valuation of assets measured at fair value in the Company’s Condensed Consolidated Balance Sheet at March 31, 2016 is summarized below.
 
 
Fair Value Measurements
 
 
(Dollars in Millions)
 
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Measured at Net Asset Value (a)
 
Total Fair Value
Fixed Maturities:
 
 
 
 
 
 
 
 
 
 
U.S. Government and Government Agencies and Authorities
 
$
128.6

 
$
192.6

 
$
—

 
$
—

 
$
321.2

States and Political Subdivisions
 


 
1,610.0

 
—

 
—

 
1,610.0

Corporate Securities:
 
 
 
 
 
 
 
 
 

Bonds and Notes
 
—

 
2,463.0

 
431.8

 
—

 
2,894.8

Redeemable Preferred Stocks
 
—

 
—

 
3.3

 
—

 
3.3

Collateralized Loan Obligations
 
—

 
—

 
83.2

 
—

 
83.2

Other Mortgage- and Asset-backed
 
—

 
1.3

 
3.6

 
—

 
4.9

Total Investments in Fixed Maturities
 
128.6

 
4,266.9

 
521.9

 
—

 
4,917.4

Equity Securities:
 
 
 
 
 
 
 
 
 
 
Preferred Stocks:
 
 
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
—

 
79.2

 
5.1

 
—

 
84.3

Other Industries
 
—

 
6.3

 
12.6

 
—

 
18.9

Common Stocks:
 
 
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
22.9

 
6.5

 
—

 
—

 
29.4

Other Industries
 
0.5

 
1.0

 
12.6

 
—

 
14.1

Other Equity Interests:
 
 
 
 
 
 
 
 
 
 
Exchange Traded Funds
 
151.2

 
—

 
—

 
—

 
151.2

Limited Liability Companies and Limited Partnerships
 
—

 
—

 
42.2

 
161.2

 
203.4

Total Investments in Equity Securities
 
174.6

 
93.0

 
72.5

 
161.2

 
501.3

Fair Value Option Investments:
 
 
 
 
 
 
 
 
 
 
Limited Liability Companies and Limited Partnerships Hedge Funds
 
—

 
—

 
—

 
161.9

 
161.9

Other Investments:
 
 
 
 
 
 
 
 
 
 
Trading Securities
 
4.7

 
—

 
—

 
—

 
4.7

Total
 
$
307.9

 
$
4,359.9

 
$
594.4

 
$
323.1

 
$
5,585.3

At March 31, 2016 , the Company had unfunded commitments to invest an additional $110.5 million in certain limited liability investment companies and limited partnerships that will be included in Other Equity Interests when funded.

27

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 12 - Fair Value Measurements (continued)
The valuation of assets measured at fair value in the Company’s Condensed Consolidated Balance Sheet at December 31, 2015 is summarized below.
 
 
Fair Value Measurements
 
 
(Dollars in Millions)
 
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Measured at Net Asset Value
 
Total Fair Value
Fixed Maturities:
 
 
 
 
 
 
 
 
 
 
U.S. Government and Government Agencies and Authorities
 
$
124.9

 
$
195.7

 
$
—

 
$
—

 
$
320.6

States and Political Subdivisions
 
—

 
1,622.6

 
—

 
—

 
1,622.6

Corporate Securities:
 
 
 
 
 
 
 
 
 
 
Bonds and Notes
 
—

 
2,376.5

 
436.3

 
—

 
2,812.8

Redeemable Preferred Stocks
 
—

 
—

 
3.8

 
—

 
3.8

Collateralized Loan Obligations
 
—

 
—

 
87.3

 
—

 
87.3

Other Mortgage- and Asset-backed
 
—

 
1.4

 
3.8

 
—

 
5.2

Total Investments in Fixed Maturities
 
124.9

 
4,196.2

 
531.2

 
—

 
4,852.3

Equity Securities:
 
 
 
 
 
 
 

 
 
Preferred Stocks:
 
 
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
—

 
79.8

 
5.1

 
—

 
84.9

Other Industries
 
—

 
6.2

 
12.8

 
—

 
19.0

Common Stocks:
 
 
 
 
 
 
 
 
 
 
Finance, Insurance and Real Estate
 
16.6

 
6.6

 
—

 
—

 
23.2

Other Industries
 
0.6

 
0.8

 
12.1

 
—

 
13.5

Other Equity Interests:
 
 
 
 
 
 
 
 
 
 
Exchange Traded Funds
 
177.1

 
—

 
—

 
—

 
177.1

Limited Liability Companies and Limited Partnerships
 
—

 
—

 
45.6

 
159.9

 
205.5

Total Investments in Equity Securities
 
194.3

 
93.4

 
75.6

 
159.9

 
523.2

Fair Value Option Investments:
 
 
 
 
 
 
 
 
 
 
Limited Liability Companies and Limited Partnership Hedge Funds
 
—

 
—

 
—

 
164.5

 
164.5

Other Investments:
 
 
 
 
 
 
 
 
 
 
Trading Securities
 
4.7

 
—

 
—

 
—

 
4.7

Total
 
$
323.9

 
$
4,289.6

 
$
606.8

 
$
324.4

 
$
5,544.7

The Company’s investments in Fixed Maturities that are classified as Level 1 in the two preceding tables primarily consist of U.S. Treasury Bonds and Notes. The Company’s investments in Equity Securities that are classified as Level 1 in the two preceding tables consist of either investments in publicly-traded common stocks or exchange traded funds. The Company’s investments in Fixed Maturities that are classified as Level 2 in the two preceding tables primarily consist of investments in corporate bonds, obligations of states and political subdivisions, and bonds and mortgage-backed securities of U.S. government agencies. The Company’s investments in Equity Securities that are classified as Level 2 in the two preceding tables primarily

28

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 12 - Fair Value Measurements (continued)
consist of investments in preferred stocks. The Company uses a leading, nationally recognized provider of market data and analytics to price the vast majority of the Company’s Level 2 measurements. The provider utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information. Because many fixed maturity securities do not trade on a daily basis, the provider’s evaluated pricing applications apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. In addition, the provider uses model processes to develop prepayment and interest rate scenarios. The pricing provider’s models and processes also take into account market convention. For each asset class, teams of its evaluators gather information from market sources and integrate relevant credit information, perceived market movements and sector news into the evaluated pricing applications and models. The Company generally validates the measurements obtained from its primary pricing provider by comparing them with measurements obtained from one additional pricing provider that provides either prices from recent market transactions, quotes in inactive markets or evaluations based on its own proprietary models.
The Company investigates significant differences related to the values provided. On completion of its investigation, management exercises judgment to determine the price selected and whether adjustments, if any, to the price obtained from the Company’s primary pricing provider would warrant classification of the price as Level 3. In instances where a measurement cannot be obtained from either pricing provider, the Company generally will evaluate bid prices from one or more binding quotes obtained from market makers to value investments in inactive markets and classified by the Company as Level 2. The Company generally classifies securities when it receives non-binding quotes or indications as Level 3 securities unless the Company can validate the quote or indication against recent transactions in the market.
The Company’s Investments in Fixed Maturities that are classified as Level 3 in the two preceding tables primarily consist of privately placed securities not rated by a Nationally Recognized Statistical Rating Organization and are priced primarily using a market yield approach. A market yield approach uses a risk-free rate plus a credit spread depending on the underlying credit profile of the security. For floating rate securities, the risk-free rate used in the market yield is the contractual floating rate of the security. For each individual security, the Company or the Company’s third party appraiser gathers information from market sources, relevant credit information, perceived market movements and sector news and determines an appropriate market yield for each security. The market yield selected is then used to discount the estimated future cash flows of the security to determine the fair value. The Company separately evaluates market yields based upon asset class to assess the reasonableness of the recorded fair value. For non-investment-grade Investments in Fixed Maturities that are classified as Level 3, the two primary asset classes are senior debt and junior debt. Senior debt includes those securities that receive first priority in a liquidation and junior debt includes any fixed maturity security with other than first priority in a liquidation.
The table below presents quantitative information about the significant unobservable inputs utilized by the Company in determining fair values for fixed maturity investments in corporate securities classified as Level 3 at March 31, 2016 .
(Dollars in Millions)
 
Unobservable Input
 
Total Fair Value
 
Range of Unobservable Inputs
 
Weighted-average Yield
Investment-grade
 
Market Yield
 
$
96.5

 
1.6
%
-
10.7
%
 
4.3
%
Non-investment-grade:
 
 
 
 
 
 
 
 
 
 
Senior Debt
 
Market Yield
 
107.0

 
5.7

-
16.2

 
10.7

Junior Debt
 
Market Yield
 
215.1

 
9.0

-
23.8

 
13.9

Collateralized Loan Obligations
 
Market Yield
 
83.2

 
3.4

-
13.5

 
7.1

Other
 
Various
 
20.1

 
 
 
 
 
 
Total Level 3 Fixed Maturity Investments in Corporate Securities
 
 
 
$
521.9

 
 
 
 
 
 

29

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 12 - Fair Value Measurements (continued)
The table below presents quantitative information about the significant unobservable inputs utilized by the Company in determining fair values for fixed maturity investments in corporate securities classified as Level 3 at December 31, 2015 .
(Dollars in Millions)
 
Unobservable Input
 
Total Fair Value
 
Range of Unobservable Inputs
 
Weighted-average Yield
Investment-grade
 
Market Yield
 
$
98.7

 
2.6
%
-
6.9
%
 
4.4
%
Non-investment-grade:
 
 
 
 
 
 
 
 
 
 
Senior Debt
 
Market Yield
 
114.2

 
5.9

-
15.3

 
10.4

Junior Debt
 
Market Yield
 
216.3

 
8.2

-
26.2

 
13.6

Collateralized Loan Obligations
 
Market Yield
 
87.3

 
3.1

-
10.8

 
6.1

Other Debt
 
Various
 
14.7

 
 
 
 
 
 
Total Level 3 Fixed Maturity Investments in Corporate Securities
 
 
 
$
531.2

 
 
 
 
 
 
For an investment in a fixed maturity security, an increase in the yield used to determine the fair value of the security will decrease the fair value of the security. A decrease in the yield used to determine fair value will increase the fair value of the security, but the fair value increase is generally limited to par, unless callable at a premium, if the security is currently callable.
The Company’s other investments that are classified as Level 3 primarily consist of Limited Liability Companies and Limited Partnerships, but also certain Preferred Stocks and Common Stocks. The Company either uses valuations provided by third party fund managers or third party appraisers, or that are generated internally. These valuations typically employ various valuation techniques commonly used in the industry, including earnings multiples based on comparable public securities, industry-specific non-earnings based multiples, market yields based on comparable public securities and discounted cash flow models.
Information by security type pertaining to the changes in the fair value of the Company’s investments classified as Level 3 for the three months ended March 31, 2016 is presented below.
 
 
Fixed Maturities
 
Equity Securities
 
 
(Dollars in Millions)
 
Corporate
Bonds
and Notes
 
Redeemable
Preferred
Stocks
 
Collateralized Loan Obligations
 
Other Mortgage-
and Asset-
backed
 
Preferred
and 
Common
Stocks
 
Other
Equity
Interests
 
Total
Balance at Beginning of Period
 
$
436.3

 
$
3.8

 
$
87.3

 
$
3.8

 
$
30.0

 
$
45.6

 
$
606.8

Total Gains (Losses):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in Condensed Consolidated Statement of Operations
 
(2.5
)
 
—

 
(0.6
)
 
—

 
(1.0
)
 
(0.4
)
 
(4.5
)
Included in Other Comprehensive Income
 
(0.8
)
 
(0.1
)
 
(5.2
)
 
(0.2
)
 
1.3

 
(0.5
)
 
(5.5
)
Purchases
 
40.1

 
—

 
1.7

 
—

 
—

 
—

 
41.8

Settlements
 
(5.8
)
 
(0.4
)
 
—

 
—

 
—

 
—

 
(6.2
)
Sales
 
(35.5
)
 
—

 
—

 
—

 
—

 
(2.5
)
 
(38.0
)
Balance at End of Period
 
$
431.8

 
$
3.3

 
$
83.2

 
$
3.6

 
$
30.3

 
$
42.2

 
$
594.4

The Company’s policy is to recognize transfers between levels as of the end of the reporting period. There were no transfers between levels for the three months ended March 31, 2016 .

30

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 12 - Fair Value Measurements (continued)
Information by security type pertaining to the changes in the fair value of the Company’s investments classified as Level 3 for the three months ended March 31, 2015 is presented below.
 
 
Fixed Maturities
 
Equity Securities
 
 
(Dollars in Millions)
 
Corporate
Bonds
and Notes
 
Redeemable
Preferred
Stocks
 
Collateralized Loan Obligations
 
Other Mortgage-
and Asset-
backed
 
Preferred
and 
Common
Stocks
 
Other
Equity
Interests
 
Total
Balance at Beginning of Period
 
$
360.6

 
$
6.7

 
$
64.4

 
$
3.9

 
$
38.8

 
$
44.0

 
$
518.4

Total Gains (Losses):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in Condensed Consolidated Statement of Operations
 
(2.3
)
 
—

 
0.1

 
—

 
(0.8
)
 
(1.0
)
 
(4.0
)
Included in Other Comprehensive Income
 
2.4

 
(0.3
)
 
1.3

 
—

 
(0.7
)
 
0.3

 
3.0

Purchases
 
36.2

 
—

 
4.1

 
—

 
0.4

 
0.1

 
40.8

Settlements
 
(4.2
)
 
—

 
—

 
—

 
—

 
—

 
(4.2
)
Sales
 
(17.9
)
 
—

 
—

 
—

 
(0.7
)
 
—

 
(18.6
)
Transfers out of Level 3
 
—

 
—

 
—

 
—

 
(3.8
)
 
—

 
(3.8
)
Balance at End of Period
 
$
374.8

 
$
6.4

 
$
69.9

 
$
3.9

 
$
33.2

 
$
43.4

 
$
531.6

There were no transfers between Levels 1 and 2 or Levels 1 and 3 for the three months ended March 31, 2015 . The $3.8 million of transfers out of Level 3 for the three months ended March 31, 2015 were due to changes in the availability of market observable inputs.
The fair value of Debt is estimated using quoted prices for similar liabilities in markets that are not active. The inputs
used in the valuation are considered Level 2 measurements. The fair value of Short-term Investments is estimated using inputs that are considered either Level 1 or Level 2 measurements.

31

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 13 - Contingencies
In the ordinary course of its businesses, the Company is involved in legal proceedings, including lawsuits, regulatory examinations and inquiries. Except with regard to the matters discussed below, based on currently available information, the Company does not believe that it is reasonably possible that any of its pending legal proceedings will have a material effect on the Company’s consolidated financial statements.
Over the last several years, certain state treasurers/controllers, insurance regulators, legislators, and their respective agents have aggressively pursued an array of initiatives that seek, in various ways, to impose new duties on life insurance companies to proactively search for deaths of their insureds and contact the insureds’ beneficiaries even though such beneficiaries may not have submitted claims, including due proof of death, as required under the terms of regulator-approved policy forms and the Company was otherwise unaware of the insured’s death. These initiatives together comprise a set of circumstances involving potential changes in the law or changes in the interpretation of existing laws that could have the effect of altering the terms of Kemper’s life insurance subsidiaries’ (the “Life Companies”) existing life insurance contracts by imposing new requirements that did not exist and were not contemplated at the time the Life Companies entered into such contracts.
Legislation and related litigation. One type of initiative involves legislation (the “DMF Statutes”). DMF Statutes have been enacted in eleven states, with varying effective dates, that require life insurance companies to compare on a regular basis their records for all in-force policies (including policies issued prior to the effective dates of the DMF Statute) against the database of reported deaths maintained by the Social Security Administration or a comparable database (a “Death Master File” or “DMF”). In contrast, ten other states have enacted DMF Statutes that also require such comparisons but only as to policies issued by the Life Companies after the statutes’ respective effective dates. With respect to certain of those DMF Statutes that apply retroactively and would likely have an adverse effect on the Company’s operations and financial position, the Life Companies filed declaratory judgment actions challenging the application of such statutes to policies issued prior to the subject DMF Statute’s effective date:
•
In November 2012, certain of the Life Companies filed an action in Kentucky state court, asking the court to construe the Kentucky DMF Statute to apply only prospectively, i.e., only to life insurance policies issued in Kentucky on or after the effective date of the Kentucky DMF Statute, consistent with what the Life Companies believe are the requirements of applicable Kentucky statutory law, the Kentucky Constitution and the Contract Clause of the United States Constitution. In April 2013, the trial court held that the Kentucky DMF Statute applied to life insurance policies issued before the statute’s January 1, 2013 effective date. The subject Life Companies appealed and in August 2014, in a unanimous opinion, the Kentucky Court of Appeals reversed the trial court and held that the Kentucky DMF Statute fell within Kentucky’s statutory presumption against retroactive laws. Therefore, the Court ruled, the Kentucky DMF Statute can only apply to policies issued on or after January 1, 2013. The Kentucky Department of Insurance sought review of this ruling by the Supreme Court of Kentucky, which granted discretionary review in August 2015. In February 2016, the Department of Insurance requested that its appeal be dismissed and this request was granted, thus concluding the litigation. Consequently, the Kentucky DMF Statute is deemed to apply to policies issued on or after January 1, 2013.
•
In July 2013, certain of the Life Companies filed an action in state court in Maryland, asking the court to construe the Maryland DMF Statute to apply only prospectively, consistent with what the Life Companies believe are the requirements of Maryland’s common law presumption against retroactive application of new laws, the Maryland Constitution and the Contract Clause of the United States Constitution. The Maryland Insurance Administration (the “MIA”) filed a motion to dismiss, contending that the subject Life Companies were required to exhaust their administrative remedies before filing an action in court. In March 2014, the trial court granted the MIA’s motion and the Life Companies appealed that ruling. The Maryland appellate courts declined to stay enforcement of the Maryland DMF Statute pending the appeal and the Life Companies are complying with that statute while they pursue an appeal. The Life Companies’ appeal was denied by the Maryland Court of Special Appeals in October 2015 and the Life Companies requested review by Maryland’s highest court, the Court of Appeals, which in February 2016 granted the petition for writ of certiorari and have agreed to hear the appeal.

32

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 13 - Contingencies (continued)
•
In May 2016, certain of the Life Companies filed suit in Florida state court, asking the court to construe the Florida DMF Statute to apply only prospectively, i.e., only to life insurance policies issued in Florida on or after the effective date of the Florida DMF Statute, consistent with what the Life Companies believe are the requirements of Florida law, the Florida Constitution and the Contract Clause of the United States Constitution.
Unclaimed property compliance audits and related litigation. A second type of initiative involves an unclaimed property compliance audit of the Life Companies (the “Treasurers’ Audit”) being conducted by a private audit firm (the “Audit Firm”) retained by the treasurers/controllers of more than thirty states and related litigation. In July 2013, the California State Controller (the “CA Controller”) filed a complaint for injunctive relief against the Life Companies in state court in California, seeking an order requiring the Life Companies to produce all of their in-force policy records to the Audit Firm to enable the firm to perform a comparison of such records against a DMF, in an attempt to ascertain whether any of the insureds under such policies may be deceased; as described below, the Life Companies have filed a counterclaim in this case. In December 2013, the CA Controller filed a motion for preliminary injunction seeking the same injunctive relief; that motion was continued until the California Court of Appeal ruled in a similar case involving an unaffiliated insurance company (the “ANICO Appeal”). In July 2014, the trial court granted a motion by the CA Controller to stay the litigation against the Life Companies pending a decision in the ANICO Appeal. In March 2015, the California Court of Appeal reversed the order granting the preliminary injunction to the CA Controller in the ANICO Appeal. In light of the result in the ANICO Appeal, the stay of the litigation involving the Life Companies was lifted and the CA Controller withdrew its motion for preliminary injunction; discovery activity has resumed and the matter is set for trial in early 2017. Pending the outcome of this litigation, the Life Companies have not produced their in-force policy records to the CA Controller.
In October 2015, certain of the Life Companies filed a complaint for injunctive and other relief in state court in Illinois seeking a declaration that the Treasurer of the State of Illinois (the “IL Treasurer”) lacks the authority to compel those Life Companies to produce all in-force policy records to the Audit Firm, which is also a named defendant. In this litigation, the Life Companies further assert that life insurance proceeds become unclaimed property subject to escheat to Illinois five years after the insurer receives a claim and proof of death or the insured attains the mortality limiting age and is then unable to locate the beneficiary, and not five years after the date of the insured’s death. This complaint was filed in connection with the Treasurers’ Audit and in response to a demand by the IL Treasurer that the Life Companies produce all in-force policy records.
Examinations by insurance regulators and related litigation. A third type of initiative involves examinations by state insurance regulators. The Life Companies are the subject of a multi-state market conduct examination by certain state insurance regulators that is focused on the Life Companies’ claim settlement and policy administration practices, and specifically their compliance with state unclaimed property statutes (the “Multi-State Exam”). The Multi-State Exam originated in June 2012 as a single-state examination by the Illinois Department of Insurance (the “IDOI”). Insurance regulators from five additional states (California, Florida, New Hampshire, North Dakota and Pennsylvania) joined the examination in May 2013 (New Hampshire later withdrew). In July 2013, the Life Companies received requests from the IDOI, as managing lead state for the Multi-State Exam, for a significant volume of information beyond that which the Life Companies had already produced, including the records of all in-force policies and other information of the type previously requested by the Audit Firm as part of the Treasurers’ Audit and which is the subject of the CA Controller’s litigation. This request by the IDOI prompted the litigation in Illinois and other states described below.
In September 2013, certain of the Life Companies filed declaratory judgment actions against insurance regulators in the states of California, Florida, Illinois and Pennsylvania, asking the courts in those states to declare that applicable law does not require life insurers to search a DMF to ascertain whether insureds are deceased. These complaints also asked the courts to declare that regulators in those states do not have the legal authority to (i) obtain life insurers’ policy records for the purpose of comparing those records against a DMF, and/or (ii) impose payment obligations on life insurers before a claim and due proof of death have been submitted by policy beneficiaries or the insured reaches the mortality limiting age specified therein. The action in California was filed as a cross-complaint to the CA Controller’s complaint and joined the California Insurance Commissioner and the Audit Firm as defendants. In December 2015, the Life Companies voluntarily dismissed the litigation against the IDOI after that department agreed to withdraw the request for records of all in-force policies and advised the Life Companies that it intended to proceed with a single-state market conduct exam without use of a DMF. At least one or more of the states remaining in the Multi-State Exam has indicated that they intend to continue with the exam. The actions against the insurance regulators in the states of Florida and Pennsylvania were stayed by agreement of the parties pending resolution of the action

33

KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 13 - Contingencies (continued)
with the IDOI and may resume in 2016. Pending resolution of the litigation arising from the Multi-State Exam, the Life Companies have not produced their in-force policy records in connection with the Multi-State Exam.
Conclusion. The results of the aforementioned legislative actions, Treasurers’ Audit, Multi-State Exam and the related litigation cannot currently be predicted. The Life Companies continue to maintain that states lack the legal authority to establish new requirements that would effectively change the terms of existing life insurance contracts with regard to basic claims handling obligations and processes. If state officials are able to impose such new requirements retroactively upon the Life Companies’ existing life insurance policies, it will fundamentally alter the nature and timing of the Life Companies’ responsibilities under such policies by eliminating the effect of contractual terms that condition claim settlement and payment on the receipt of a claim, including “due proof of death” of an insured. The outcomes of the various initiatives and related litigation could result in changes in the law that could effectively alter the terms of the Life Companies’ existing life insurance contracts by imposing new requirements that have a significant impact on, including acceleration of, the Life Companies’ payment and/or escheatment of policy benefits, and materially increase claims handling costs, none of which were contemplated when such policies were issued. Any attempt to predict the ultimate outcomes (including any estimate of the resulting effect on the Life Companies claim liabilities and reserves for future policy benefits) of these efforts to change the law would entail predicting on a state-by-state-basis numerous uncertainties including, but not limited to:
•
How many states eventually enact laws, interpret existing laws or take other action to require the use of a DMF, or may exact such usage through regulation, examinations or audits;
•
The matching criteria to be used in comparing records of the Life Companies against a DMF;
•
The universe of policies affected;
•
Whether and to what extent any such laws would be applied retroactively; and
•
The results of unclaimed property audits, examinations and other actions by state insurance regulators, and related litigation including challenges to the constitutionality of laws purporting to have retroactive application.
Due to the complexity and multi-jurisdictional nature of this issue, as well as the indeterminate number of potential outcomes and their uncertain effects on the Life Companies’ business, Kemper cannot reasonably estimate the amount of loss or other economic effect that it would recognize if the Life Companies were subjected to requirements of the types described in this Note on a retroactive basis.
Note 14 - Related Parties
Mr. Christopher B. Sarofim, a director of Kemper, is Vice Chairman and a member of the board of directors of Fayez Sarofim & Co. (“FS&C”), a registered investment advisory firm. FS&C provided investment management services with respect to certain assets of Kemper’s subsidiary, Trinity, under an agreement between the parties. During the second quarter of 2015, Trinity disposed of all the assets managed by FS&C. Investment expenses incurred in connection with such agreement were $0.1 million for the three months ended March 31, 2015 .
FS&C also provides investment management services with respect to certain funds of the Company’s defined benefit pension plan. The Company’s defined benefit pension plan had $140.2 million in assets managed by FS&C at March 31, 2016 under an agreement with FS&C whereby FS&C provides investment management services. Investment expenses incurred in connection with such agreement were $0.1 million for each of the three month periods ended March 31, 2016 and 2015 .
The Company believes that the services described above have been provided on terms no less favorable to the Company than could have been negotiated with non-affiliated third parties.

34


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Summary of Results
Net Income (Loss)
Net Loss was $2.1 million ( $0.04 per unrestricted common share) for the three months ended March 31, 2016 , compared to Net Income of $13.5 million ( $0.26 per unrestricted common share) for the same period in 2015 .
Loss from Continuing Operations was $2.2 million ( $0.04 per unrestricted common share) for the three months ended March 31, 2016 , compared to Income from Continuing Operations of $13.5 million ( $0.26 per unrestricted common share) for the same period in 2015 .
A reconciliation of Segment Net Operating Income to Consolidated Net Operating Income (Loss) (a non-GAAP financial measure) and to Net Income (Loss) for the three months ended March 31, 2016 and 2015 is presented below.
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
 
Increase
(Decrease)
Segment Net Operating Income (Loss):
 
 
 
 
 
 
Property & Casualty Insurance
 
$
(13.1
)
 
$
13.4

 
$
(26.5
)
Life & Health Insurance
 
20.3

 
16.1

 
4.2

Total Segment Net Operating Income
 
7.2

 
29.5

 
(22.3
)
Corporate and Other Net Operating Loss
 
(7.8
)
 
(7.7
)
 
(0.1
)
Consolidated Net Operating Income (Loss)
 
(0.6
)
 
21.8

 
(22.4
)
Net Income (Loss) From:
 
 
 
 
 
 
Net Realized Gains on Sales of Investments
 
4.4

 
2.2

 
2.2

Net Impairment Losses Recognized in Earnings
 
(6.0
)
 
(4.6
)
 
(1.4
)
Loss from Early Extinguishment of Debt
 
—

 
(5.9
)
 
5.9

Income (Loss) from Continuing Operations
 
(2.2
)
 
13.5

 
(15.7
)
Income from Discontinued Operations
 
0.1

 
—

 
0.1

Net Income (Loss)
 
$
(2.1
)
 
$
13.5

 
$
(15.6
)
Revenues
Earned Premiums were $546.0 million for the three months ended March 31, 2016 , compared to $431.3 million for the same period in 2015 , an increase of $114.7 million . Earned Premiums for the three months ended March 31, 2016 increased by $108.6 million and $6.1 million in the Property & Casualty Insurance segment and Life & Health Insurance segment, respectively. See “ Property & Casualty Insurance ” and “ Life & Health Insurance ” for discussion of the changes in each segment’s earned premiums.
Net Investment Income decreased by $3.6 million for the three months ended March 31, 2016 , compared to the same period in 2015 . Net Investment Income from Alternative Investments which consist of Equity Method Limited Liability Investments, Fair Value Option Investments and other limited liability investments included in Equity Securities decreased by $4.1 million due to lower investment returns. Alternative investment income from Equity Method Limited Liability Investments and Fair Value Option Investments decreased by $3.6 million and $3.5 million , respectively, for the three months ended March 31, 2016 , compared to the same period in 2015 , while alternative investment income from other limited liability investments included in Equity Securities increased by $3.0 million . See “ Investment Results ” under the sub-caption “ Net Investment Income ” for additional discussion.
Net Realized Gains on Sales of Investments were $6.8 million for the three months ended March 31, 2016 , compared to $3.4 million for the same period in 2015 . Net Impairment Losses Recognized in Earnings were $9.3 million for the three months ended March 31, 2016 , compared to $7.0 million for the same period in 2015 . See “ Investment Results ” under the sub-captions “ Net Realized Gains on Sales of Investments ” and “ Net Impairment Losses Recognized in Earnings ” for additional discussion. The Company cannot predict if or when similar investment gains or losses may occur in the future.

35


Non-GAAP Financial Measures
Underlying Losses and LAE and Underlying Combined Ratio
The following discussion for the Property & Casualty Insurance segment uses the non-GAAP financial measures of (i) Underlying Losses and LAE and (ii) Underlying Combined Ratio. Underlying Losses and LAE (also referred to in the discussion as “Current Year Non-catastrophe Losses and LAE”) exclude the impact of catastrophe losses, and loss and LAE reserve development from prior years from the Company’s Incurred Losses and LAE, which is the most directly comparable GAAP financial measure. The Underlying Combined Ratio is computed by adding the Current Year Non-catastrophe Losses and LAE Ratio with the Insurance Expense Ratio. The most directly comparable GAAP financial measure is the Combined Ratio, which is computed by adding total incurred losses and LAE, including the impact of catastrophe losses and loss and LAE reserve development from prior years, with the Insurance Expense Ratio.
The Company believes Underlying Losses and LAE and the Underlying Combined Ratio are useful to investors and uses these financial measures to reveal the trends in the Company’s Property & Casualty Insurance segment that may be obscured by catastrophe losses and prior year reserve development. These catastrophe losses may cause the Company’s loss trends to vary significantly between periods as a result of their incidence of occurrence and magnitude and can have a significant impact on incurred losses and LAE and the combined ratio. Prior-year reserve developments are caused by unexpected loss development on historical reserves. Because reserve development relates to the re-estimation of losses from earlier periods, it has no bearing on the performance of the Company’s insurance products in the current period. The Company believes it is useful for investors to evaluate these components separately and in the aggregate when reviewing the Company’s underwriting performance.
Consolidated Net Operating Income (Loss)
Consolidated Net Operating Income (Loss) is an after-tax, non-GAAP financial measure and is computed by excluding from Income (Loss) from Continuing Operations the after-tax impact of:
(i)
Net Realized Gains on Sales of Investments;
(ii)
Net Impairment Losses Recognized in Earnings related to investments;
(iii)
Loss from Early Extinguishment of Debt; and
(iv)
Significant non-recurring or infrequent items that may not be indicative of ongoing operations.
Significant non-recurring items are excluded when (a) the nature of the charge or gain is such that it is reasonably unlikely to recur within two years and (b) there has been no similar charge or gain within the prior two years. The most directly comparable GAAP financial measure is Income (Loss) from Continuing Operations. There were no applicable significant non-recurring items that the Company excluded from the calculation of Consolidated Net Operating Income (Loss) for the three months ended March 31, 2016 or 2015 .
The Company believes that Consolidated Net Operating Income (Loss) provides investors with a valuable measure of its ongoing performance because it reveals underlying operational performance trends that otherwise might be less apparent if the items were not excluded. Net Realized Gains on Sales of Investments and Net Impairment Losses Recognized in Earnings related to investments included in the Company’s results may vary significantly between periods and are generally driven by business decisions and external economic developments such as capital market conditions that impact the values of the Company’s investments, the timing of which is unrelated to the insurance underwriting process. Loss from Early Extinguishment of Debt is driven by the Company’s financing and refinancing decisions and capital needs, as well as external economic developments such as debt market conditions, the timing of which is unrelated to the insurance underwriting process. Significant non-recurring items are excluded because, by their nature, they are not indicative of the Company’s business or economic trends.
The preceding non-GAAP financial measures should not be considered a substitute for the comparable GAAP financial measures, as they do not fully recognize the overall profitability of the Company’s businesses.

36


Property & Casualty Insurance
Selected financial information for the Property & Casualty Insurance segment follows.
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Net Premiums Written
 
$
403.4

 
$
279.7

Earned Premiums
 
$
396.2

 
$
287.6

Net Investment Income
 
11.9

 
14.8

Other Income
 
0.2

 
0.3

Total Revenues
 
408.3

 
302.7

Incurred Losses and LAE related to:
 
 
 
 
Current Year:
 
 
 
 
Non-catastrophe Losses and LAE
 
297.4

 
198.5

Catastrophe Losses and LAE
 
37.5

 
10.3

Prior Years:
 
 
 
 
Non-catastrophe Losses and LAE
 
4.7

 
(5.0
)
Catastrophe Losses and LAE
 
(2.7
)
 
(2.2
)
Total Incurred Losses and LAE
 
336.9

 
201.6

Insurance Expenses
 
94.2

 
83.1

Operating Profit (Loss)
 
(22.8
)
 
18.0

Income Tax Benefit (Expense)
 
9.7

 
(4.6
)
Segment Net Operating Income (Loss)
 
$
(13.1
)
 
$
13.4

Ratios Based On Earned Premiums
 
 
 
 
Current Year Non-catastrophe Losses and LAE Ratio
 
75.0
 %
 
69.0
 %
Current Year Catastrophe Losses and LAE Ratio
 
9.5

 
3.6

Prior Years Non-catastrophe Losses and LAE Ratio
 
1.2

 
(1.7
)
Prior Years Catastrophe Losses and LAE Ratio
 
(0.7
)
 
(0.8
)
Total Incurred Loss and LAE Ratio
 
85.0

 
70.1

Insurance Expense Ratio
 
23.8

 
28.9

Combined Ratio
 
108.8
 %
 
99.0
 %
Underlying Combined Ratio
 
 
 
 
Current Year Non-catastrophe Losses and LAE Ratio
 
75.0
 %
 
69.0
 %
Insurance Expense Ratio
 
23.8

 
28.9

Underlying Combined Ratio
 
98.8
 %
 
97.9
 %
Non-GAAP Measure Reconciliation
 
 
 
 
Underlying Combined Ratio
 
98.8
 %
 
97.9
 %
Current Year Catastrophe Losses and LAE Ratio
 
9.5

 
3.6

Prior Years Non-catastrophe Losses and LAE Ratio
 
1.2

 
(1.7
)
Prior Years Catastrophe Losses and LAE Ratio
 
(0.7
)
 
(0.8
)
Combined Ratio as Reported
 
108.8
 %
 
99.0
 %

37


Property & Casualty Insurance (continued)
Catastrophe Frequency and Severity
 
 
Three Months Ended
 
 
Mar 31, 2016
 
Mar 31, 2015
(Dollars in Millions)
 
Number of Events
 
Losses and LAE
 
Number of Events
 
Losses and LAE
Range of Losses and LAE Per Event:
 
 
 
 
 
 
 
 
Below $5
 
12

 
$
10.9

 
9

 
$
10.3

$5 - $10
 
—

 
—

 
—

 
—

$10 - $15
 
—

 
—

 
—

 
—

$15 - $20
 
—

 
—

 
—

 
—

$20 - $25
 
—

 
—

 
—

 
—

Greater Than $25
 
1

 
26.6

 
—

 
—

Total
 
13

 
$
37.5

 
9

 
$
10.3

Insurance Reserves
(Dollars in Millions)
 
Mar 31,
2016
 
Dec 31,
2015
Insurance Reserves:
 
 
 
 
Automobile
 
$
678.8

 
$
656.3

Homeowners
 
115.4

 
98.9

Other
 
46.1

 
45.3

Insurance Reserves
 
$
840.3

 
$
800.5

Insurance Reserves:
 
 
 
 
Loss Reserves:
 
 
 
 
Case
 
$
563.3

 
$
537.1

Incurred But Not Reported
 
157.9

 
147.6

Total Loss Reserves
 
721.2

 
684.7

LAE Reserves
 
119.1

 
115.8

Insurance Reserves
 
$
840.3

 
$
800.5

See MD&A, “Critical Accounting Estimates,” of the 2015 Annual Report for additional information pertaining to the Company’s process of estimating property and casualty insurance reserves for losses and LAE, development of property and casualty insurance losses and LAE from prior accident years, also referred to as “reserve development” in the discussion of segment results, estimated variability of property and casualty insurance reserves for losses and LAE, and a discussion of some of the variables that may impact development of property and casualty insurance losses and LAE and the estimated variability of property and casualty insurance reserves for losses and LAE.
Acquisition of Alliance United
As discussed in Note 1 to the Condensed Consolidated Financial Statements, the Company completed its acquisition of Alliance United on April 30, 2015. Alliance United is a provider of nonstandard personal automobile insurance in California and has added significant scale to the Property & Casualty Insurance segment’s premium base. The results of Alliance United’s operations have been included in the Company’s consolidated results since the date of its acquisition, which can obscure certain comparisons of quarterly results, particularly when analyzing overall segment results as well as the nonstandard personal automobile insurance line of business. To focus on the performance of the segment’s legacy business certain comparisons exclude Alliance United’s impact on the segment’s results.

38


Property & Casualty Insurance (continued)
Overall
Three Months Ended March 31, 2016 Compared to the Same Period in 2015
The Property & Casualty Insurance segment reported Segment Net Operating Loss of $13.1 million for the three months ended March 31, 2016 , compared to Segment Net Operating Income of $13.4 million for the same period in 2015 . Segment net operating results deteriorated by $26.5 million due primarily to higher incurred catastrophe losses and LAE (excluding reserve development), net operating losses from Alliance United in 2016, adverse loss and LAE reserve development in the current year, compared to favorable development in the prior year, and lower net investment income, partially offset by lower underlying losses and LAE as a percentage of earned premiums in the legacy business.
Earned Premiums in the Property & Casualty Insurance segment increased by $108.6 million . Excluding the $120.4 million impact from Alliance United, Earned Premiums decreased by $11.8 million , as lower volume accounted for a decrease of $13.2 million, while higher average earned premium accounted for an increase of $1.4 million. The lower volume was driven primarily by preferred personal automobile insurance and homeowners insurance, which had volume decreases of $8.2 million and $3.4 million, respectively. The increase in average earned premium was driven primarily by nonstandard personal automobile insurance, which had an increase of $3.5 million.
Net Investment Income in the Property & Casualty Insurance segment decreased by $2.9 million for the three months ended March 31, 2016 , compared to the same period in 2015 , due primarily to lower investment income from Alternative Investments and lower yields on fixed income securities, partially offset by investment income from the investments acquired from the acquisition of and, the capital contributed to, Alliance United. The Property & Casualty Insurance segment reported Net Investment Income from Alternative Investments of $0.1 million in 2016 , compared to income of $2.8 million in 2015 .
Underlying losses and LAE as a percentage of earned premiums were 75.0% in 2016 , an increase of 6.0 percentage points, compared to 2015 . Alliance United, which runs at a higher underlying losses and LAE ratio but lower insurance expense ratio, added 7.8 percentage points to the overall underlying losses and LAE ratio. Excluding the impact of Alliance United, underlying losses and LAE as a percentage of earned premiums were 67.2% in 2016 , compared to 69.0% in 2015 , or an improvement of 1.8 percentage points, as homeowners insurance, other personal insurance, preferred personal automobile insurance and nonstandard personal automobile insurance improved, while commercial automobile insurance was fairly flat. The improvement of 1.8 percentage points was tempered slightly by a mix shift in the overall legacy book of business to a greater proportion of nonstandard personal automobile insurance, which runs at a higher underlying loss ratio. Underlying incurred losses and LAE exclude the impact of catastrophes and loss and LAE reserve development. Catastrophe losses and LAE (excluding reserve development) were $37.5 million in 2016 , compared to $10.3 million in 2015 , which is an increase of $27.2 million due primarily to a hailstorm in Texas in late March 2016 with estimated losses and LAE of $26.6 million. Loss and LAE reserve development (including catastrophe reserve development) was adverse by $2.0 million in 2016 , due primarily to Alliance United. Excluding the impact of Alliance United, loss and LAE reserve development (including catastrophe reserve development) was favorable by $4.5 million in 2016 , compared to $7.2 million in 2015 .
Insurance expenses were $94.2 million , or 23.8% of earned premiums, in 2016 , compared to $83.1 million , or 28.9% as a percentage of earned premiums in 2015 , and decreased as a percentage of earned premiums due primarily to the inclusion of Alliance United.
The Property & Casualty Insurance segment’s effective income tax rate differs from the federal statutory income tax rate due primarily to tax-exempt investment income and dividends received deductions. Tax-exempt investment income and dividends received deductions were $5.6 million in 2016 , compared to $5.1 million in 2015 .

39


Property & Casualty Insurance (continued)
Preferred Personal Automobile Insurance
Selected financial information for the preferred personal automobile insurance product line follows.
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Net Premiums Written
 
$
99.7

 
$
106.5

 
 
 
 
 
Earned Premiums
 
$
106.1

 
$
115.9

 
 
 
 
 
Incurred Losses and LAE related to:
 
 
 
 
Current Year:
 
 
 
 
Non-catastrophe Losses and LAE
 
$
73.3

 
$
81.8

Catastrophe Losses and LAE
 
4.9

 
0.2

Prior Years:
 
 
 
 
Non-catastrophe Losses and LAE
 
1.9

 
(7.2
)
Catastrophe Losses and LAE
 
(0.2
)
 
(0.1
)
Total Incurred Losses and LAE
 
$
79.9

 
$
74.7

 
 
 
 
 
Ratios Based On Earned Premiums
 
 
 
 
Current Year Non-catastrophe Losses and LAE Ratio
 
69.1
 %
 
70.6
 %
Current Year Catastrophe Losses and LAE Ratio
 
4.6

 
0.2

Prior Years Non-catastrophe Losses and LAE Ratio
 
1.8

 
(6.2
)
Prior Years Catastrophe Losses and LAE Ratio
 
(0.2
)
 
(0.1
)
Total Incurred Loss and LAE Ratio
 
75.3
 %
 
64.5
 %
Three Months Ended March 31, 2016 Compared to the Same Period in 2015
Earned Premiums on preferred personal automobile insurance decreased by $9.8 million as lower volume and lower average earned premium accounted for decreases of $8.2 million and $1.6 million, respectively. The run-off of the direct-to-consumer business accounted for over half of the decrease in earned premiums attributed to lower volume. The decrease in average earned premium was due primarily to a mix shift toward lower risk drivers and, to a lesser extent, state mix, partially offset by rate increases. Incurred losses and LAE were $79.9 million , or 75.3% of earned premiums, in 2016 , compared to $74.7 million , or 64.5% of earned premiums, in 2015 . Incurred losses and LAE as a percentage of earned premiums increased due to an unfavorable change in loss and LAE reserve development and higher incurred catastrophe losses and LAE (excluding reserve development), partially offset by lower underlying losses and LAE as a percentage of earned premiums. Underlying losses and LAE as a percentage of related earned premiums were 69.1% in 2016 , compared to 70.6% in 2015 , which is a decrease of 1.5 percentage points due primarily to lower frequency of claims on most coverages related to the mix shift toward lower risk drivers and the impacts of rate actions, partially offset by increasing loss trends. Catastrophe losses and LAE (excluding reserve development) were $4.9 million in 2016 , compared to $0.2 million in 2015 . Loss and LAE reserve development was adverse by $1.7 million in 2016 , compared to favorable development of $7.3 million in 2015 .

40


Property & Casualty Insurance (continued)
Nonstandard Personal Automobile Insurance
Selected financial information for the nonstandard personal automobile insurance product line, which include the results of Alliance United’s operations since the date of its acquisition, follows.
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Net Premiums Written
 
$
219.5

 
$
85.6

 
 
 
 
 
Earned Premiums
 
$
197.2

 
$
73.9

 
 
 
 
 
Incurred Losses and LAE related to:
 
 
 
 
Current Year:
 
 
 
 
Non-catastrophe Losses and LAE
 
$
173.3

 
$
59.3

Catastrophe Losses and LAE
 
1.7

 
0.2

Prior Years:
 
 
 
 
Non-catastrophe Losses and LAE
 
7.9

 
2.2

Catastrophe Losses and LAE
 
—

 
—

Total Incurred Losses and LAE
 
$
182.9

 
$
61.7

 
 
 
 
 
Ratios Based On Earned Premiums
 
 
 
 
Current Year Non-catastrophe Losses and LAE Ratio
 
87.8
%
 
80.2
%
Current Year Catastrophe Losses and LAE Ratio
 
0.9

 
0.3

Prior Years Non-catastrophe Losses and LAE Ratio
 
4.0

 
3.0

Prior Years Catastrophe Losses and LAE Ratio
 
—

 
—

Total Incurred Loss and LAE Ratio
 
92.7
%
 
83.5
%
Three Months Ended March 31, 2016 Compared to the Same Period in 2015
Earned Premiums on nonstandard personal automobile insurance increased by $123.3 million . Excluding the $120.4 million impact from Alliance United, Earned Premiums increased by $2.9 million as higher average earned premium accounted for an increase of $3.5 million, while lower volume accounted for a decrease of $0.6 million. Incurred losses and LAE were $182.9 million , or 92.7% of earned premiums, in 2016 , compared to $61.7 million , or 83.5% of earned premiums, in 2015 . Excluding the $118.8 million impact from Alliance United, incurred losses and LAE were $64.1 million , or 83.5% of related earned premiums, in 2016 , compared to $61.7 million , or 83.5% of earned premiums, in 2015 . Excluding Alliance United, incurred losses and LAE as a percentage of earned premiums were flat as lower underlying losses and LAE as a percentage of earned premiums and a lower level of adverse loss and LAE reserve development were offset by higher incurred catastrophe losses and LAE (excluding reserve development). Excluding Alliance United, underlying losses and LAE as a percentage of related earned premiums were 79.5% in 2016 , compared to 80.2% in 2015 , which is a decrease of 0.7 percentage points due primarily to higher average earned premium, partially offset by higher frequency of claims on most coverages, particularly bodily injury and property damage. Catastrophe losses and LAE (excluding reserve development) were $1.7 million in 2016 , compared to $0.2 million in 2015 . Excluding the impact of Alliance United, adverse loss and LAE reserve development was $1.4 million in 2016 , compared to $2.2 million in 2015 .
For the three months ended March 31, 2016 , Alliance United’s underlying losses and LAE as a percentage of related earned premiums were 93.3% . This ratio continues to be significantly higher than what had been reported by Alliance United prior to the acquisition date. Alliance United has experienced significantly higher frequency of claims on most coverages and higher severity of losses on most coverages, particularly bodily injury, than the trend that Kemper had anticipated prior to the acquisition. Alliance United’s premium rates have become inadequate due in part to the significant adverse changes in underlying frequency and severity trends. The Company continues to analyze its experience against industry information as it becomes available and believes that Alliance United’s trends may be worse than industry trends due in part to anti-selection resulting from inadequate rates and higher growth rates for new business, which tends to run at a higher underlying loss and LAE ratio than renewal business. In addition, Alliance United’s results for the three months ended March 31, 2016 include adverse loss and LAE reserve development of $6.5 million . Since the acquisition, several events have resulted in the historical

41


Property & Casualty Insurance (continued)
development factors becoming less reliable in predicting how losses will ultimately emerge. For the three months ended March 31, 2016 , the primary driver of adverse development was a decrease in the ratio of claims closed without payment, which has driven the Company’s selection of ultimate losses higher. In addition, payment development patterns, as well as claim severity patterns, may have been influenced by an inadequate level of claims adjusters, as staffing levels for Alliance United’s claims adjusters were not able to keep pace with Alliance United’s growth rate prior to and after the acquisition date and the recent spike in frequency. The Company is taking various actions to address Alliance United’s performance, including increasing the staffing levels for claims adjusters, slowing growth rates for new business, various agency management actions and filing and implementing rate increases.
Homeowners Insurance
Selected financial information for the homeowners insurance product line follows.
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Net Premiums Written
 
$
59.9

 
$
63.1

 
 
 
 
 
Earned Premiums
 
$
68.1

 
$
72.6

 
 
 
 
 
Incurred Losses and LAE related to:
 
 
 
 
Current Year:
 
 
 
 
Non-catastrophe Losses and LAE
 
$
35.2

 
$
39.8

Catastrophe Losses and LAE
 
29.9

 
9.6

Prior Years:
 
 
 
 
Non-catastrophe Losses and LAE
 
(2.7
)
 
(0.4
)
Catastrophe Losses and LAE
 
(2.4
)
 
(2.2
)
Total Incurred Losses and LAE
 
$
60.0

 
$
46.8

 
 
 
 
 
Ratios Based On Earned Premiums
 
 
 
 
Current Year Non-catastrophe Losses and LAE Ratio
 
51.7
 %
 
54.9
 %
Current Year Catastrophe Losses and LAE Ratio
 
43.9

 
13.2

Prior Years Non-catastrophe Losses and LAE Ratio
 
(4.0
)
 
(0.6
)
Prior Years Catastrophe Losses and LAE Ratio
 
(3.5
)
 
(3.0
)
Total Incurred Loss and LAE Ratio
 
88.1
 %
 
64.5
 %
Three Months Ended March 31, 2016 Compared to the Same Period in 2015
Earned Premiums in homeowners insurance decreased by $4.5 million as lower volume and lower average earned premium accounted for decreases of $3.4 million and $1.1 million, respectively. Incurred losses and LAE were $60.0 million , or 88.1% of earned premiums, in 2016 , compared to $46.8 million , or 64.5% of earned premiums, in 2015 . Incurred losses and LAE as a percentage of earned premiums increased due to higher incurred catastrophe losses and LAE (excluding reserve development), partially offset by a higher level of favorable loss and LAE reserve development and lower underlying losses and LAE as a percentage of earned premiums. Underlying losses and LAE as a percentage of earned premiums were 51.7% in 2016 , compared to 54.9% in 2015 , which is an improvement of 3.2 percentage points due primarily to lower frequency of claims, partially offset by higher severity of losses. Catastrophe losses and LAE (excluding reserve development) were $29.9 million in 2016 , compared to $9.6 million in 2015 . This increase was driven primarily by the aforementioned hailstorm in Texas in late March 2016. Favorable loss and LAE reserve development was $5.1 million in 2016 , compared to $2.6 million in 2015 .

42


Property & Casualty Insurance (continued)
Commercial Automobile Insurance
Selected financial information for the commercial automobile insurance product line follows.
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Net Premiums Written
 
$
14.2

 
$
14.0

 
 
 
 
 
Earned Premiums
 
$
13.5

 
$
13.5

 
 
 
 
 
Incurred Losses and LAE related to:
 
 
 
 
Current Year:
 
 
 
 
Non-catastrophe Losses and LAE
 
$
10.9

 
$
10.8

Catastrophe Losses and LAE
 
0.1

 
—

Prior Years:
 
 
 
 
Non-catastrophe Losses and LAE
 
(2.4
)
 
(0.2
)
Catastrophe Losses and LAE
 
—

 
—

Total Incurred Losses and LAE
 
$
8.6

 
$
10.6

 
 
 
 
 
Ratios Based On Earned Premiums
 
 
 
 
Current Year Non-catastrophe Losses and LAE Ratio
 
80.8
 %
 
80.0
 %
Current Year Catastrophe Losses and LAE Ratio
 
0.7

 
—

Prior Years Non-catastrophe Losses and LAE Ratio
 
(17.8
)
 
(1.5
)
Prior Years Catastrophe Losses and LAE Ratio
 
—

 
—

Total Incurred Loss and LAE Ratio
 
63.7
 %
 
78.5
 %
Three Months Ended March 31, 2016 Compared to the Same Period in 2015
Earned Premiums in commercial automobile insurance were unchanged, compared to the prior year, as volume growth and average earned premium were essentially flat. Incurred losses and LAE were $8.6 million , or 63.7% of earned premiums, in 2016 , compared to $10.6 million , or 78.5% of earned premiums, in 2015 . Incurred losses and LAE as a percentage of earned premiums decreased due primarily to a higher level of favorable loss and LAE reserve development. Underlying losses and LAE as a percentage of earned premiums were 80.8% in 2016 , compared to 80.0% in 2015 , which is an increase of 0.8 percentage points due primarily to higher frequency of losses across all coverages, substantially offset by lower severity of losses across most coverages, particularly bodily injury and property damage. Favorable loss and LAE reserve development was $2.4 million in 2016 , compared to $0.2 million in 2015 .


43


Property & Casualty Insurance (continued)
Other Personal Insurance
Other personal insurance products include umbrella, dwelling fire, inland marine, earthquake, boat owners and other liability coverages. Selected financial information for other personal insurance product lines follows.
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Net Premiums Written
 
$
10.1

 
$
10.5

 
 
 
 
 
Earned Premiums
 
$
11.3

 
$
11.7

 
 
 
 
 
Incurred Losses and LAE related to:
 
 
 
 
Current Year:
 
 
 
 
Non-catastrophe Losses and LAE
 
$
4.7

 
$
6.8

Catastrophe Losses and LAE
 
0.9

 
0.3

Prior Years:
 
 
 
 
Non-catastrophe Losses and LAE
 
—

 
0.6

Catastrophe Losses and LAE
 
(0.1
)
 
0.1

Total Incurred Losses and LAE
 
$
5.5

 
$
7.8

 
 
 
 
 
Ratios Based On Earned Premiums
 
 
 
 
Current Year Non-catastrophe Losses and LAE Ratio
 
41.6
 %
 
58.1
%
Current Year Catastrophe Losses and LAE Ratio
 
8.0

 
2.6

Prior Years Non-catastrophe Losses and LAE Ratio
 
—

 
5.1

Prior Years Catastrophe Losses and LAE Ratio
 
(0.9
)
 
0.9

Total Incurred Loss and LAE Ratio
 
48.7
 %
 
66.7
%
Three Months Ended March 31, 2016 Compared to the Same Period in 2015
Earned Premiums in other personal insurance decreased by $0.4 million as lower volume accounted for a decrease of $0.6 million, while higher average earned premium accounted for an increase of $0.2 million. Incurred losses and LAE were $5.5 million , or 48.7% of earned premiums, in 2016 , compared to $7.8 million , or 66.7% of earned premiums, in 2015 . Incurred losses and LAE as a percentage of earned premiums decreased due to lower underlying losses and LAE as a percentage of earned premiums and a favorable change in loss and LAE reserve development, partially offset by higher catastrophe losses and LAE (excluding reserve development). Underlying losses and LAE as a percentage of earned premiums were 41.6% in 2016 , compared to 58.1% in 2015 , which is an improvement of 16.5 percentage points due primarily to lower frequency of claims across most coverages, partially offset by higher severity of losses on umbrella coverage. Catastrophe losses and LAE (excluding reserve development) were $0.9 million in 2016 , compared to $0.3 million in 2015 . Loss and LAE reserve development was favorable by $0.1 million in 2016 , compared to adverse development of $0.7 million in 2015 .


44


Life & Health Insurance
Selected financial information for the Life & Health Insurance segment follows.
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Earned Premiums:
 
 
 
 
Life
 
$
94.4

 
$
88.0

Accident and Health
 
36.9

 
36.8

Property
 
18.5

 
18.9

Total Earned Premiums
 
149.8

 
143.7

Net Investment Income
 
55.0

 
50.4

Other Income
 
0.6

 
0.8

Total Revenues
 
205.4

 
194.9

Policyholders’ Benefits and Incurred Losses and LAE
 
99.3

 
96.1

Insurance Expenses
 
75.1

 
74.0

Operating Profit
 
31.0

 
24.8

Income Tax Expense
 
(10.7
)
 
(8.7
)
Segment Net Operating Income
 
$
20.3

 
$
16.1

Insurance Reserves
(Dollars in Millions)
 
Mar 31,
2016
 
Dec 31,
2015
Insurance Reserves:
 
 
 
 
Future Policyholder Benefits
 
$
3,294.4

 
$
3,278.4

Incurred Losses and LAE Reserves:
 
 
 
 
Life
 
42.1

 
41.2

Accident and Health
 
21.9

 
21.4

Property
 
6.0

 
5.2

Total Incurred Losses and LAE Reserves
 
70.0

 
67.8

Insurance Reserves
 
$
3,364.4

 
$
3,346.2

Three Months Ended March 31, 2016 Compared to the Same Period in 2015
Earned Premiums in the Life & Health Insurance segment increased by $6.1 million for the three months ended March 31, 2016 , compared to the same period in 2015 . Earned premiums on life insurance increased by $6.4 million in 2016 , compared to 2015 , due primarily to an adjustment of $7.6 million recorded in the first quarter of 2015 to correct deferred premium reserves on certain limited pay life insurance policies. Excluding the adjustment, earned premiums on life insurance decreased by $1.2 million as a decrease of $1.5 million from life insurance products offered by the Kemper Home Service Companies (“KHSC”) was partially offset by an increase of $0.3 million from life insurance products offered by Reserve National Insurance Company (“Reserve National”). Earned premiums on accident and health insurance increased by $0.1 million in 2016 , compared to 2015 . Earned premiums on property insurance decreased by $0.4 million in 2016 , compared to 2015 .
Net Investment Income increased by $4.6 million for the three months ended March 31, 2016 , compared to the same period in 2015 , due primarily to higher investment returns from Alternative Investments and, to a lesser extent, higher yields on fixed income securities.

45


Life & Health Insurance (continued)
Operating Profit in the Life & Health Insurance segment was $31.0 million before income taxes for the three months ended March 31, 2016 , compared to $24.8 million for the same period in 2015 . Policyholders’ Benefits and Incurred Losses and LAE increased by $3.2 million in 2016 due primarily to higher incurred losses and LAE on property insurance and higher incurred accident and health insurance losses, partially offset by lower policyholders’ benefits on life insurance. Policyholders’ benefits on life insurance were $71.3 million in 2016 , compared to $71.8 million in 2015 , a decrease of $0.5 million due primarily to lower death claims. Incurred accident and health insurance losses were $20.5 million , or 55.6% of accident and health insurance earned premiums, in 2016 , compared to $19.1 million , or 51.9% of accident and health insurance earned premiums, in 2015 . Incurred accident and health insurance losses increased as a percentage of earned premiums due primarily to higher frequency and higher average claim costs in Medicare Supplement and higher average claim costs in outpatient and indemnity products, partially offset by lower average claim costs in other supplemental products. Incurred losses and LAE on property insurance were $7.5 million , or 40.5% of property insurance earned premiums, in 2016 , compared to $5.2 million , or 27.5% of property insurance earned premiums, in 2015 . Underlying losses and LAE on property insurance were $5.2 million , or 28.1% of property insurance earned premiums, in 2016 , compared to $5.3 million , or 28.0% of property insurance earned premiums, in 2015 . Catastrophe losses and LAE (excluding development) were $1.6 million in 2016 . Catastrophe losses and LAE (excluding development) were insignificant in 2015 . Unfavorable loss and LAE reserve development was $0.7 million in 2016 , compared to favorable development of $0.2 million in 2015 . Insurance Expenses in the Life & Health Insurance segment increased by $1.1 million due primarily to higher commission expenses for KHSC, partially offset by lower corporate overhead costs allocated to the segment. Segment Net Operating Income in the Life & Health Insurance segment was $20.3 million for the three months ended March 31, 2016 , compared to $16.1 million in 2015 .
Unclaimed Property
Certain state treasurers/controllers, insurance regulators, and legislators are involved in an array of initiatives that could result in significant changes to the application of unclaimed property laws and related claims handling practices with respect to life insurance policies. These initiatives seek, in various ways, to impose a new duty on the part of life insurers to proactively search for deaths of their insureds. It is the Company’s position that state officials lack the legal authority to impose new requirements where such requirements have the effect of changing the terms of existing life insurance contracts. See the Unclaimed Property Risk Factor in Item 1A., “Risk Factors,” of Part II of this Quarterly Report on Form 10‑Q, Note 13, “Contingencies,” to the Condensed Consolidated Financial Statements and MD&A, “Liquidity and Capital Resources” for additional information about these matters.

46


Investment Results
Investment Income
Net Investment Income for the three months ended March 31, 2016 and 2015 was:
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Investment Income (Loss):
 
 
 
 
Interest on Fixed Income Securities
 
$
60.0

 
$
59.5

Dividends on Equity Securities Excluding Alternative Investments
 
2.8

 
3.4

Alternative Investments:
 
 
 
 
Equity Method Limited Liability Investments
 
(4.3
)
 
(0.7
)
Fair Value Option Investments
 
(2.6
)
 
0.9

Limited Liability Investments Included in Equity Securities
 
7.3

 
4.3

Total Alternative Investments
 
0.4

 
4.5

Short-term Investments
 
0.1

 
—

Loans to Policyholders
 
5.4

 
5.3

Real Estate
 
3.0

 
2.9

Total Investment Income
 
71.7

 
75.6

Investment Expenses:
 
 
 
 
Real Estate
 
2.7

 
2.7

Other Investment Expenses
 
2.0

 
2.3

Total Investment Expenses
 
4.7

 
5.0

Net Investment Income
 
$
67.0

 
$
70.6

Net Investment Income was $67.0 million and $70.6 million for the three months ended March 31, 2016 and 2015 , respectively. Net Investment Income decreased by $3.6 million in 2016 due primarily to lower investment returns from Alternative Investments.
Total Comprehensive Investment Gains
The components of Total Comprehensive Investment Gains for the three months ended March 31, 2016 and 2015 were:
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Recognized in Condensed Consolidated Statements of Operations:
 
 
 
 
Gains on Sales
 
$
7.1

 
$
3.5

Losses on Sales
 
(0.3
)
 
(0.1
)
Net Impairment Losses Recognized in Earnings
 
(9.3
)
 
(7.0
)
Net Loss Recognized in Condensed Consolidated Statements of Operations
 
(2.5
)
 
(3.6
)
Recognized in Other Comprehensive Income
 
100.8

 
52.4

Total Comprehensive Investment Gains
 
$
98.3

 
$
48.8


47


Investment Results (continued)
Net Realized Gains on Sales of Investments
The components of Net Realized Gains on Sales of Investments for the three months ended March 31, 2016 and 2015 were:
 
 
Three Months Ended
(Dollars in Millions)
 
Mar 31,
2016
 
Mar 31,
2015
Fixed Maturities:
 
 
 
 
Gains on Sales
 
$
7.1

 
$
2.0

Losses on Sales
 
(0.3
)
 
(0.1
)
Equity Securities:
 
 
 
 
Gains on Sales
 
—

 
1.5

Net Realized Gains on Sales of Investments
 
$
6.8

 
$
3.4

 
 
 
 
 
Gross Gains on Sales
 
$
7.1

 
$
3.5

Gross Losses on Sales
 
(0.3
)
 
(0.1
)
Net Realized Gains on Sales of Investments
 
$
6.8

 
$
3.4

Net Impairment Losses Recognized in Earnings
The Company regularly reviews its investment portfolio for factors that may indicate that a decline in the fair value of an investment is other than temporary. Losses arising from other-than-temporary declines in fair values are reported in the Condensed Consolidated Statements of Operations in the period that the declines are determined to be other-than-temporary. The components of Net Impairment Losses Recognized in Earnings in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015 were:
 
 
Three Months Ended
 
 
Mar 31,
2016
 
Mar 31,
2015
(Dollars in Millions)
 
Amount
 
Number of Issuers
 
Amount
 
Number of Issuers
Fixed Maturities
 
$
(7.8
)
 
7
 
$
(2.4
)
 
4
Equity Securities
 
(1.5
)
 
7
 
(4.6
)
 
13
Net Impairment Losses Recognized in Earnings
 
$
(9.3
)
 
 
 
$
(7.0
)
 
 
Investment Quality and Concentrations
The Company’s fixed maturity investment portfolio is comprised primarily of high-grade municipal, corporate and agency bonds. At March 31, 2016 , 90% of the Company’s fixed maturity investment portfolio was rated investment-grade, which is defined as a security having a rating of AAA, AA, A or BBB from Standard & Poor’s (“S&P”); a rating of Aaa, Aa, A or Baa from Moody’s Investors Service (“Moody’s”); a rating of AAA, AA, A or BBB from Fitch Ratings (“Fitch”); or a rating from the National Association of Insurance Commissioners (“NAIC”) of 1 or 2.
The following table summarizes the credit quality of the Company’s fixed maturity investment portfolio at March 31, 2016 and December 31, 2015 :
 
 
 
 
Mar 31, 2016
 
Dec 31, 2015
NAIC
Rating
 
S&P Equivalent Rating
 
Fair Value
in Millions
 
Percentage
of Total
 
Fair Value
in Millions
 
Percentage
of Total
1
 
AAA, AA, A
 
$
3,227.3

 
65.6
%
 
$
3,222.5

 
66.4
%
2
 
BBB
 
1,198.0

 
24.4

 
1,149.0

 
23.7

3-4
 
BB, B
 
230.5

 
4.7

 
222.4

 
4.6

5-6
 
CCC or Lower
 
261.6

 
5.3

 
258.4

 
5.3

Total Investments in Fixed Maturities
 
$
4,917.4

 
100.0
%
 
$
4,852.3

 
100.0
%

48


Investment Quality and Concentrations (continued)
Gross unrealized losses on the Company’s investments in below-investment-grade fixed maturities were $21.1 million and $16.5 million at March 31, 2016 and December 31, 2015 , respectively.
The following table summarizes the fair value of the Company’s investments in governmental fixed maturities at March 31, 2016 and December 31, 2015 :
 
 
Mar 31, 2016
 
Dec 31, 2015
(Dollars in Millions)
 
Fair Value
 
Percentage
of Total
Investments
 
Fair Value
 
Percentage
of Total
Investments
U.S. Government and Government Agencies and Authorities
 
$
321.2

 
4.9
%
 
$
320.6

 
5.0
%
States and Political Subdivisions:
 
 
 
 
 
 
 
 
Pre-refunded with U.S. Government and Government Agencies and Authorities Held in Trust
 
83.2

 
1.3

 
93.7

 
1.5

States
 
588.7

 
8.9

 
605.0

 
9.4

Political Subdivisions
 
173.8

 
2.6

 
172.1

 
2.7

Revenue Bonds
 
764.3

 
11.6

 
751.8

 
11.7

Total Investments in Governmental Fixed Maturities
 
$
1,931.2

 
29.3
%
 
$
1,943.2

 
30.3
%
The following table summarizes the fair value of the Company’s investments in non-governmental fixed maturities by industry at March 31, 2016 and December 31, 2015 :
 
 
Mar 31, 2016
 
Dec 31, 2015
(Dollars in Millions)
 
Fair Value
 
Percentage
of Total
Investments
 
Fair Value
 
Percentage
of Total
Investments
Manufacturing
 
$
1,209.3

 
18.4
%
 
$
1,160.4

 
18.0
%
Finance, Insurance and Real Estate
 
695.4

 
10.6

 
707.4

 
11.0

Services
 
389.8

 
5.9

 
374.4

 
5.8

Transportation, Communication and Utilities
 
348.2

 
5.3

 
334.4

 
5.2

Mining
 
138.4

 
2.1

 
139.7

 
2.2

Retail Trade
 
95.3

 
1.4

 
91.1

 
1.4

Wholesale Trade
 
82.6

 
1.3

 
80.6

 
1.3

Agriculture, Forestry and Fishing
 
26.5

 
0.4

 
20.6

 
0.3

Other
 
0.7

 
—

 
0.5

 
—

Total Investments in Non-governmental Fixed Maturities
 
$
2,986.2

 
45.4
%
 
$
2,909.1

 
45.2
%
The following table summarizes the fair value of the Company’s investments in non-governmental fixed maturities by range of amount invested at March 31, 2016 .
(Dollars in Millions)
 
Number of Issuers
 
Aggregate Fair Value
Below $5
 
370

 
$
811.5

$5 -$10
 
126

 
856.6

$10 - $20
 
65

 
882.0

$20 - $30
 
13

 
306.7

Greater Than $30
 
4

 
129.4

Total
 
578

 
$
2,986.2

The Company’s short-term investments primarily consist of overnight repurchase agreements, U.S. Treasury bills, overnight interest bearing accounts, money market funds and certificates of deposits. At March 31, 2016 , the Company had $235.6 million invested in overnight repurchase agreements primarily collateralized by securities issued by the U.S. government and government agencies and authorities, $41.5 million of U.S. Treasury bills, $40.7 million invested in overnight interest bearing accounts with one of the Company’s custodial ban

49


ks, $39.0 million invested in money market funds which primarily invest in U.S. Treasury securities and $10.2 million of certificates of deposit issued by a single bank.
Investment Quality and Concentrations (continued)
At the time of borrowing, the repurchase agreements generally require the borrower to provide collateral to the Company at least equal to the amount borrowed from the Company. The Company bears some investment risk in the event that a borrower defaults and the value of collateral falls below the amount borrowed.
The following table summarizes the fair value of the Company’s ten largest investment exposures, excluding investments in U.S. Government and Government Agencies and Authorities, pre-refunded municipal bonds and Short-term Investments, at March 31, 2016 :
(Dollars in Millions)
 
Fair
Value
 
Percentage
of Total
Investments
Fixed Maturities:
 
 
 
 
States and Political Subdivisions:
 
 
 
 
Texas
 
$
102.8

 
1.6
%
Michigan
 
79.4

 
1.2

Ohio
 
79.2

 
1.2

Georgia
 
77.5

 
1.2

Colorado
 
68.2

 
1.0

Florida
 
67.1

 
1.0

Wisconsin
 
59.6

 
0.9

New York
 
55.5

 
0.8

Equity Securities—Other Equity Interests:
 
 
 
 
Vanguard Total Stock Market ETF
 
78.2

 
1.2

Equity Method Limited Liability Investments:
 
 
 
 
Tennenbaum Opportunities Fund V, LLC
 
56.4

 
0.9

Total
 
$
723.9

 
11.0
%


50


Investments in Limited Liability Companies and Limited Partnerships
The Company owns investments in various limited liability investment companies and limited partnerships that primarily invest in hedge funds, distressed debt, mezzanine debt and secondary transactions. The Company’s investments in these limited liability investment companies and limited partnerships are reported either as Equity Method Limited Liability Investments, Other Equity Interests and included in Equity Securities, or Fair Value Option Investments depending on the accounting method used to report the investment. Additional information pertaining to these investments at March 31, 2016 and December 31, 2015 is presented below.
 
 
Unfunded
Commitment
 
Reported Value
Asset Class
 
Mar 31,
2016
 
Mar 31,
2016
 
Dec 31,
2015
Reported as Equity Method Limited Liability Investments at Cost Plus Cumulative Undistributed Earnings:
 
 
 
 
 
 
Distressed Debt
 
$
—

 
$
82.1

 
$
90.5

Mezzanine Debt
 
51.5

 
50.7

 
38.8

Secondary Transactions
 
20.0

 
35.1

 
38.5

Senior Debt
 
0.5

 
9.7

 
10.8

Growth Equity
 
—

 
4.8

 
4.8

Leveraged Buyout
 
0.1

 
2.9

 
2.8

Other
 
—

 
5.2

 
4.4

Total Equity Method Limited Liability Investments
 
72.1

 
190.5

 
190.6

Reported as Other Equity Interests at Fair Value:
 
 
 
 
 
 
Mezzanine Debt
 
66.8

 
85.8

 
83.8

Senior Debt
 
24.5

 
37.9

 
37.9

Distressed Debt
 
6.8

 
18.2

 
18.9

Secondary Transactions
 
10.0

 
13.2

 
14.2

Hedge Fund
 
—

 
—

 
—

Leveraged Buyout
 
1.4

 
6.8

 
5.9

Other
 
1.0

 
41.5

 
44.8

Total Reported as Other Equity Interests at Fair Value
 
110.5

 
203.4

 
205.5

Reported as Fair Value Option Investments:
 
 
 
 
 
 
Hedge Funds
 
—

 
161.9

 
164.5

Total Investments in Limited Liability Companies and Limited Partnerships
 
$
182.6

 
$
555.8

 
$
560.6

The Company expects that it will be required to fund its commitments over the next several years. The Company expects that the proceeds from distributions from these investments will be the primary source of funding of such commitments.
Interest and Other Expenses
Interest and Other Expenses was $22.3 million for the three months ended March 31, 2016 , compared to $29.7 million for the same period in 2015 . Other expenses decreased by $5.4 million in 2016 due primarily to lower amortization of accumulated unrecognized actuarial losses related to the Company’s defined benefit pension plan and lower compensation expense. Interest expense decreased by $2.0 million in 2016 due primarily to a lower level of debt outstanding during the first quarter of 2016 , compared to the first quarter of 2015 . See MD&A, “Liquidity and Capital Resources,” and Note 4, “Debt,” to the Condensed Consolidated Financial Statements for additional discussion of debt activity.
Income Taxes
The Company’s effective income tax rate from continuing operations differs from the Federal statutory income tax rate due primarily to the effects of tax-exempt investment income and the dividends received deductions. Tax-exempt investment income and dividends received deductions were $6.6 million for the three months ended March 31, 2016 , compared to $6.7 million for the same period in 2015 .


51


Recently Issued Accounting Pronouncements
The Company has adopted all recently issued accounting pronouncements with effective dates prior to April 1, 2016. The impact of adoption was not material. With the possible exceptions of ASU 2015-09, Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts, ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities , and ASU 2016-02, Leases (Topic 842 ), the Company does not expect the adoption of all other recently issued accounting pronouncements with effective dates after March 31, 2016 to have a material impact on the Company’s financial statements and/or disclosures. See Note 1, “Basis of Presentation,” to the Condensed Consolidated Financial Statements for additional discussion of recently adopted accounting pronouncements.
Liquidity and Capital Resources
Debt
Kemper has a $225.0 million , unsecured, revolving credit agreement expiring June 2, 2020. There were no outstanding borrowings at March 31, 2016 or December 31, 2015 under the credit agreement.
Trinity and United Insurance are members of the FHLB of Dallas and Chicago, respectively. During the first three months of 2016 and 2015 , Trinity borrowed and repaid $10.0 million and $20.5 million , respectively, under its agreement with the FHLB of Dallas. There were no advances from the FHLB of Dallas or Chicago outstanding at either March 31, 2016 or December 31, 2015 .
On February 24, 2015, Kemper issued $250.0 million of its 4.35% senior notes due February 15, 2025. The net proceeds of the issuance were $247.3 million , net of discount and transaction costs. Kemper used the net proceeds from the sale of the 2025 Senior Notes, together with available cash, to redeem in full the $250.0 million outstanding principal amount of its 6.00% Senior Notes due November 30, 2015. Kemper recognized a loss of $9.1 million before income taxes in the first quarter of 2015 from the early redemption of these senior notes.
Subsidiary Dividends and Capital Contributions
Various state insurance laws restrict the ability of Kemper’s insurance subsidiaries to pay dividends without regulatory approval. Such insurance laws generally restrict the amount of dividends paid in an annual period to the greater of statutory net income from the previous year or 10% of statutory capital and surplus. Kemper’s direct insurance subsidiaries did not pay dividends to Kemper during the first three months of 2016 . Kemper estimates that its direct insurance subsidiaries would be able to pay approximately an additional $154.5 million in dividends to Kemper during the remainder of 2016 without prior regulatory approval. On February 11, 2016, Kemper contributed $25 million of additional capital to Alliance United.
Common Stock Repurchases and Dividends to Shareholders
On August 6, 2014, the Board of Directors approved a common stock repurchase program under which Kemper is authorized to repurchase up to $300 million of its common stock. During the first three months of 2016 , Kemper repurchased 0.1 million shares of its common stock at an aggregate cost of $3.8 million in open market transactions.
Kemper paid a quarterly dividend to shareholders of $0.24 per common share in the first quarter of 2016 . Dividends and dividend equivalents paid were $12.2 million for the three months ended March 31, 2016 .
Sources of Funds
Kemper directly held cash and investments totaling $295.7 million at March 31, 2016 , compared to $341.2 million at December 31, 2015 .
Sources available for the repayment of indebtedness, repurchases of common stock, future shareholder dividend payments and the payment of interest on Kemper’s senior notes and subordinated debentures include cash and investments directly held by Kemper, receipt of dividends from Kemper’s insurance subsidiaries and borrowings under the credit agreement.
The primary sources of funds for Kemper’s insurance subsidiaries are premiums, investment income and proceeds from the sales and maturity of investments, advances from the FHLBs of Dallas and Chicago, and capital contributions from Kemper. The primary uses of funds are the payment of policyholder benefits under life insurance contracts, claims under property and casualty insurance contracts and accident and health insurance contracts, the payment of commissions and general expenses, the purchase of investments and repayments of advances from the FHLBs of Dallas and Chicago. Generally, there is a time lag


52


Liquidity and Capital Resources (continued)
between when premiums are collected and when policyholder benefits and insurance claims are paid. Changes in the legal environment relative to application of state unclaimed property laws and related insurance claims handling practices could result in changes in the manner in which Kemper’s life insurance companies administer life insurance death benefits and escheat unclaimed benefits to the states, and could have a significant effect on, including decreasing such time lag due to an acceleration of, the payment and/or remittance of such benefits to the states under their unclaimed property laws relative to what is currently contemplated by Kemper. See the Company’s Risk Factor set forth in Item 1A. of Part II of this Quarterly Report on Form 10-Q, Note 13, “Contingencies,” to the Condensed Consolidated Financial Statements and the section of this MD&A entitled “Life & Health Insurance” for additional information on these matters. During periods of growth, insurance companies typically experience positive operating cash flows and are able to invest a portion of their operating cash flows to fund future policyholder benefits and claims. During periods in which premium revenues decline, insurance companies may experience negative cash flows from operations and may need to sell investments to fund payments to policyholders and claimants. In addition, if the Company’s property and casualty insurance subsidiaries experience several significant catastrophic events over a relatively short period of time, investments may have to be sold in advance of their maturity dates to fund payments, which could result in either investment gains or losses. Management believes that its property and casualty insurance subsidiaries maintain adequate levels of liquidity in the event that they were to experience several future catastrophic events over a relatively short period of time.
Net Cash Provided by Operating Activities was $77.2 million for the three months ended March 31, 2016 , compared to $29.0 million for the same period in 2015 .
Net Cash Used by Financing Activities was $15.5 million for the three months ended March 31, 2016 , compared to $45.1 million for the same period in 2015 . Net proceeds from the issuance of debt from FHLB advances provided $10.0 million for the three months ended March 31, 2016 . Kemper used $10.0 million of cash to repay the FHLB advances for the three months ended March 31, 2016 . Kemper used $279.3 million of cash to repay debt for the three months ended March 31, 2015 , of which $258.8 million was used to redeem the 2015 Senior Notes and $20.5 million to repay the FHLB advances. Net proceeds from the issuance of debt provided $267.8 million for the three months ended March 31, 2015 , of which $247.3 million was related to the issuance of the 2025 Senior Notes and $20.5 million from FHLB advances. Kemper used $3.8 million of cash during the first three months of 2016 to repurchase shares of its common stock, compared to $23.4 million in the same period of 2015 , including $1.5 million of cash to settle repurchases made at the end of 2014. Kemper used $12.2 million of cash to pay dividends for the three months ended March 31, 2016 , compared to $12.3 million of cash used to pay dividends in the same period of 2015 . The quarterly dividend rate was $0.24 per common share for the first quarter of 2016 and each quarter of 2015 .
Cash available for investment activities in total is dependent on cash flow from Operating Activities and Financing Activities and the level of cash the Company elects to maintain. Net Cash Used by Investing Activities was $63.0 million for the three months ended March 31, 2016 , compared to Net Cash Provided by Investing Activities of $27.7 million for the same period in 2015 . Net cash used by acquisitions of short-term investments was $111.7 million for the three months ended March 31, 2016 , compared to $15.2 million the same period in 2015 . Fixed Maturities investing activities provided net cash of $39.3 million for the three months ended March 31, 2016 , compared to $29.4 million for the same period in 2015 . Equity Securities investing activities provided net cash of $22.6 million for the three months ended March 31, 2016 , compared to $7.0 million for the same period in 2015 . Equity Method Limited Liability Investments investing activity used net cash of $9.5 million for the three months ended March 31, 2016 , compared to net cash provided of $11.6 million for the same period in 2015 .
Critical Accounting Estimates
Kemper’s subsidiaries conduct their operations in two industries: property and casualty insurance and life and health insurance. Accordingly, the Company is subject to several industry-specific accounting principles under GAAP. The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The process of estimation is inherently uncertain. Accordingly, actual results could ultimately differ materially from the estimated amounts reported in a company’s financial statements. Different assumptions are likely to result in different estimates of reported amounts.
The Company’s critical accounting policies most sensitive to estimates include the valuation of investments, the valuation of reserves for property and casualty insurance incurred losses and LAE, the assessment of recoverability of goodwill, the valuation of pension benefit obligations and the valuation of postretirement benefit obligations other than pensions. The Company’s critical accounting policies are described in the MD&A included in the 2015 Annual Report. There has been no material change, subsequent to December 31, 2015 , to the information previously disclosed in the 2015 Annual Report with respect to these critical accounting estimates and the Company’s critical accounting policies.

53


Item 3. Quantitative and Qualitative Disclosures About Market Risk
Pursuant to the rules and regulations of the SEC, the Company is required to provide the following disclosures about Market Risk.
Quantitative Information About Market Risk
Financial instruments subject to material market risk disclosures required by the SEC were reported on the following lines of the Company’s Condensed Consolidated Balance Sheets:
1)
Investments in Fixed Maturities;
2)
Investments in Equity Securities;
3)
Fair Value Option Investments; and
4)
Debt.
Investments in Fixed Maturities and Debt are subject to material interest rate risk. The Company’s Investments in Equity Securities include common and preferred stocks and, accordingly, are subject to material equity price risk and interest rate risk, respectively. The Company’s Fair Value Option Investments include hedge funds that are subject to material equity price risk.
For purposes of this disclosure, market risk sensitive financial instruments are divided into two categories: financial instruments acquired for trading purposes and financial instruments acquired for purposes other than trading. The Company’s market risk sensitive financial instruments are generally classified as held for purposes other than trading. The Company has no significant holdings of financial instruments acquired for trading purposes. The Company has no significant holdings of derivatives.
The Company measures its sensitivity to market risk by evaluating the change in its financial assets and liabilities relative to fluctuations in interest rates and equity prices. The evaluation is made using instantaneous changes in interest rates and equity prices on a static balance sheet to determine the effect such changes would have on the Company’s market value at risk and the resulting pre-tax effect on Shareholders’ Equity. The changes chosen represent the Company’s view of adverse changes which are reasonably possible over a one-year period. The selection of the changes chosen should not be construed as the Company’s prediction of future market events, but rather an illustration of the impact of such possible events.
For the interest rate sensitivity analysis presented below, the Company assumed an adverse and instantaneous increase of 100 basis points in the yield curve at both March 31, 2016 and December 31, 2015 for Investments in Fixed Maturities. Such 100 basis point increase in the yield curve may not necessarily result in a corresponding 100 basis point increase in the interest rate for all investments in fixed maturities. For example, a 100 basis point increase in the yield curve for risk-free, taxable investments in fixed maturities may not result in a 100 basis point increase for tax-exempt investments in fixed maturities. For Investments in Fixed Maturities, the Company also anticipated changes in cash flows due to changes in the likelihood that investments would be called or pre-paid prior to their contractual maturity. All other variables were held constant. For preferred stock equity securities, the Company assumed an adverse and instantaneous increase of 100 basis points in market interest rates from their levels at both March 31, 2016 and December 31, 2015 . All other variables were held constant. For Debt, the Company assumed an adverse and instantaneous decrease of 100 basis points in market interest rates from their levels at both March 31, 2016 and December 31, 2015 . All other variables were held constant.
The Company measured equity price sensitivity assuming an adverse and instantaneous 30% decrease in the Standard and Poor’s Stock Index (the “S&P 500”) from its levels at March 31, 2016 and December 31, 2015 , respectively, with all other variables held constant. The Company’s investments in common stock equity securities were correlated with the S&P 500 using the common stock portfolio’s weighted-average beta of 0.99 and 0.99 at March 31, 2016 and December 31, 2015 , respectively. Beta measures a stock’s relative volatility in relation to the rest of the stock market, with the S&P 500 having a beta coefficient of 1.00. The common stock portfolio’s weighted-average beta was calculated using each security’s beta for the five-year periods ended March 31, 2016 and December 31, 2015 , respectively, and weighted on the fair value of such securities at March 31, 2016 and December 31, 2015 , respectively. For equity securities without observable market inputs, the Company assumed a beta of 1.00 at March 31, 2016 and December 31, 2015 . The Company’s Fair Value Option Investments were correlated with the S&P 500 using such portfolio’s weighted-average beta of 0.12 and 0.14 at March 31, 2016 and December 31, 2015 , respectively, which was calculated for each hedge fund in the portfolio and weighted on the fair value of the hedge funds.

54


The estimated adverse effects on the fair values of the Company’s financial instruments using these assumptions were:
 
 
 
 
Pro Forma Increase (Decrease)
(Dollars in Millions)
 
Fair Value
 
Interest
Rate Risk
 
Equity
Price Risk
 
Total Market
Risk
March 31, 2016
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Investments in Fixed Maturities
 
$
4,917.4

 
$
(303.5
)
 
$
—

 
$
(303.5
)
Investments in Equity Securities
 
501.3

 
(7.3
)
 
(119.6
)
 
(126.9
)
Fair Value Option Investments
 
161.9

 
—

 
(6.0
)
 
(6.0
)
Liabilities:
 
 
 
 
 
 
 
 
Debt
 
$
786.0

 
$
30.0

 
$
—

 
$
30.0

December 31, 2015
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Investments in Fixed Maturities
 
$
4,852.3

 
$
(307.6
)
 
$
—

 
$
(307.6
)
Investments in Equity Securities
 
523.2

 
(7.2
)
 
(126.0
)
 
(133.2
)
Fair Value Option Investments
 
164.5

 
—

 
(6.7
)
 
(6.7
)
Liabilities:
 
 
 
 
 
 
 

Debt
 
$
781.3

 
$
33.0

 
$
—

 
$
33.0

The market risk sensitivity analysis assumes that the composition of the Company’s interest rate sensitive assets and liabilities, including, but not limited to, credit quality, and the equity price sensitive assets existing at the beginning of the period remains constant over the period being measured. It also assumes that a particular change in interest rates is uniform across the yield curve regardless of the time to maturity. Interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. Also, any future correlation, either in the near term or the long term, between the Company’s common stock equity securities portfolio and the S&P 500 may differ from the historical correlation as represented by the weighted-average historical beta of the common stock equity securities portfolio. Accordingly, the market risk sensitivity analysis may not be indicative of, is not intended to provide, and does not provide, a precise forecast of the effect of changes in market rates on the Company’s income or shareholders’ equity. Further, the computations do not contemplate any actions the Company may undertake in response to changes in interest rates or equity prices.
To the extent that any adverse 100 basis point change occurs in increments over a period of time instead of instantaneously, the adverse impact on fair values would be partially mitigated because some of the underlying financial instruments would have matured. For example, proceeds from any maturing assets could be reinvested and any new liabilities would be incurred at the then current interest rates.
Qualitative Information About Market Risk
Market risk is a broad term related to economic losses due to adverse changes in the fair value of a financial instrument and is inherent to all financial instruments. SEC disclosure rules focus on only one element of market risk - price risk. Price risk relates to changes in the level of prices due to changes in interest rates, equity prices, foreign exchange rates or other factors that relate to market volatility of the rate, index or price underlying the financial instrument. The Company’s primary market risk exposures are to changes in interest rates and equity prices.
The Company manages its interest rate exposures with respect to Investments in Fixed Maturities by investing primarily in investment-grade securities of moderate effective duration.
Item 4. Controls and Procedures
(a)
Evaluation of disclosure controls and procedures.
The Company’s management, with the participation of Kemper’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on such evaluation, Kemper’s Chief Executive Officer and Chief Financial Officer have

55


concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by Kemper in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the SEC’s rules and forms, and accumulated and communicated to the Company’s management, including Kemper’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b)
Changes in internal controls.
In April 2016, the Company completed the process of assessing Alliance United’s internal controls over financial reporting. Accordingly, Alliance United, a company that Kemper acquired on April 30, 2015, will be included within the Company’s evaluation of internal control over financial reporting going forward. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION
Items not listed here have been omitted because they are inapplicable or the answer is negative.
Item 1. Legal Proceedings
Information concerning pending legal proceedings is incorporated herein by reference to Note 13, “Contingencies,” to the Condensed Consolidated Financial Statements (Unaudited) in Part I of this Form 10-Q.
Item 1A. Risk Factors
There were no significant changes in the risk factors included in Item 1A. of Part I of the 2015 Annual Report, except for the following risk factor, which is amended and restated in its entirety as follows:
Changes in the application of state unclaimed property laws and related insurance claims handling practices could have a significant effect on (including an acceleration of) the payment and/or escheatment of life insurance death benefits and significantly increase claims handling costs relative to what is currently contemplated by Kemper (the “Unclaimed Property Risk Factor”).
In recent years, many states have begun to aggressively expand the application of their unclaimed property laws as they relate to life insurance proceeds. The treasurers or controllers (collectively, “Treasurers”) of a large majority of states have engaged private audit firms to examine the practices and procedures of life insurance companies with respect to the reporting and remittance of proceeds associated with life insurance policies, annuity contracts and retained asset accounts under state unclaimed property laws. Related measures are also being taken or considered by state insurance regulators, both individually and collectively through the auspices of the NAIC, and some state insurance regulators have initiated market conduct examinations focused on claims handling and unclaimed property practices of life insurers. Additionally, since 2012, a number of states have enacted legislation pertaining to unclaimed property.
As a result of these audits and examinations, a number of large life insurance groups have agreed to alter historic practices that were previously considered to be lawful and appropriate relative to claims handling and the reporting and remittance of life insurance policy proceeds under state unclaimed property laws. Based on published reports, at least twenty life insurance groups have entered into settlement agreements with state insurance regulators and twenty-four groups with Treasurers. Under the terms of these agreements, the settling companies typically agree to establish a practice of periodically searching for deceased insureds, even prior to the receipt of a claim, by comparing their in-force policy records against a database of reported deaths maintained by the Social Security Administration or a comparable database (collectively, a “Death Master File” or “DMF”). The settlements usually apply to policies that were in force at any time since January 1, 1992. In conducting these comparisons against a DMF, the insurers are required to use complex “fuzzy” matching criteria which in many cases result in a large volume of potential matches for any given insured. In such cases, the insurer must either assume a costly and administratively burdensome process of disproving any such ambiguous matches or accept such matches as valid and escheat the related policy benefits to the states if the beneficiaries cannot be found. All settlements to date with insurance regulators have involved payment of monetary penalties (ranging from about $1.2 million up to $40 million), while settlements with Treasurers have required payment of interest on sums remitted, calculated from the date of death of the insured (rather than from the insurer’s first knowledge of death or receipt of a claim). The amounts publicly reported by the settling companies to have been paid to beneficiaries and/or escheated to the states have been substantial. The settlements to date have involved companies that engaged in “asymmetric” DMF use, which is using a DMF to terminate annuity payments to deceased

56


annuitants but not using a DMF to determine if that same deceased annuitant might also be an insured under a life insurance policy issued by that company. Because Kemper’s life insurance subsidiaries (the “Life Companies”) did not engage in the asymmetric conduct that gave rise to those settlements, they have opposed attempts by certain state officials to effect changes to the Life Companies’ claims handling and unclaimed property practices of the sort embodied in the foregoing settlements and have challenged through legal proceedings the authority of such officials to compel such changes. There can be no assurances that the Life Companies will ultimately be successful in resisting such attempts or any that may arise in the future.
Separately, the National Conference of Insurance Legislators (“NCOIL”) has adopted model legislation which, if enacted, would require life insurance companies to compare their in-force life insurance policy records against a DMF for the purpose of identifying potentially deceased insureds with respect to whom the subject life insurance company has not yet received a claim, including due proof of death. Twenty-one states have adopted versions of the NCOIL model legislation (the “DMF Statutes”). While ten of such states have enacted DMF Statutes that would apply only to policies issued by the Life Companies after the statutes’ effective dates, eleven apply retroactively and could have a significant effect on, including an acceleration of, the payment of life insurance benefits to beneficiaries or, in instances where beneficiaries cannot be located, the remittance of such benefits to the states under their unclaimed property laws. Additionally, in 2015, a drafting subgroup of the NAIC began work on possible model legislation that would also address unclaimed property in the life insurance context; while the future and final provisions of such NAIC model legislation are unclear, the adoption of such model could increase the likelihood that unfavorable legislation could be adopted in states in which the Life Companies operate. Kemper cannot presently predict whether any other states will enact similar legislation or, if enacted, exactly what form such legislation will take.
The Life Companies are the subject of an unclaimed property compliance audit (the “Treasurers’ Audit”) by a private audit firm retained by the Treasurers of more than thirty states (the “Audit Firm”). In July 2013, the California State Controller (the “CA Controller”) filed a complaint against the Life Companies in state court in California, seeking an order requiring the Life Companies to produce their in-force insurance policy records to the Audit Firm to enable the firm to perform a comparison of such records against a DMF. The Life Companies have filed a cross-complaint against the CA Controller, adding the Audit Firm and California Insurance Commissioner as cross-defendants. In October 2015, certain of the Life Companies filed a complaint in state court in Illinois seeking a declaration that the Treasurer of the State of Illinois (“the IL Treasurer”) lacks the authority to compel those Life Companies to produce all in-force policy records to the Audit Firm, which is also a named defendant. See Note 13, “Contingencies,” to the Condensed Consolidated Financial Statements for further details on the legal proceedings with the CA Controller and IL Treasurer.
A market conduct examination of the Life Companies was initiated in 2012 by the Illinois Department of Insurance (the “IDOI”), focusing on the Life Companies’ claim settlement and policy administration practices, and specifically compliance with unclaimed property statutes. Five additional states joined the examination in May 2013 (the “Multi-State Exam”) and, shortly thereafter, the Life Companies received requests from the IDOI, as the Multi-State Exam’s managing lead state, for a significant volume of information beyond that which the Life Companies had already produced, including all of the subject Life Companies’ records of in-force policies and other information of the type requested by the Audit Firm as part of the Treasurers’ Audit. This request prompted the Life Companies to file declaratory judgment actions against the insurance regulators of four states (Illinois, California, Pennsylvania and Florida) participating in the Multi-State Exam; these actions include the cross-complaint against the CA Controller described above. In December 2015, the Life Companies voluntarily dismissed the litigation against the IDOI after that department agreed to withdraw the request for records of all in-force policies and advised the Life Companies of the IDOI’s intent to proceed with a single-state market conduct exam without use of a DMF. At least one or more of the states remaining in the Multi-State Exam have indicated that they intend to continue with the exam, including the attempted use of a DMF. See Note 13, “Contingencies,” to the Condensed Consolidated Financial Statements for further details on the litigation connected to the Multi-State Exam.
Should these various efforts by state officials succeed in retroactively imposing new claims handling and escheatment requirements with regard to previously issued life insurance policies, such requirements could have a material adverse effect on the Company’s profitability, financial position and cash flows. The Company’s stance in opposition to the aforementioned actions by state legislators, Treasurers and insurance regulators, including the Life Companies’ initiation of the litigation described above and in Note 13, “Contingencies,” to the Condensed Consolidated Financial Statements, also creates a risk of reputational damage to the Company among various constituencies (including its principal insurance regulators, federal and state legislators, the media including social media, rating agencies, investors, insurance agents, and current and prospective policyholders), particularly if the Company’s position is not ultimately vindicated. Examples of reputational exposure include a February 2016 article in the Wall Street Journal and an April 2016 segment on CBS 60 Minutes , both of which addressed matters relating to this Unclaimed Property Risk Factor. Regardless of the outcome, the Company will incur significant attorneys’ fees, direct litigation and examination costs, and substantial amounts of management time that would otherwise be spent on running the Company’s operations.

57


See Note 13, “Contingencies,” to the Condensed Consolidated Financial Statements and the sections of the MD&A entitled “Life & Health Insurance” and “Liquidity and Capital Resources” for additional information on the legal proceedings, including lawsuits, regulatory examinations and inquiries, and other matters described above.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  
Information pertaining to purchases of Kemper common stock for the three months ended March 31, 2016 follows.
 
 
 
 
 
 
Total
 
Maximum
 
 
 
 
 
 
Number of Shares
 
Dollar Value of Shares
 
 
 
 
Average
 
Purchased as Part
 
that May Yet Be
 
 
Total
 
Price
 
of Publicly
 
Purchased Under
 
 
Number of Shares
 
Paid per
 
Announced Plans
 
the Plans or Programs
Period
 
Purchased (1)
 
Share
 
or Programs (1)
 
(Dollars in Millions) (1)
January 1 - January 31
 
546

 
$
32.76

 
—

 
$
247.5

February 1 - February 28
 
135,905

 
$
27.13

 
135,905

 
$
243.8

March 1 - March 31
 
4,373

 
$
27.28

 
4,373

 
$
243.7

(1) On August 6, 2014, Kemper’s Board of Directors authorized the repurchase of up to $300 million of Kemper’s common stock. See MD&A, “Liquidity and Capital Resources.”
Total Number of Shares Purchased in the preceding table include 546 shares that were withheld to satisfy tax withholding obligations on the vesting of restricted stock awards under Kemper’s long-term equity-based compensation plans during the quarter ended March 31, 2016 .
Item 6. Exhibits
An Exhibit Index has been filed as part of this report on page E-1. Exhibit numbers correspond to the numbering system in Item 601 of Regulation S-K.

58


Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Kemper Corporation
 
 
 
Date:
May 5, 2016
/S/    JOSEPH P. LACHER, JR.
 
 
Joseph P. Lacher, Jr.
 
 
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
Date:
May 5, 2016
/S/    FRANK J. SODARO
 
 
Frank J. Sodaro
 
 
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
 
 
 
Date:
May 5, 2016
/S/    RICHARD ROESKE
 
 
Richard Roeske
 
 
Vice President and Chief Accounting Officer
(Principal Accounting Officer)

59


Exhibit Index

The following exhibits are either filed as a part hereof or are incorporated by reference. Exhibit numbers followed by an asterisk (*) indicate exhibits that are management contracts or compensatory plans or arrangements.
 
 
 
 
Incorporated by Reference
 
 
Exhibit Number
 
Exhibit Description
 
Form
 
File Number
 
Exhibit
 
Filing Date
 
Filed or Furnished Herewith
10.1
 
Form of Performance-Based Restricted Stock Unit Award Agreement under the Kemper 2011 Omnibus Equity Plan, as of February 26, 2016
 
 
 
 
 
 
 
 
 
X
10.2
 
Separation Agreement, dated as of March 2, 2016, with Denise I. Lynch, former Vice President and Property & Casualty Group Executive of the Company
 
 
 
 
 
 
 
 
 
X
10.3
 
Non-Qualified Deferred Compensation Plan As Amended and Restated on March 16, 2016
 
 
 
 
 
 
 
 
 
X
31.1
 
Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14(a)
 
 
 
 
 
 
 
 
 
X
31.2
 
Certification of Chief Financial Officer Pursuant to SEC Rule 13a-14(a)
 
 
 
 
 
 
 
 
 
X
32.1
 
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K)
 
 
 
 
 
 
 
 
 
X
32.2
 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K)
 
 
 
 
 
 
 
 
 
X
101.1
 
XBRL Instance
 
 
 
 
 
 
 
 
 
X
101.2
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
 
 
X
101.3
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
 
 
 
X
101.4
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
 
 
 
X
101.5
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
 
 
 
X
101.6
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
 
 
X


E-1
Exhibit 10.1

Kemper Corporation 2011 Omnibus Equity Plan
PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD AGREEMENT
This PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD AGREEMENT (“Agreement”) is made as of this ______ day of ___________, ____ (“Grant Date”) between KEMPER CORPORATION, a Delaware corporation (“Company”), and «name» (“Award Holder”) for an Award of an aggregate of «shares» («shares») restricted stock units (the “RSUs”), each representing the right to receive one share of the Company’s common stock (“Common Stock”) on the terms and conditions set forth in this Agreement.
SIGNATURES
As of the date set forth above, the parties have accepted the terms of this Agreement by signing this Agreement by an electronic signature, and each party agrees that such signature shall not be denied legal effect, validity or enforceability solely because it was submitted or executed electronically.
KEMPER CORPORATION          AWARD HOLDER
By: «CEO Signature and Title»    By: «name»

RECITALS
A.    The Board of Directors of the Company has adopted the Kemper Corporation 2011 Omnibus Equity Plan (“Plan”), including all amendments to date, to be administered by the Compensation Committee of the Company’s Board of Directors or any subcommittee thereof or other committee designated by the Board to administer the Plan (“Committee”). Capitalized terms that are not defined herein shall be defined in accordance with the Plan.
B.    The Plan authorizes the Committee to grant to selected employees, directors and Third Party Service Providers of the Company or any Affiliate of the Company awards of various types, including restricted stock units providing the right to receive shares of Common Stock under specified terms and conditions.
C.    Pursuant to the Plan, the Committee has determined that it is in the best interest of the Company and its shareholders to grant the Award Holder an Award of restricted stock units under the terms and conditions specified in this Agreement as an inducement to remain in the service of the Company and an incentive for increased effort during such service.
NOW, THEREFORE, the parties hereto agree as follows:
1.      Grant . The Company grants the RSUs to the Award Holder, subject to the terms and conditions set forth in this Agreement. Except as otherwise set forth herein, the RSUs shall not entitle the Award Holder to any rights of a shareholder of Common Stock.


As of 2-26-16



2.      Vesting and Forfeiture .
(a)      Restricted Period . Fifty percent (50%) of the RSUs shall be subject to the vesting terms of Exhibit A and fifty percent (50%) of the RSUs shall be subject to the vesting terms of Exhibit B. The RSUs shall be restricted during a period (“Restricted Period”) that begins on the Grant Date and expires on the date(s) that they vest in accordance with Exhibit A or B, as applicable (“Vesting Date”), provided that the RSUs have not been forfeited pursuant to Section E of such applicable Exhibit and:
(i)     the Award Holder is in Service (as hereafter defined) on the Vesting Date; or
(ii) the Award Holder is Retirement Eligible (as hereafter defined) prior to the date the Award Holder terminates Service and the Award Holder has not, at any time prior to or on the Vesting Date, become an employee of a competitor of the Company or any of its Affiliates or otherwise engaged in any activity that is competitive with the Company or any of its Affiliates, as determined by the Company in its sole discretion.
The RSUs will vest on the Vesting Date only to the extent provided in and in accordance with the provisions of the applicable Exhibit.
(b)      Certain Definitions.
(i) “ Service ” means that the Award Holder is employed by, or a Third Party Service Provider or member of the board of directors of, the Company or an Affiliate.
(ii) “ Retirement Eligible ” means that the Award Holder has either attained age 60 and completed 10 years of Service as an Employee or attained age 65 and completed 5 years of Service as an Employee.
3.      Conversion of RSUs; Issuance of Common Stock . Except as otherwise provided in Section 8, the Company shall cause one share of Common Stock to be issued, within the time period provided below, for each RSU that is vesting upon the applicable Vesting Date.
Any issuance of Common Stock shall be subject to applicable tax withholding obligations as described in Section 6 and shall be in book-entry form, registered in the Award Holder’s name (or in the name of the Award Holder’s Representative, as the case may be), in payment of whole RSUs. Except as otherwise provided in Section 8, in no event shall the date that Common Stock is issued to the Award Holder (“Settlement Date”) occur later than the first to occur of (a) March 15 th following the calendar year in which the Award Holder’s RSUs are no longer subject to a substantial risk of forfeiture, as such term is defined for purposes of Section 409A, or (b) ninety (90) days following the applicable Vesting Date.
4.      Dividend Equivalents . If a cash dividend is declared and paid by the Company with respect to the Common Stock during the Restricted Period, the Award Holder shall be entitled to


As of 2-26-16


receive a cash payment equal to the total cash dividend the Award Holder would have received had the RSUs been actual shares of Common Stock, subject to applicable tax withholding obligations as described in Section 6. The cash payment shall be made on the date that the dividends are payable to holders of Common Stock (“Dividend Payment Date”).  The rules of Treas. Reg. § 1.409A-3(d) shall be applied in determining whether a cash payment is made on the Dividend Payment Date.
5.      Fair Market Value of Common Stock . The fair market value (“Fair Market Value”) of a share of Common Stock shall be determined for purposes of this Agreement by reference to the closing price of a share of Common Stock as reported by the New York Stock Exchange (or such other exchange on which the shares of Common Stock are primarily traded) for the Grant Date or Vesting Date, as applicable, or if no prices are reported for that day, the last preceding day on which such prices are reported (or, if for any reason no such price is available, in such other manner as the Committee in its sole discretion may deem appropriate to reflect the fair market value thereof).
6.      Withholding of Taxes . The Award Holder acknowledges that the conversion of the RSUs to Common Stock will result in the Award Holder being subject to income taxes and payroll taxes, to the extent that payroll taxes have not previously become due. The Company will deduct from the number of RSUs that are scheduled to vest on the Vesting Date(s) whole shares of Common Stock having a Fair Market Value equal to the amount determined by the Company to satisfy any applicable minimum statutory withholding or other tax obligations that may arise upon such vesting, and the Award Holder shall remit to the Company in cash any and all applicable withholding taxes that exceed the amount available to the Company using whole shares.
The Company shall withhold from any dividend equivalents paid during the Restricted Period only the amounts the Company is required to withhold to satisfy any applicable tax withholding requirements with respect to such dividend equivalents based on minimum statutory withholding rates for federal and state tax purposes, including any payroll taxes.
7.      Section 409A . The Company intends that the Award hereunder shall either be exempt from the application of, or compliant with, the requirements of Section 409A and this Award Agreement shall be interpreted and administered in accordance with such intent. In no event shall the Company and/or its Affiliates be liable for any tax, interest or penalties that may be imposed on the Award Holder (or the Award Holder’s estate) under Section 409A.
8.      Shares to be Issued in Compliance with Federal Securities Laws and Other Rules . No shares of Common Stock issuable in settlement of the RSUs shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended (whether by registration or satisfaction of exemption conditions), all applicable listing requirements of the New York Stock Exchange (or such other exchange(s) or market(s) on which shares of the same class are then listed) and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. By signing this Agreement, the Award Holder represents and warrants that none of the shares to be acquired in settlement of the RSUs will be acquired with a view towards any sale, transfer or distribution of said shares in violation of the Securities Act of


As of 2-26-16


1933 as amended (“Act”), and the rules and regulations promulgated thereunder, or any applicable “blue sky” laws, and that the Award Holder hereby agrees to indemnify the Company in the event of any violation by the Award Holder of such Act, rules, regulations or laws. The Company will use its best efforts to complete all actions necessary for such compliance so that settlement can occur within the period specified in Section 3; provided that if the Company reasonably anticipates that settlement within such period will cause a violation of applicable law, settlement may be delayed provided that settlement occurs at the earliest date at which the Company reasonably anticipates that such settlement will not cause a violation of applicable law, all in accordance with Treas. Reg. § 1.409A-2(b)(7)(ii).
9.      No Assignment or Other Transfer . During the Restricted Period, neither this Agreement, the RSU nor any rights and privileges granted hereby may be transferred, assigned, pledged or hypothecated in any way, whether by operation of the law or otherwise, except by will or the laws of descent and distribution. Without limiting the generality of the preceding sentence, no rights or privileges granted hereby may be assigned or otherwise transferred during the Restricted Period to the spouse or former spouse of the Award Holder pursuant to any divorce proceedings, settlement or judgment. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this Agreement, the RSUs or any other rights or privileges granted hereby contrary to the provisions hereof shall be null and void and of no force or effect.
10.      Certain Adjustments . The provisions of Sections 4.4 and 19.2 of the Plan relating to certain adjustments in the case of stock splits, reorganizations, equity restructurings and similar matters described therein are hereby incorporated in and made a part of this Agreement. Any such adjustments shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of Common Stock shall be issued under the Plan on any such adjustment.
11.      Participation by Award Holder in Other Company Plans . Nothing herein contained shall affect the right of the Award Holder to participate in and receive benefits under and in accordance with the then current provisions of any retirement plan or employee welfare benefit plan or program of the Company or of any Affiliate of the Company, subject in each case, to the terms and conditions of any such plan or program.
12.      Not an Employment or Service Contract . Nothing herein contained shall be construed as an agreement by the Company or any of its Affiliates, expressed or implied, to employ or contract for the services of the Award Holder, to restrict the right of the Company or any of its Affiliates to discharge the Award Holder or cease contracting for the Award Holder’s services or to modify, extend or otherwise affect in any manner whatsoever, the terms of any employment agreement or contract for services which may exist between the Award Holder and the Company or any of its Affiliates.
13.      Agreement Subject to the Plan . The RSUs hereby granted are subject to, and the Company and the Award Holder agree to be bound by, all of the terms and conditions of the Plan, as the same may be amended from time to time hereafter in accordance with the terms thereof, but no such amendment shall adversely affect the Award Holder’s rights under this Agreement without


As of 2-26-16


his or her prior written consent. To the extent that the terms or conditions of this Agreement conflict with the terms or conditions of the Plan, the Plan shall govern.
14.     Arbitration . Notwithstanding the terms of any other agreement in effect between the parties, all disputes related to this Agreement or any RSUs granted hereunder shall be submitted to final and binding arbitration with the American Arbitration Association (“AAA”) pursuant to the AAA Employment Arbitration Rules and Mediation Procedures (“AAA Rules”) as amended from time to time. A copy of the AAA Rules is available to the Award Holder upon written request to the Company’s Director of Human Resources at One East Wacker Drive, Chicago, Illinois 60601 (or such other address as the Company may specify from time to time), or may be obtained online at: www.adr.org .
To initiate arbitration, either party must file a Demand for Arbitration (“Demand”) in the manner described in the AAA Rules. After a Demand has been filed and served, either party may request that the dispute initially be mediated pursuant to the AAA Rules, in which event such dispute shall be mediated. If mediation does not fully resolve the dispute or if neither party requests mediation, then the matter will be subject to arbitration before a single arbitrator who shall have the power to award any types of legal or equitable relief (other than punitive damages) available in a court of competent jurisdiction, including, but not limited to, attorneys’ fees and costs, and all defenses that would be applicable in a court of competent jurisdiction shall be available. Unless provided otherwise in the arbitrator’s award, each party will pay its own attorneys’ fees and costs. To the extent required by law or the AAA Rules, all administrative costs of arbitration (including reimbursement of filing fees) and the fees of the arbitrator will be paid by the Company. The parties agree that no class action proceedings (or joinder or consolidation with claims of any other person) may be brought in connection with this Agreement without the written consent of both parties.
15.     Governing Law . This Agreement and any disputes hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware, without application of its conflicts of laws principles, and the Federal Arbitration Act.
16.      Miscellaneous . This Agreement, together with the Plan, is the entire agreement of the parties with respect to the RSUs granted hereby and may not be amended except in a writing signed by both the Company and the Award Holder. If any provision of this Agreement is deemed invalid, it shall be modified to the extent possible and minimally necessary to be enforceable, and, in any event, the remainder of this Agreement will be in full force and effect.
17.      Forfeiture and Clawback of Award . Notwithstanding the terms regarding vesting and forfeiture or any other provision set forth in this Agreement and as a condition to the receipt of this Award, the rights, payments and benefits with respect to this Award are subject to reduction, cancellation, forfeiture, or recoupment by the Company if and to the extent required in accordance with Company policy as in effect from time to time (“Company Policy”), and/or as otherwise required by applicable law, rule or regulation of the Securities and Exchange Commission, or rule or listing requirement of the New York Stock Exchange as in effect from time to time (collectively with the Company Policy, “Applicable Requirements”) in connection with an accounting restatement or under such other circumstances as specified in the Applicable Requirements. Any


As of 2-26-16


action taken under this provision shall be made pursuant to the Company’s determination, which shall be final, binding and conclusive.
ADDITIONAL PROVISIONS APPLICABLE ONLY TO EXECUTIVE OFFICERS OF THE COMPANY:
18.      Stock Holding Period . The Award Holder agrees to hold the shares of Common Stock acquired upon the vesting of the RSUs for a minimum of twelve months following their Vesting Date. This holding period shall not apply to shares of Common Stock withheld by the Company to settle tax liabilities related to vesting, and as otherwise may be provided under the Company’s Stock Ownership Policy.



As of 2-26-16


EXHIBIT A
Vesting Schedule Based on Relative TSR
for Fifty Percent (50%) of RSUs Granted under Award Agreement
A. Definition of Terms :
“Additional Shares” means any shares of Common Stock to be issued to the Award Holder on the Vesting Date in the event that the Company’s Relative TSR Percentile Rank exceeds the Target Performance Level.
“Award Agreement” means the Performance-Based Restricted Stock Unit Award Agreement to which this Exhibit is a part, pursuant to which an award of performance-based RSUs has been granted.
“Company’s Relative TSR Percentile Rank” means the Company’s TSR Percentile Rank relative to the companies in the Peer Group as certified by the Committee for the Performance Period.
“Disability” means that the Award Holder either: (A) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months and, with respect to an Award Holder who is an Employee, is receiving income replacement benefits for a period of not less than three months under an accident and health plan (e.g., a long term disability plan) covering Employees of the Company or Affiliate that employs the Award Holder; or (B) has been determined to be totally disabled by the Social Security Administration or Railroad Retirement Board.
“Grant Date” is defined in the first paragraph of the Award Agreement.
“Peer Group” means the peer group approved by the Committee which shall be the companies that comprised the S&P Supercomposite Insurance Index at the beginning of the Performance Period (other than the Company), adjusted as of the end of the Performance Period to remove any such companies which are no longer included in the S&P Supercomposite Insurance Index as of the last day of the Performance Period.
“Performance Period” means the three-year period starting on March 1 of the calendar year in which the Grant Date occurs (“Start Date”) and ending on the calendar day immediately preceding the three-year anniversary of the Start Date.
“Separation from Service” has the meaning ascribed to such term in IRC Section 409A.
“Target Performance Level” means the Company’s Relative TSR Percentile Rank at the 50 th percentile.
“Target Shares” means fifty percent (50%) of the total number of shares of performance-based RSUs granted on the Grant Date, as specified in the first paragraph of the Award Agreement.



“TSR” means Total Shareholder Return as determined by the Committee for the Performance Period.
“TSR Percentile Rank” means the percentile performance of the Company and each of the companies in the Peer Group based on the TSR for such company as determined by the Committee for the Performance Period.
“Vesting Date” means the date that the Committee certifies the Company’s Relative TSR Percentile Rank, except as otherwise provided in Section E below.
B. Determination of Vesting Date Events :
As soon as practicable following the end of the Performance Period, the Committee will determine the Company’s Relative TSR Percentile Rank in accordance with the methodology described in the next section below. The Company’s Relative TSR Percentile Rank will determine the number of Target Shares that will vest or be forfeited on the Vesting Date, and the number of Additional Shares, if any, that will be issued to the Award Holder on the Vesting Date, as described below under “Vesting Determination.”
C. TSR Percentile Rank Calculation Methodology :
The Company’s Relative TSR Percentile Rank will be calculated in a two-step process. First, the TSR will be calculated for the Company and each company in the Peer Group. Then, the TSR Percentile Rank for the Company and each of the companies in the Peer Group will be determined. The TSR and the TSR Percentile Rank will be determined by the Committee in accordance with the formula and methods approved by the Committee, as described below.
Formula for Calculating TSR
For purposes of this Exhibit, the TSR for the Company and each of the companies comprising the Peer Group will be calculated as follows:
Ending Stock Price – Beginning Stock Price + Dividends Reinvested on all Ex-Dividend Dates
Beginning Stock Price
Share Price Averaging Period
The beginning and ending stock prices in the above formula for TSR will be calculated using a trailing average approach (i.e., average of the closing stock prices for 20 consecutive trading days prior to the beginning and end of the Performance Period).
Reinvestment of Dividends and Other Adjustments
The above TSR formula assumes that dividends are paid and reinvested into additional shares of common stock on their ex-dividend dates. TSR will be adjusted for stock dividends, stock splits, spin-offs and other corporate changes having a similar effect.



As of 2-26-16



Calculation of TSR Percentile Rank
The percentile performance for determining the TSR Percentile Rank will be measured using the Microsoft Excel function PERCENTRANK.
D. Vesting Determination :
Except as otherwise provided in Section E, the RSUs held by the Award Holder will vest, to the extent earned for the Performance Period, on the Vesting Date only if the Award Holder has not had a Separation from Service prior to such date. Once the Company’s Relative TSR Percentile Rank is determined by the Committee, the Company will confirm the number of Target Shares that will vest or be forfeited on the Vesting Date, and the number of Additional Shares, if any, that will be issued to the Award Holder on the Vesting Date consistent with the following provisions:
•
If the Company’s Relative TSR Percentile Rank is at the Target Performance Level, 100% of the Target Shares will vest on the Vesting Date. If the Company’s Relative TSR Percentile Rank is above the Target Performance Level, Additional Shares will also be issued to the Award Holder on the Vesting Date. If the Company’s Relative TSR Percentile Rank is less than the Target Performance Level, some or all of the Target Shares will be forfeited.
•
The number of the Target Shares that will vest on the Vesting Date, and the number of any Additional Shares that will be issued to the Award Holder on the Vesting Date, will be determined in accordance with the table set forth below. Any Target Shares that do not vest in accordance with the table will be forfeited on the Vesting Date.
If the Company’s Relative TSR Percentile Rank for the Performance Period falls between the percentile levels specified in the first column of the table, the number of Shares that will vest or be granted or forfeited on the Vesting Date shall equal the number corresponding to the percentage interpolated on a straight-line basis.



Company’s Relative TSR Percentile Rank


Total Shares to Vest (and/or to be Granted) on Vesting Date as Percentage of Target Shares

90 th or Higher
200%
75 th
150%
50 th
100%
25 th
50%
Below 25 th
0%




As of 2-26-16


E. Determination of Vesting in Case of Certain Terminations and Other Events :
Notwithstanding any contrary provisions of the Plan:
(1)    Retirement Eligible . (a) Except as otherwise provided in (1)(b) or another subsection of this Section E, if the Award Holder is Retirement Eligible, all RSUs held by the Award Holder will vest on the last day of the Performance Period, to the extent earned for the Performance Period, in an amount equal to the number of Target Shares that would vest in accordance with the provisions of Sections A – D above, if any, multiplied by a fraction, the numerator of which is the number of full months in the Performance Period during which the Award Holder was actively in Service, and the denominator of which is the total number of months in the Performance Period. A partial month worked shall be counted as a full month if the Award Holder was actively working for fifteen (15) days or more in that month. All RSUs that do not vest in accordance with this provision shall be forfeited.
(b) If, on or prior to the last day of the Performance Period, the Award Holder is Retirement Eligible and either (i) becomes an employee of a competitor of the Company or any of its Affiliates or otherwise engages in any activity that is competitive with the Company or any of its Affiliates, as determined by the Company in its sole discretion, or (ii) the Award Holder’s Service is terminated for Substantial Cause, then any of the RSUs that are restricted on the date of such employment, activity or termination shall be forfeited to the Company.
(2)    Termination on Death or Disability . The Vesting Date shall be the date of the Award Holder’s death or Disability if the Award Holder dies or becomes Disabled prior to the three-year anniversary of the Grant Date: (i) while in Service; or (ii) after terminating Service if the Award Holder (A) was Retirement Eligible on the date of such termination of Service for a reason other than Substantial Cause, and (B) had not, at any time prior to the date of the Award Holder’s death or Disability, become an employee of a competitor of the Company or any of its Affiliates or otherwise engaged in any activity that is competitive with the Company or any of its Affiliates, as determined by the Company in its sole discretion. On such Vesting Date: (a) the Performance Period shall be deemed to have been completed; (b) a number of RSUs shall vest in an amount equal to the number of Target Shares multiplied by a fraction, the numerator of which is the number of full months in the Performance Period during which the Award Holder was actively in Service, and the denominator of which is the total number of months in the original Performance Period (a partial month worked shall be counted as a full month if the Award Holder was actively in Service for fifteen (15) days or more in that month); (c) no Additional Shares shall be issued to the Award Holder; and (d) all RSUs that do not vest in accordance with this provision shall be forfeited.
(3)      Termination on Divestiture . In the event that, prior to the three-year anniversary of the Grant Date, the Award Holder is no longer employed by the Company or an Affiliate upon and as result of the divestiture by the Company of its controlling interest in the Award Holder’s Employer, or other cessation of the Company’s control of such Employer, the Performance Period and vesting determination set forth in Sections A – D above shall be deemed revised as follows, provided that the Award Holder does not otherwise continue in Service with the Company or another Affiliate:


As of 2-26-16


•
The Performance Period shall be deemed revised to end on the effective date of such divestiture or cessation of control (“Vesting Date”);
•
The Company’s Relative TSR Percentile Rank will be determined for such truncated Performance Period by the Committee in accordance with the methodology set forth above.
•
The Target Shares will vest or be forfeited on the Vesting Date in accordance with the table set forth below, but no Additional Shares will be issued to the Award Holder; and
•
If the Company’s Relative TSR Percentile Rank for the truncated Performance Period falls between the percentile levels specified in the first column of the table set forth below, the number of Target Shares that will vest on the Vesting Date shall equal the number corresponding to the percentage interpolated on a straight-line basis from the percentages specified in the second column of the table.

Company’s Relative TSR Percentile Rank


Total Shares to Vest on Vesting Date as Percentage of Target Shares
50 th or Higher
100%
25 th
50%
Below 25 th
0%

(4)      Other Termination of Service . If the Award Holder ceases to be in Service prior to the Vesting Date (including, without limitation, by reason of a divestiture or cessation of control of an Affiliate), and is not Retirement Eligible, under circumstances other than those set forth in the foregoing subsections (1) – (3) of this Section E, all unvested RSUs held by the Award Holder shall be forfeited to the Company on the date of such cessation of Service, and no Additional Shares shall be issued to the Award Holder.
(5)    Leave of Absence . In the event that the Award Holder is on an approved Leave of Absence (other than a short-term disability leave) at the end of the Performance Period or takes such a leave of absence at any time during the Performance Period, then the RSUs will vest, forfeit or be granted, as applicable, to the extent earned for the Performance Period, in an amount equal to the number of Target Shares that would vest and the number of Additional Shares that would be issued in accordance with the provisions of Sections A – D above, if any, multiplied by a fraction, the numerator of which is the number of full months in the Performance Period during which the Award Holder was an active Employee not on such leave of absence and the denominator of which is the total number of months in the Performance Period.
(6)    Change of Control. This Award may be subject to termination or early vesting in connection with a Change in Control in accordance with the provisions of Section 18.3 of the Plan.
F. Interpretations Related to Calculations and Determinations Related to Performance :


As of 2-26-16


(1)    Interpretations. The Company shall have the reasonable discretion to interpret or construe ambiguous, unclear or implied terms applicable to this Award Agreement, and to make any findings of fact necessary to make a calculation or determination hereunder.
(2)    Disagreements. A decision made in good faith by the Company shall govern and be binding in the event of any dispute regarding a method of calculation of performance or a determination of vesting or forfeiture in connection with this Award.
(3)    Method of Calculating Final Number of Vested or Forfeited Target Shares.
The following methods shall apply in determining the number of Target Shares that will vest or be forfeited on the Vesting Date pursuant to Section D above. As a general rule, the determination for performance that falls between Percentile Rank points in the table in Section D above would be interpolated on a straight-line basis, as stated in Section D.
Specifically, the formula to be used to calculate the final number of Target Shares that will vest or be forfeited is as follows:
•
For TSR performance between the 25th & 50th Percentile Ranks, the number of Target Shares that will vest as a % of the total number of Target Shares equals: 50% + [(Actual Percentile Rank - 25)/50]%
•
For TSR performance between the 50th & 75th Percentile Ranks, the number of Target Shares that will vest as a % of the total number of Target Shares equals: 100% + [(Actual Percentile Rank - 50)/50]%
•
For TSR performance between the 75th & 90th Percentile Ranks, the number of Target Shares that will vest as a % of the total number of Target Shares equals: 150% + [(Actual Percentile Rank - 75)/30]%
Note that since the interval between the 75th & 90th Percentile Rank is shorter (15 percentiles) compared to the other quadrants (25 percentiles), the vesting result for this particular quadrant would be higher compared to the other quadrants.
(4)    Rounding Conventions.
•
Regarding rounding of TSRs, percentages for each company in the Peer Group shall be computed to two decimal points, i.e., XX.XX%)
•
Regarding TSR Percentile Rank, the percentile rankings for each company in the Peer Group shall be rounded to the nearest percentage (e.g., 85% rather than 85.4166666%) before calculating the linearly interpolated payout, and the final payout percentage shall be rounded to the nearest percentage (e.g., 183% rather than 183.333333%).
•
Target Shares that will vest and any Additional Shares that will result from the application of the methods and formula set forth in the foregoing subsection F


As of 2-26-16


(3) and Section D above shall only be paid out in whole shares. Any fractional shares that would otherwise result from such application shall be rounded down to the nearest whole number of shares.


As of 2-26-16


EXHIBIT B
Vesting Schedule Based on Operational Metric
for Fifty Percent (50%) of RSUs Granted under Award Agreement
A. Definition of Terms :
“Additional Shares” means any shares of Common Stock to be issued to the Award Holder on the Vesting Date in the event that the Company’s Operational Performance Results exceed the Target Performance Level.
“Award Agreement” means the Performance-Based Restricted Stock Unit Award Agreement to which this Exhibit is a part, pursuant to which an award of performance-based RSUs has been granted.
“Disability” means that the Award Holder either: (A) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months and, with respect to an Award Holder who is an Employee, is receiving income replacement benefits for a period of not less than three months under an accident and health plan (e.g., a long term disability plan) covering Employees of the Company or Affiliate that employs the Award Holder; or (B) has been determined to be totally disabled by the Social Security Administration or Railroad Retirement Board.
“Grant Date” is defined in the first paragraph of the Award Agreement.
“Operational Performance Results” means the Company’s Adjusted Return on Equity as defined in Section C below and certified by the Committee for the Performance Period.
“Performance Period” means the three-year period ending on the December 31 immediately preceding the three-year anniversary of the Grant Date.
“Separation from Service” has the meaning ascribed to such term in Section 409A.
“Target Shares” means fifty percent of the total number of shares of performance-based RSUs granted on the Grant Date, as specified in the first paragraph of the Award Agreement.
“Vesting Date” means the date that the Committee certifies the Operational Performance Results, except as otherwise provided in Section E below.
B. Determination of Vesting Date Events :
As soon as practicable following the end of the Performance Period, the Committee will determine the Company’s Operational Performance Results in accordance with the methodology described in the next section below. The Company’s Operational Performance Results will determine the number of Target Shares that will vest or be forfeited on the Vesting Date, and the number of Additional


As of 2-26-16


Shares, if any, that will be issued to the Award Holder on the Vesting Date, as described below under “Vesting Determination.”
C. Operational Performance Calculation Methodology :
The following table shows the Maximum, Target and Threshold Performance Levels for the Company’s Operational Performance Results:

Level of Achievement for Performance Period

Operational Performance Results

Total Shares to Vest (and/or be Granted) on Vesting Date as Percentage of Target Shares

Maximum
 
200%
Target
 
100%
Threshold
 
50%
Below Threshold
 
0%

At the conclusion of the Performance Period, the Committee will determine the Company’s Operational Performance Results in accordance with the formula and methods described below, including consideration of whether the Company’s Ratio of Debt to Total Capitalization at the end of the Performance Period exceeds 35%.
Formula for Calculating Operational Performance Results
For purposes of this Exhibit, the Operational Performance Results for the Company will be calculated as follows:
Adjusted Return on Equity shall be computed by dividing the sum of Adjusted Net Income for each of the three years in the Performance Period by the sum of the Adjusted Average Shareholders’ Equity for each of the three years.
Adjusted Net Income is defined as Net Income as reported in the Company’s financial statements for the respective year, adjusted to take into account the after-tax impacts of the following items, to the extent the Committee deems them not indicative of the Company’s core operating performance:
(i)
adjust the amount of Actual CAT Losses and LAE to equal Expected CAT Losses;
(ii)
adjust Net Realized Gains on Sales of Investments and Net Impairment Losses Recognized in Earnings to equal Expected Net Realized Gains on Sales of Investments and Expected Net Impairment Losses Recognized in Earnings;


As of 2-26-16


(iii)
significant unusual judgments or settlements in connection with the Company’s legal contingencies or benefit plans; and
(iv)
additional significant unusual or nonrecurring items as permitted by the Plan.
Adjusted Average Shareholders’ Equity is defined as the simple average of Total Shareholders’ Equity as reported in the Company’s financial statements for the beginning and end of year for each year in the Performance Period, adjusted to take into account the after-tax impacts of the following items, to the extent the Committee deems them not indicative of the Company’s core operating performance:
(i)
Unrealized Gains and Losses on Fixed Maturity Securities from Adjusted Shareholders Equity;
(ii)
the modifications made in calculating Adjusted Net Income; and
(iii)
additional significant unusual or nonrecurring items as permitted by the Plan.
Actual CAT Losses and LAE means the actual Catastrophe Losses and associated Loss Adjustment Expenses, including catastrophe reserve development, as reported in the Management Reports.
Expected CAT Losses, Expected Net Realized Gains on Sales of Investments, and Expected Net Impairment Losses Recognized in Earnings means the amounts specified in the Management Reports as “Planned” or “Expected” for the 2016 Annual Performance Period for, respectively, (A) Catastrophe Losses and associated Loss Adjustment Expenses, including catastrophe reserve development, (B) Net Realized Gains on Sales of Investments, and (C) Net Impairment Losses Recognized in Earnings.
Management Reports means the Hyperion reports, or their reporting equivalent, prepared by the Company for the relevant Plan Year or other time period.
Unrealized Gains and Losses on Fixed Maturity Securities means the Unrealized Gains and Losses on Fixed Maturity Securities as reported in the Management Reports.
D. Vesting Determination :
Except as otherwise provided in Section E, the RSUs held by the Award Holder will vest, to the extent earned for the Performance Period, on the Vesting Date only if the Award Holder has not had a Separation from Service prior to such date.
Once the Company’s Operational Performance Results are determined by the Committee, the Company will confirm the number of Target Shares that will vest or be forfeited on the Vesting Date, and the number of Additional Shares, if any, that will be issued to the Award Holder on the Vesting Date consistent with the following provisions:
•
If the Company’s Operational Performance Results are at or above the Target Performance Level, 100% of the Target Shares will vest on the Vesting Date. If the Company’s Operational Performance Results are above the Target Performance Level, Additional Shares will also


As of 2-26-16


be issued to the Award Holder on the Vesting Date. If the Company’s Operational Performance Results are less than the Target Performance Level, some or all of the Target Shares will be forfeited.
•
The number of the Target Shares that will vest on the Vesting Date, and the number of any Additional Shares that will be issued to the Award Holder on the Vesting Date, will be determined in accordance with the table set forth in Section C above. Any Target Shares that do not vest in accordance with the table will be forfeited on the Vesting Date.
E. Determination of Vesting in Case of Certain Terminations and Other Events :
Notwithstanding any contrary provisions of the Plan:
(1)    Retirement Eligible . (a) Except as otherwise provided in (1)(b) or another subsection of this Section E, if the Award Holder is Retirement Eligible, all RSUs held by the Award Holder will vest on the last day of the Performance Period, to the extent earned for the Performance Period, in an amount equal to the number of Target Shares that would vest in accordance with the provisions of Sections A – D above, if any, multiplied by a fraction, the numerator of which is the number of full months in the Performance Period during which the Award Holder was actively in Service, and the denominator of which is the total number of months in the Performance Period. A partial month worked shall be counted as a full month if the Award Holder was actively working for fifteen (15) days or more in that month. All RSUs that do not vest in accordance with this provision shall be forfeited.
(b) If, on or prior to the last day of the Performance Period, the Award Holder is Retirement Eligible and either (i) becomes an employee of a competitor of the Company or any of its Affiliates or otherwise engages in any activity that is competitive with the Company or any of its Affiliates, as determined by the Company in its sole discretion, or (ii) the Award Holder’s Service is terminated for Substantial Cause, then any of the RSUs that are restricted on the date of such employment, activity or termination shall be forfeited to the Company.
(2)    Termination on Death or Disability . The Vesting Date shall be the date of the Award Holder’s death or Disability if the Award Holder dies or becomes Disabled prior to the three-year anniversary of the Grant Date: (i) while in Service; or (ii) after terminating Service if the Award Holder (A) was Retirement Eligible on the date of such termination of Service for a reason other than Substantial Cause, and (B) had not, at any time prior to the date of the Award Holder’s death or Disability, become an employee of a competitor of the Company or any of its Affiliates or otherwise engaged in any activity that is competitive with the Company or any of its Affiliates, as determined by the Company in its sole discretion. On such Vesting Date: (a) the Performance Period shall be deemed to have been completed; (b) a number of RSUs shall vest in an amount equal to the number of Target Shares multiplied by a fraction, the numerator of which is the number of full months in the Performance Period during which the Award Holder was actively in Service, and the denominator of which is the total number of months in the original Performance Period (a partial month worked shall be counted as a full month if the Award Holder was actively in Service for fifteen (15) days or more in that month); (c) no Additional Shares shall be issued to the Award Holder; and (d) all RSUs that do not vest in accordance with this provision shall be forfeited.


As of 2-26-16


(3)      Termination on Divestiture . In the event that, prior to the three-year anniversary of the Grant Date, the Award Holder is no longer employed by the Company or an Affiliate upon and as result of the divestiture by the Company of its controlling interest in the Award Holder’s Employer, or other cessation of the Company’s control of such Employer, the Performance Period and vesting determination set forth in Sections A – D above shall be deemed revised as follows, provided that the Award Holder does not otherwise continue in Service with the Company or another Affiliate:
•
The Performance Period shall be deemed revised to end on the effective date of such divestiture or cessation of control (“Vesting Date”);
•
The Company’s Operational Performance Results will be determined for such truncated Performance Period by the Committee in accordance with the methodology set forth above.
•
The Target Shares will vest or be forfeited on the Vesting Date in accordance with the table set forth below, but no Additional Shares will be issued to the Award Holder; and
•
If the Company’s Operational Performance Results for the truncated Performance Period fall between the percentile levels specified in the first column of the table set forth below, the number of Target Shares that will vest on the Vesting Date shall equal the number corresponding to the percentage interpolated on a straight-line basis from the percentages specified in the second column of the table.

Company’s Operational Performance Results


Total Shares to Vest on Vesting Date as Percentage of Target Shares
Target
100%
Threshold
50%
Below Threshold
0%

(4)      Other Termination of Service . If the Award Holder ceases to be in Service prior to the Vesting Date (including, without limitation, by reason of a divestiture or cessation of control of an Affiliate), and is not Retirement Eligible, under circumstances other than those set forth in the foregoing subsections (1) – (3) of this Section E, all unvested RSUs held by the Award Holder shall be forfeited to the Company on the date of such cessation of Service, and no Additional Shares shall be issued to the Award Holder.
(5)    Leave of Absence . In the event that the Award Holder is on an approved Leave of Absence (other than a short-term disability leave) at the end of the Performance Period or takes such a leave of absence at any time during the Performance Period, then the RSUs will vest, forfeit or be granted, as applicable, to the extent earned for the Performance Period, in an amount equal to the number of Target Shares that would vest and the number of Additional Shares that would be issued in accordance with the provisions of Sections A – D above, if any, multiplied by a fraction, the numerator of which is the number of full months in the Performance Period during which the


As of 2-26-16


Award Holder was an active Employee not on such leave of absence and the denominator of which is the total number of months in the Performance Period.
(6)    Change of Control. This Award may be subject to termination or early vesting in connection with a Change in Control in accordance with the provisions of Section 18.3 of the Plan.
F. Interpretations Related to Calculations and Determinations Related to Performance :
(1)    Interpretations. The Company shall have the reasonable discretion to interpret or construe ambiguous, unclear or implied terms applicable to this Award Agreement, and to make any findings of fact necessary to make a calculation or determination hereunder.
(2)    Disagreements. A decision made in good faith by the Company shall govern and be binding in the event of any dispute regarding a method of calculation of performance or a determination of vesting or forfeiture in connection with this Award.
(3)    Method of Calculating Final Number of Vested or Forfeited Target Shares.
The number of Target Shares that will vest or be forfeited on the Vesting Date pursuant to Section D above for performance that falls between the percentage points specified in the second column of the table in Section C above shall be interpolated on a straight-line basis.
(4)    Rounding Conventions.
•
Regarding rounding of results, percentages shall be computed to one decimal point, i.e., XX.X%)
•
Target Shares that will vest and any Additional Shares that will result from the application of the methods in the foregoing subsection F(3) and Section D above shall only be paid out in whole shares. Any fractional shares that would otherwise result from such application shall be rounded down to the nearest whole number of shares.


As of 2-26-16

Exhibit 10.2

SEPARATION AGREEMENT
This Separation Agreement (“Agreement”) is made between Denise I. Lynch (“Employee”) and Kemper Corporate Services, Inc., for itself and on behalf of all of its affiliates (collectively, “Employer”), on the date last written below.
BACKGROUND
Employee is currently employed by Employer and, among other things, is the Vice President and Property and Casualty Group Executive of Employer’s parent company, Kemper Corporation. Employer does not provide severance pay on the termination of employment as a matter of right or entitlement. Severance pay is a benefit provided solely at Employer’s discretion under appropriate circumstances and only when Employer receives a signed release of claims before payments begin.
In consideration of Employee’s cooperation and assistance in the transition of her responsibilities, Employer has determined that it is appropriate to provide severance pay to Employee and Employee wishes to take advantage of that benefit. Employee and Employer now wish to specifically describe Employee’s severance benefits and the parties’ respective rights and obligations.
TERMS AND CONDITIONS
In consideration of their mutual promises and undertakings described below, Employee and Employer agree as follows:
1.      Employment Responsibilities End . Employee’s employment by Employer shall end at the close of business on February 10, 2016 (“Termination Date”). Employee no longer will be authorized to transact business or incur any expenses, obligations and liabilities on behalf of the Employer after the Termination Date. Employee agrees not to seek reinstatement, future employment, or other working relationship with the Employer or any of its affiliates. Employee acknowledges: (a) Employee has reported to the Employer any and all work-related injuries incurred during employment; (b) the Employer properly provided any leave of absence because of Employee’s or a family member’s health condition and Employee has not been subjected to any improper treatment, conduct or actions due to a request for or taking such leave; (c) Employee has provided the Employer with written notice of any and all concerns regarding suspected ethical and compliance issues or violations on the part of the Employer or any released person or entity; and (d) Employee has not filed any complaints, claims, or actions against the Employer or any Released Party (as defined below).
Employee further agrees that Employee has been paid all wages, benefits, and other compensation owed to Employee by Employer through the Termination Date, subject to the

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obligation of Employer for the payment of: (a) salary at Employee’s current base rate through the Termination Date , (b) a 2015 Annual Bonus and/or 2013-2015 Multi-Year Bonus, if any, (c) expense reimbursement reports that are outstanding on the date hereof or which are submitted hereafter pursuant to Section 15, and (d) all paid time off (PTO), if any, that will be accrued but unpaid on the Termination Date. Any such accrued and unpaid PTO will be paid to Employee no later than the next regularly scheduled payday after the Termination Date. Employee agrees that Employee is not entitled to any additional or future compensation or benefits arising out of Employee’s employment with Employer, except for such compensation or benefits, if any, arising under the retirement, welfare benefits, bonus and equity compensation plans of Kemper Corporation to which Employee may be entitled by virtue of Employee’s employment with Employer, subject in all cases to the terms and conditions of the plans and agreements governing such compensation and benefits. Without limitation to the above, Employee acknowledges and agrees that Employee is not entitled to any severance pay pursuant to the Kemper Corporation Employee General Severance Pay Plan.
2.     Severance Payment and Outplacement Services . A cash severance payment in the gross total amount of Five Hundred Thousand Dollars ($500,000), less applicable taxes and withholdings, will be paid in a lump sum to Employee provided that all of the following conditions have occurred: (a) Employee signs this Agreement and returns it to Employer within 21 days, by March 2, 2016, (b) Employee submits a signed resignation in the form of Attachment A hereto, such resignation to be effective as of the close of business on February 10, 2016, (c) the seven-day revocation period has passed without revocation of this Agreement, (d) Employee has executed and returned the Acknowledgment Form (Attachment B hereto) to Employer confirming Employee’s decision not to revoke this Agreement, and (e) Employee has returned all company property to Employer. Employee acknowledges and agrees that the severance payment shall not be deemed “compensation” for purposes of any of Employer’s qualified retirement plans or other benefit programs and payment of the severance payment does not entitle Employee to any retirement plan contributions by Employer for Employee’s benefit or account.     
Employee further acknowledges and agrees that the termination of Employee’s employment will result in the forfeiture of: (a) any amounts potentially payable to Employee under multi-year incentive awards granted to Employee in 2014 and 2015 under the Kemper Corporation 2009 Performance Incentive Plan, in accordance with Section 6.4(a) of such plan and the agreements governing such awards to which Employee is a party; and (b) any outstanding Restricted Stock Unit awards and Stock Option and SAR awards under the Kemper Corporation 2011 Omnibus Equity Plan, in accordance with such plan and the termination provisions of the respective award agreements to which Employee is a party, subject to the post-termination exercise provisions in the applicable Stock Option and SAR agreements.

Upon return of the required documents and property listed below, Employer agrees to provide up to $15,000 for outplacement services for Employee through a professional outplacement provider, provided that Employee commences utilization of those services by May 1, 2016.

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3.      Unemployment Claims . Employer expressly agrees that the release language in Section 5 below shall not prevent Employee from applying for unemployment benefits to which Employee may be entitled under applicable law.
4.      Non-Solicitation of Employees, Confidentiality, Good Behavior and Return of Property .
(a) Employee Agrees that she shall not for a period of twelve (12) months immediately following the Termination Date, solicit, induce or entice any person then employed by Employer to leave the employ of Employer. This prohibition applies only to employees with whom Employee had Material Contact pursuant to Employee’s duties during the period of twelve (12) months immediately preceding the Termination Date and includes, without limitation, all officers of Kemper Corporation. For purposes of this Agreement, “Material Contact” means interaction between Employee and another employee of Employer: (i) with whom Employee actually dealt, or (ii) whose employment or dealings with Employer or services for Employer were handled, coordinated, managed, or supervised by Employee. If Employee breaches the terms of this Section 4(a), she will be liable for any attorneys’ fees incurred by Employer in seeking enforcement of this Section 4(a). Notwithstanding the foregoing sentence, Employer will also have the right to seek any other legal and equitable relief to which it might be entitled for any breach of this Agreement, including Section 4(a).
(b) Employee agrees not to disclose, communicate, use to the detriment of Employer or for Employee’s own benefit or the benefit of any other person, or misuse in any way any confidential information or trade secrets of Employer.
(c) Employee agrees to return to Employer all Employer credit cards, identification cards, access cards and keys to Employer’s properties or facilities that Employee may have in her possession. Employee shall return any and all Employer confidential files and all Employer confidential and proprietary information that Employee may have in her possession.
Employee shall return any and all of Employer’s property, including but not limited to, computer equipment, peripherals, printers, and company vehicles, other than the iPad she was previously issued.
Employer agrees that Employee may retain the phone number assigned to the cellular phone number which is assigned to the Employer. Employee will be responsible for taking all necessary steps to transfer such number to an account in her name and will be responsible for all costs of maintaining service for such phone number after the Termination Date and Employer agrees to reasonably cooperate with Employee in connection with such steps.

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5.      Consideration to Employer - Release of Claims and Agreement Not to Sue . Except as stated below, Employee hereby forever releases, discharges and holds harmless Employer and its respective parent company, subsidiaries, affiliates, predecessors, successors and assigns, and their officers, directors, shareholders, principals, employees, insurers, and agents from any claim or cause of action whatsoever which Employee either has or may have against Employer resulting from or arising out of or related to Employee’s employment by Employer, or the termination of that employment, including any claims or causes of action Employee has or may have pursuant to the Age Discrimination in Employment Act, 29 USC Section 621 et seq.; the Older Workers Benefit Protection Act of 1990; Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act of 1991, 42 USC Sec. 2000(e); the Americans with Disabilities Act, 42 USC Sec. 12101; the Rehabilitation Act of 1973, 29 USC Sec. 701; the Family and Medical Leave Act of 1993, 29 USC Sec. 2618; 775 Ill. Comp. Stat. Ann. 5/1-103, 5/2-102, 5/2-103, 5/2-104, and 56 Ill. Adm. Code 5210.110; Employer Retirement Income Security Act of 1974, 29 USC 1001 et seq. ; and any other law or regulation of any local, state or federal jurisdiction.
This release does not apply to any claims or rights that may arise after the date that Employee signs this Agreement, or relate to the consideration for this Agreement, vested rights under the Employer’s employee benefit plans as applicable on the date Employee signs this Agreement, or any claims that the controlling law clearly states may not be released by private agreement. Furthermore, this release does not waive any rights Employee might have to indemnification as a corporate officer pursuant to Kemper Corporation’s certificate of incorporation and bylaws, applicable benefit plan documents, or by applicable statutory or common law.
Nothing in this Agreement shall be construed to prohibit Employee from filing a charge with or participating in any investigation or proceeding conducted by the Equal Employment Opportunity Commission (“EEOC”), National Labor Relations Board (“NLRB”), or a comparable state or local agency, or participating in any investigation or proceeding conducted by such administrative agency. Notwithstanding the foregoing, Employee agrees to waive her right to recover monetary damages in any charge, complaint, or arbitration filed by Employee or by anyone else on her behalf, except as may be awarded by the Securities and Exchange Commission (“SEC”). On the date of this Agreement, Employee represents and warrants that Employee has no claims, complaints, charges, or other proceedings pending with any administrative agency, commission or other forum relating directly or indirectly to Employee’s employment with Employer, or if Employee does have such a charge pending, she understands that such a claim, complaint, or charge will not result in any monetary benefit to Employee due to acceptance of consideration for signing this release.
Other than an action for breach of this Agreement, Employee expressly acknowledges that if Employee files any claim or lawsuit, or causes or aids any claim or arbitration to be filed on Employee’s behalf, regarding any matter described in this Agreement, Employer may be entitled

4

to recover from Employee some or all money paid under this Agreement, plus attorneys’ fees and costs incurred in defending against such action, to the extent permitted by law.
6.      No Admission of Liability . Nothing in this Agreement shall be construed to be an admission of liability by Employer and its respective parent company, subsidiaries, affiliates, predecessors, successors and assigns, and their officers, directors, shareholders, principals, employees, insurers, and agents for any alleged violation of any of Employee’s statutory rights or any common law duty imposed upon Employer.
7.      Adequate Consideration . Employee agrees that the consideration provided for this Agreement is above and beyond any amounts already owed to Employee and is adequate consideration for all promises and releases contained in this Agreement.
8.      Non-waiver . The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach of the same or any other provision of this Agreement.
9.      Notices . Any notices required or permitted to be given under this Agreement shall be sufficient if in writing and personally delivered or sent by a recognized overnight courier service to Employee’s residence as last shown on Employer’s employment records, in the case of Employee, or to Kemper Corporate Services, Inc., Attn: Lisa M. King, Vice President, One East Wacker Drive, Suite 1000, Chicago, Illinois 60601, in the case of Employer.
10.      Successors and Assigns . Except as otherwise provided in specific provisions above, this Agreement shall be binding upon and inure to the benefit of Employee, Employee’s spouse, Employee’s heirs, executors, administrators, designated beneficiaries and upon anyone claiming under Employee or Employee’s spouse, and shall be binding upon and inure to the benefit of Employer and its successors and assigns. Employee warrants and represents that, except as provided herein, no right, claim, cause of action or demand, or any part thereof, which Employee may have arising out of or in any way related to Employee’s employment with Employer, has been or will be assigned, granted or transferred in any way to any other person, entity, firm or corporation, in any manner, including by subrogation or by operation of marital property rights.
11.      Severability . If a court or other body of competent jurisdiction should determine that any term or provision of this Agreement is invalid or unenforceable, such term or provision shall be reformed rather than voided, if possible, in accordance with the purposes stated in this Agreement and with applicable law, and all other terms and provisions of this Agreement shall be deemed valid and enforceable to the extent possible.
12.      Oral Agreements; Applicable Law . The parties acknowledge that there are no oral agreements or understandings that conflict with, modify, supplement or supersede the terms and

5

conditions of this Agreement. This Agreement shall be construed under the laws of the State of Illinois applicable to contracts entered into and to be performed in the State of Illinois.
13.      Representations and Warranties . By signing below, the Employee represents and warrants that Employee has been advised in writing to consult with an attorney before signing this Agreement, and Employee has had the opportunity to do so if desired. Employee acknowledges that this Agreement has been delivered to Employee on February 10, 2016 and understands that Employee has up to twenty-one (21) days following such date to sign and return this Agreement to Employer. Employee agrees that any changes made to this Agreement do not restart the running of the 21-day period.
The Employee further acknowledges and understands that some portions of the payments and/or benefits described in this Agreement, are the consideration to the Employee for waiving rights under the Age Discrimination in Employment Act (“ADEA”) referenced in Section 5 and for Employee’s obligations described in Section 4.
Finally, Employee understands that Employee has the right within seven (7) days of the signing of this Agreement to revoke Employee’s waiver of rights to claim damages under ADEA. If Employee does revoke that waiver within the seven (7) day period, the Agreement shall be null and void.
Any revocation must be in writing and delivered to Lisa M. King, Vice President, Kemper Corporate Services, Inc., One East Wacker Drive, Suite 1000, Chicago, IL 60601. Any such revocation must comply with the notice provisions of Section 9 and be delivered to Employer no later than the seventh day after execution of this Agreement.
14.      Expense Reimbursement . By no later than February 24, 2016, Employee agrees to submit an expense account form to Employer for reimbursement of reasonable business expense items incurred on behalf of Employer prior to the Termination Date for which Employer has not yet then paid. Upon receipt of such expense account form, together with such supporting documentation as Employer may reasonably require, Employer will pay Employee for business expense items so incurred within 30 days of Employee’s Termination Date.
15.      Employee Cooperation and Assistance . Employee agrees to cooperate fully with Employer in the defense or prosecution of any lawsuits, arbitrations, or any other types of proceedings, and in the preparation of any response to any examination or investigation by any government entity or agency, and with respect to any other claims or matters (all such lawsuits, arbitrations, proceedings, examinations, investigation, claims and matters being collectively referred to as “Proceedings”), arising out of or in any way related to the policies, practices, or conduct of Employer and its affiliates during the time Employee was employed by Employer, and shall testify fully and truthfully in connection therewith. In addition, Employee agrees that, upon

6

reasonable notice, Employee will participate in such informal interviews by counsel for Employer as may be reasonably necessary to ascertain Employee’s knowledge concerning the facts relating to any such Proceedings, and to cooperate with such counsel in providing testimony whether through deposition or affidavit in any such Proceeding.
Employee agrees to immediately notify Employer if she is served with legal process to compel her to disclose any information related to either her employment with Employer or information regarding one or more of its affiliates, unless prohibited by law. Employee further agrees to immediately notify Employer if she is contacted regarding any legal claim or legal matter related to her employment with Employer, unless prohibited by applicable law.

In all events, Employer will reimburse Employee for her reasonable travel, lodging and other out-of-pocket expenses associated with her compliance with this Section 15. Employer will make every reasonable effort to accommodate Employee’s personal and business schedules when requesting her assistance and cooperation.
16.    Indemnification and Right to Counsel. Employer agrees to indemnify, in accordance with its Amended and Restated Bylaws, Certificate of Incorporation and applicable Delaware law, Employee if she is or becomes a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including, without limitation, an action by or in the right of Employer) by reason of the fact that Employee was employed by Employer (and Employer may indemnify Employee by reason of the fact that she was an agent of Employer, or was serving at the request of Employer as a director, trustee, member, manager, officer, or agent of another limited liability company, corporation, partnership, joint venture, trust or other enterprise), against any liabilities, expenses (including reasonable attorneys’ fees and expenses and any other costs and expenses incurred in connection with defending such action, suit or proceeding), judgments, fines and amounts paid in settlement actually and reasonably incurred by Employee in connection with such action, suit or proceeding if not the result of willful misconduct, gross negligence or fraud, and Employee acted in good faith and in a manner she reasonably believed to be in or not opposed to the best interest of Employer, and, with respect to any criminal action or proceeding, had no reasonable cause to believe her conduct was unlawful.
Employee will promptly notify Employer of any threatened, pending or completed action, suit or proceeding against Employee which could reasonably be expected to give rise to a right by Employee to be indemnified under this Agreement. Employer shall not be liable to indemnify Employee under this Agreement for any amounts paid in settlement of any action, suit or proceeding without the prior written consent of Employer, which consent shall not be unreasonably withheld or delayed.

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Should a conflict of interest be found to exist between Employee and Employer, Employer will pay the reasonable cost of Employee’s independent legal representation. Employer and Employee shall make a good faith effort to agree on selection of independent counsel and if an agreement cannot be reached, then within 10 days Employer and Employee shall each designate a representative and such representatives shall, together, designate an umpire who will select the independent counsel, which selection shall be final and binding.
17.     Confidentiality and Non-Disparagement . The nature and terms of this Agreement are strictly confidential and they have not been and shall not be disclosed by Employee at any time to any person other than Employee’s lawyer or accountant, a governmental agency, or Employee’s immediate family without the prior written consent of an officer of the Company, except as necessary in any legal proceedings directly related to the provisions and terms of this Agreement, to prepare and file income tax forms, or as required by court order after reasonable notice to the Company.
Employee agrees not to make statements to clients, customers and suppliers of the Released Parties or to other members of the public that are in any way disparaging or negative towards the Released Parties or their products and services.
Employer agrees to instruct its Executive Leadership team to not make statements that are in any way disparaging toward Employee, including to any ratings agencies or analysts regarding Employee’s performance or termination.
18.      Exemption from § 409A of the Internal Revenue Code of 1986, as amended (the “Code”) . Other than payments pursuant to Paragraph 15, all payments due under this Agreement will be paid no later than March 31, 2016. It is the intent of the Parties that all such payments are to be considered to be short-term deferrals to which Code Section 409A is not applicable by reason of Treasury Regulation Section 1.409A-1(b)(4).

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Caution: This Agreement is a Release. Employer hereby advises Employee to read it and to consult with an attorney prior to signing it.
TO EVIDENCE THEIR AGREEMENT, the parties have executed this document as of the date last written below.
Denise I. Lynch                Kemper Corporate Services, Inc.

/s/ Denise I. Lynch                  /s/ C. Thomas Evans, Jr.        
C. Thomas Evans, Jr.
Secretary

Dated:     3-2-16                     Dated:     3-2-16                



9

ATTACHMENT A
Resignation
I, Denise I. Lynch, hereby resign, effective as of the close of business on February 10, 2016, as an officer, director and/or member of any benefit plan committee or trust of Kemper Corporation and each of its direct and indirect subsidiaries and other affiliates in which I hold any such positions.

                            


Dated:                     


10


ATTACHMENT B
Seven Day Right to Revocation
Acknowledgment Form
I, Denise I. Lynch, hereby acknowledge that Kemper Corporate Services, Inc. tendered a Separation Agreement offer which I voluntarily agreed to accept on___________, 2016 a date at least seven days prior to today’s date.
I certify that seven calendar days have elapsed since my voluntary acceptance of this above-referenced offer (i.e. seven days have elapsed since the above date), and that I have voluntarily chosen not to revoke my acceptance of the above-referenced Separation Agreement.
Signed this ___ day of ________________, 2016


                            
Denise I. Lynch

11
Exhibit 10.3

KEMPER CORPORATION
NON-QUALIFIED DEFERRED COMPENSATION PLAN
As Amended and Restated on March 16 , 2016



TABLE OF CONTENTS
     Page

ARTICLE I
DEFINITIONS
1

ARTICLE II
ELIGIBILITY
6

ARTICLE III
DEFERRALS
6

ARTICLE IV
FUNDING
10

ARTICLE V
INVESTMENT OF FUNDS, ACCOUNT MAINTENANCE AND VESTING
11

ARTICLE VI
PAYMENT OF BENEFITS
13

ARTICLE VII
PAYMENTS UPON DEATH
14

ARTICLE VIII
ADMINISTRATION OF THE PLAN
14

ARTICLE IX
AMENDMENT OR TERMINATION
15

ARTICLE X
GENERAL PROVISIONS
16



 
i
 


KEMPER CORPORATION
NON-QUALIFIED DEFERRED COMPENSATION PLAN
The Unitrin, Inc. Non-Qualified Deferred Compensation Plan was adopted effective January 1, 2002 and has been amended and restated as follows: (a) effective January 1, 2008 to comply with Code Section 409A (as hereafter defined); (b) effective January 1, 2009 to clarify the operation of the Plan and its compliance with Code Section 409A, (c) effective August 25, 2011 to reflect the change in the name of the Plan Sponsor to Kemper Corporation and (d) effective as of January 1, 2014 to allow distributions to be made upon a Participant’s death or Disability as set forth herein and to incorporate prior amendments to the Plan. The Plan is now being amended and restated to allow the period for making a deferral election with respect to performance-based compensation to be made after the date the performance period begins to the extent that Kemper Corporation decides, in its discretion, to extend such election period and such extension complies with Code Section 409A. In no event shall this amendment and restatement apply to any performance-based compensation for which the performance period began prior to January 1, 2016 or any Plan Election which had become irrevocable under Code Section 409A on or prior to the date this amendment and restatement is adopted.
The purpose of the Plan is to provide a benefit to directors who are not employees of Kemper Corporation and select executives of Kemper Corporation or one of its subsidiaries. Plan Participants are allowed the opportunity to elect to defer a portion of their Eligible Compensation (as defined in Section 1.15) to some future period. The Plan is intended to be an unfunded “top hat plan” exempt from certain provisions of ERISA.
ARTICLE I
DEFINITIONS
1.1      General . For purposes of the Plan, the following terms, when capitalized, will have the following meanings. The masculine pronoun wherever used herein will include the feminine gender, the singular number will include the plural, and the plural will include the singular, unless the context clearly indicates a different meaning.
1.2      “ Account ” means the aggregate of a Participant’s bookkeeping sub-accounts established pursuant to Section 5.1.
1.3      “ Administrative Committee ” means the Administrative Committee of the Kemper Corporation 401(k) Savings Plan.
1.4      “ Affiliated Company” or “Affiliate ” means any corporation, trade or business entity which is a member of a controlled group of corporations, trades or businesses of which the Company is also a member, as provided in Code Sections 414(b) or (c).
1.5      “ Beneficiary Designation Form ” means a written document (in printed or electronic form), the form of which the Company shall determine from time to time, on which a Participant shall have the right to designate a beneficiary.



1.6      “ Board ” means the Board of Directors of the Company.
1.7      “ Bonus Compensation ” means the annual formula and annual discretionary management bonuses earned in a given year and generally paid in the following year. Bonus Compensation does not include any other bonus including, but not limited to, a relocation bonus, a hiring bonus, a stay bonus, Multi-Year Incentive Compensation or other periodic bonuses.
1.8      “ Change of Control ” means Change of Control as defined in Section 4.3.
1.9      “ Code ” means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated thereunder.
1.10      “ Code Section 409A ” means Section 409A of the Code.
1.11      “ Committee ” means the Compensation Committee of the Board.
1.12      “ Company ” means Kemper Corporation, a Delaware corporation, or, to the extent provided in Section 10.9, any successor corporation or other entity resulting from a reorganization, merger or consolidation into or with the Company, or a transfer or sale of substantially all of the assets of the Company.
1.13      “ Director Fees ” means the cash fees Outside Directors earn.
1.14      “ Disability ” means that a Participant either
(a)      is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months and, with respect to an Employee Participant, is receiving income replacement benefits for a period of not less than three months under an accident and health plan (e.g. an Employer’s long term disability plan) covering employees of the Employee Participant’s Employer; or
(b)      has been determined to be totally disabled by the Social Security Administration or Railroad Retirement Board.
1.15      “ Eligible Compensation ” means Regular Base Salary, Bonus Compensation, Multi-Year Incentive Compensation or Director Fees that is paid by the Company or an Affiliate.
1.16      “ Eligible Employees ” means a select group of management employees of the Company or an Affiliate.
1.17      “ Employee Participant ” means with respect to any Plan Year, an Eligible Employee who has been designated in writing as a Participant pursuant to Section 2.1.
1.18      “ Employer ” means the Company and its Affiliates.

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1.19      “ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated thereunder.
1.20      “ 401(a)(17) Limit ” means the amount of compensation which may be considered by a plan sponsor for purposes of determining benefits under a qualified retirement plan. This amount is automatically adjusted annually by the Secretary of the Treasury for increases in the cost-of-living and such adjustment shall automatically be taken into account by the Plan.
1.21      “ Investment Preference Form ” means a written document (in printed or electronic form), the form of which the Company shall determine from time to time, on which a Participant shall communicate his or her investment preference.
1.22      “ Multi-Year Incentive Compensation ” means compensation based on the achievement of one or more performance goals measured over more than a one year period. Multi-Year Incentive Compensation does not include Bonus Compensation.
1.23      “ Outside Directors ” mean the directors of the Board who are not employees of the Company.
1.24      “ Outside Director Participant ” means with respect to any Plan Year, a Participant who is an Outside Director for that Plan Year.
1.25      “ Participation Date ” means the date on which an Eligible Employee or an Outside Director is eligible to participate in the Plan, as set forth in Section 2.2.
1.26      “ Participant ” means an Employee Participant or an Outside Director Participant.
1.27      “ Performance-Based Compensation ” means Bonus Compensation and Multi-Year Incentive Compensation the amount of which, or the entitlement to which, is contingent on the satisfaction of preestablished organizational or individual performance criteria relating to a performance period of at least 12 consecutive months. Organizational or individual performance criteria are considered preestablished if established in writing by not later than 90 days after the commencement of the period of service to which the criteria relates, provided that the outcome is substantially uncertain at the time the criteria are established. The determination of whether Compensation is Performance-Based Compensation shall be made in accordance with the Regulations, including the following:
(a)      Performance-Based Compensation does not include any amount or portion of any amount that will be paid either regardless of performance, or based upon a level of performance that is substantially certain to be met at the time the criteria is established. However, Compensation may be Performance-Based Compensation where the amount will be paid regardless of satisfaction of the performance criteria due to the Participant’s death, disability (as defined below), or a change in control event (as defined in Section 1.409A-3(i)(5)(i) of the Regulations), provided that a payment made under such circumstances without regard to the satisfaction of the performance criteria will not constitute Performance-Based Compensation. For purposes of this Section, a disability refers to any medically determinable physical or mental impairment resulting in the Participant’s inability

3    

to perform the duties of his or her position or any substantially similar position, where such impairment can be expected to result in death or can be expected to last for a continuous period of not less than six months.
(b)      Performance-Based Compensation may include payments based upon subjective performance criteria provided that:
(i)      The subjective performance criteria are bona fide and relate to the performance of the Participant, a group of service providers that includes the Participant, or a business unit for which the Participant provides services (which may include the entire organization); and
(ii)      The determination that any subjective performance criteria have been met is not made by the Participant or a family member of the Participant (as defined in Section 267(c)(4) of the Code applied as if the family of an individual includes the spouse of any member of the family), or a person under the effective control of the Participant or such a family member, and no amount of the compensation of the person making such determination is effectively controlled in whole or in part by the Participant or such a family member.
1.28      “ Plan ” means the Kemper Corporation Non-Qualified Deferred Compensation Plan.
1.29      “ Plan Administrator ” means the Committee.
1.30      “ Plan Election ” means the following: (a) for Employee Participants, an election to defer a part of such Participant’s Regular Base Salary, such Participant’s Bonus Compensation, or such Participant’s Multi-Year Incentive Compensation, all pursuant to Section 3.2, and (b) for Outside Director Participants, an election to defer Director Fees pursuant to Section 3.2. A Participant’s Plan Election shall also include an election by the Participant specifying the calendar year in which payments shall commence, the method of payment with respect to the payout of all future benefits attributable to deferrals for the Plan Year and whether the Participant elects to receive a lump sum distribution upon death or Disability prior to the calendar year in which payments would otherwise commence. A Participant may delay payment or change the form of payment by filing a new Plan Election, but only to the extent permitted by Section 6.4 of the Plan.
1.31      “ Plan Year ” means any calendar year during which the Plan is in effect.
1.32      “ Regular Base Salary ” means the annual scheduled base salary, excluding, without limitation, stock option income, severance pay, and income included in pay due to fringe benefits.
1.33      “ Regulations ” means the regulations, as amended from time to time, which are issued under Code Section 409A.
1.34      “ Separation from Service ” means the Participant’s termination from employment from the Employer, subject to the following and other provisions of the Regulations:

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(a)      The employment relationship is treated as continuing intact while the Participant is on military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six months, or if longer, so long as the individual retains a right to reemployment with the Employer under an applicable statute or by contract. A leave of absence constitutes a bona fide leave of absence only if there is a reasonable expectation that the Participant will return to perform services for the Employer. If the period of leave exceeds six months and the Participant does not retain a right to reemployment under an applicable statute or by contract, the employment relationship is deemed to terminate on the first day immediately following such six-month period.
(b)      In determining whether a Separation from Service has occurred, the following presumptions, which may be rebutted as provided in the Regulations, shall apply:
(i)      A Participant is presumed to have separated from service where the level of bona fide services performed decreases to a level equal to 20% or less of the average level of services performed by the Participant during the immediately preceding 36-month period.
(ii)      A Participant will be presumed not to have separated from service where the level of bona fide services performed continues at a level that is 50% or more of the average level of services performed by the Participant during the immediately preceding 36-month period.
No presumption applies to a decrease in the level of bona fide services performed to a level that is more than 20% but less than 50% of the average level of bona fide services performed during the immediately preceding 36-month period. If a Participant had not performed services for the Employer for 36 months, the full period that the Participant has performed services for the Employer shall be substituted for 36 months.
(c)      For purposes of this Section, the term “Employer” has the meaning set forth in Section 1.18 provided that the following shall apply in determining whether a person is an Affiliate as defined in Section 1.4:
(i)      In applying Code Sections 1563(a)(1), (2) and (3) for purposes of determining a controlled group of corporations under Code Section 414(b), the phrase “at least 50 percent” shall be used instead of “at least 80 percent” each place it appears in Code Sections 1563(a)(1), (2) and (3); and
(ii)      In applying Treas. Reg. Section 1.414(c)-2 for purposes of determining trades or businesses (whether or not incorporated) that are under common control for purposes of Code Section 414(c), “at least 50 percent” is used instead of “at least 80 percent” each place it appears in Treas. Reg. Section 1.414(c)-2.
(d)      In the event of the sale or other disposition of assets by the Company or an Affiliate (the “ Seller ”) to an unrelated service recipient (the “ Buyer ”), the Seller and the Buyer may specify whether a Separation from Service has occurred for a Participant who

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would otherwise experience a Separation from Service with the Seller, in accordance with the rules set forth in Section 1.409A-1(h)(4) of the Regulations.
1.35      “ Trust ” means a so-called “rabbi trust,” the assets of which shall remain, for all purposes, a part of the general unrestricted assets of the Company.
1.36      “ Valuation Date ” means each day that the New York Stock Exchange is open for business. The determination of the Valuation Date as of which changes in investment preferences under the Plan are effected shall be made in accordance with rules and procedures established by the Company.
ARTICLE II
ELIGIBILITY
2.1      Eligibility . The Board may, in its discretion, or an Affiliate may, in its discretion and subject to the approval of the Board, designate in writing any Eligible Employee as a Participant who is eligible to participate in the Plan. An Outside Director is automatically eligible to participate in the Plan.
2.2      Participation Date and Notice . An Eligible Employee designated as a Participant pursuant to Section 2.1 shall become a Participant as of the date determined by the Company. An Outside Director shall become a Participant as of the date he or she is elected a director of the Board. The date that an Eligible Employee or Outside Director is eligible to participate in the Plan shall be known as the Participation Date. The Company will provide the Participant with notice of the Participant’s Participation Date and the forms needed to make an election pursuant to Section 3.2 as soon as reasonably practicable after the Company is informed of a Participant’s Participation Date.
ARTICLE III
DEFERRALS
3.1      Deferral Amounts .
(a)      Participants may elect to defer Eligible Compensation subject to the limits described below. A separate election for Regular Base Salary, Bonus Compensation, Multi-Year Incentive Compensation and Director Fees must be made. Outside Director Participants may elect to defer up to 100% of their Director Fees. Subject to Section 3.1(b), Employee Participants may elect to defer up to (i) 60% of their Regular Base Salary, (ii) 85% of their Bonus Compensation, and (iii) for Multi-Year Incentive Compensation for which the first year of the performance period begins on or after January 1, 2013, 85% of their Multi-Year Incentive Compensation.
(b)      The amount that an Employee Participant may defer cannot be in excess of his or her Regular Base Salary, Bonus Compensation and Multi-Year Compensation, respectively, reduced by their “Applicable Taxes.” “Applicable Taxes” means the taxes on the Regular Base

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Salary, Bonus Compensation and Multi-Year Compensation, respectively, which a Participant elects to defer under the Plan and which are described in the following Regulations:
(i)      Treas. Reg. § 1.409A-3(j)(4)(vi), which allows an Employer to accelerate payment of Eligible Compensation deferred under the Plan to pay FICA taxes on such Eligible Compensation and income tax withholding related to such FICA taxes; and
(ii)      Treas. Reg. § 1.409A-3(j)(4)(xi), which allows an Employer to accelerate payment of Eligible Compensation deferred under the Plan to pay state, local or foreign taxes on such Eligible Compensation and income tax withholding related to such taxes.
3.2      Plan Election . The Company shall provide each Participant, upon becoming a Participant and thereafter annually, with a Plan Election to be filed by the Participant, in accordance with such procedures as may be established by the Company but subject to the following:
(a)      First Year of Eligibility . Upon first becoming a Participant, a Participant must file an election in such form as the Company may require if the Participant wishes to defer Eligible Compensation under the Plan for the calendar year in which he or she becomes a Participant. Such election must be filed within thirty (30) days following the Participant’s Participation Date, at which time the election shall become irrevocable, except with respect to any Performance-Based Compensation for which a later election is made under Section 3.2(c). The election under this Section shall apply only to Compensation that is paid on or after the first day of the first month after the date of such election. For Compensation that is earned based upon a specified performance period (such as an annual bonus), the election shall apply to the total amount of the Compensation for the performance period multiplied by the ratio of the number of days remaining in the performance period after the election over the total number of days in the performance period.
(b)      Annual Election . Except as otherwise provided in Section 3.2(a) or 3.2(c), a Participant desiring to participate in the Plan for a Plan Year must file with the Company a Plan Election not later than the close of the Participant’s taxable year next preceding the period of service for which the right to the compensation arises, at which time the election shall become irrevocable. Such Plan Election shall be effective on the first day of the Plan Year following the filing thereof.
(c)      Performance-Based Compensation . A Participant may elect to defer the receipt of any portion or all of any Performance-Based Compensation. A Participant must make an affirmative election, in such form as the Company may require, for each performance period for which the Participant wishes to defer any portion or all of his or her Performance-Based Compensation that is earned in such performance period. The election must be made on or before the earlier of (i) the date established by the Company or (ii) the date that is six months before the end of the performance period provided that the Participant performs services continuously from the later of the beginning of the performance period or the date the performance criteria are established through the date an election is made under this paragraph, and provided further that in no event may an election to defer Performance-Based Compensation be made after such compensation has become readily ascertainable. The date that the Company establishes for making an election with respect to Performance-Based Compensation does not need to be the same for each

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Participant and may be earlier than the latest date for making such election under Code Section 409A. For purposes of this paragraph, if the Performance-Based Compensation is a specified or calculable amount, the compensation is readily ascertainable if and when the amount is first substantially certain to be paid. If the Performance-Based Compensation is not a specified or calculable amount because, for example, the amount may vary based upon the level of performance, the compensation, or any portion of the compensation, is readily ascertainable when the amount is first both calculable and substantially certain to be paid. For this purpose, the Performance-Based Compensation is bifurcated between the portion that is readily ascertainable and the amount that is not readily ascertainable. Accordingly, in general any minimum amount that is both calculable and substantially certain to be paid shall be treated as readily ascertainable.
(d)      Except as provided in Section 3.2(c), in no event shall a Participant be permitted to defer Eligible Compensation for any period that has commenced prior to the date on which the Plan is effective or the date on which a Plan Election is signed by the Participant and accepted by the Company.
(e)      Upon receipt of a properly completed and executed Plan Election, the Company shall notify the payroll department of the Participant’s Employer to withhold that portion of the Participant’s Eligible Compensation specified in the agreement. All amounts shall be withheld ratably throughout the Plan Year except for any bonus or incentive amounts, which shall be withheld in a single lump sum. In no event shall the Participant be permitted to defer more than the amount specified by the Plan.
ARTICLE IV
FUNDING
4.1      Unsecured Obligation . Individual Participant deferrals of Eligible Compensation and the hypothetical investment earnings/losses thereon shall be reflected in book entries maintained by or on behalf of the Company, as set forth in Section 5.1. The existence of such book entries shall not create a trust of any kind, or a fiduciary relationship between the Company, any third party record keeper and the Participant, his or her designated beneficiary, or other beneficiaries provided for under the Plan. The bookkeeping entries represent an unsecured obligation of the Company to pay deferred Eligible Compensation and the investment earnings/losses thereon to a Participant at a future date.
4.2      Discretionary Rabbi Trust . If the Company so determines, in its sole discretion, payments to a Participant or his or her designated beneficiary or any other beneficiary hereunder may be made from assets held in a Trust. No person shall have any interest in such assets by virtue of the Plan. The Company’s obligations hereunder shall be an unfunded and unsecured promise to pay money in the future. Any Participant having a right to receive payments pursuant to the provisions of the Plan shall have no greater rights than any unsecured general creditor of the Company in the event of the Company’s insolvency or bankruptcy, and no person shall have nor acquire any legal or equitable right, claim or interest in or to any property or assets of the Company. In no event shall the assets accumulated in the Trust be construed as creating a funded plan under

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the applicable provisions of ERISA, or under the Code, or under the provisions of any other applicable statute or regulation.
4.3      Change in Control .
(a)      Upon a Change of Control the Company shall, as soon as possible, but in no event longer than 30 days following the Change of Control, make an irrevocable contribution to the Trust in an amount that is sufficient to pay each Participant or beneficiary the benefits to which such Participant(s) or their beneficiaries would be entitled pursuant to the terms of the Plan as of the date on which the Change of Control occurred. For purposes of the Plan “Change of Control” shall mean the occurrence of any of the following events:
(i)
any “Person” (defined below) is or becomes the “Beneficial Owner,” (defined below) directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its “Affiliate” (defined below)) representing 25% or more of the combined voting power of the Company’s then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (1) of subparagraph (iii) below; or
(ii)
the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 31, 2013, constituted the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of directors of the Company) whose appointment or election by the Board of Directors or nomination for election by the Company’s shareholders was approved or recommended by a vote of at least two-thirds of the directors still in office who either were directors on December 31, 2013 or whose appointment, election or nomination for election was previously so approved or recommended; or
(iii)
there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (1) a merger or consolidation which results in the directors of the Company immediately prior to such merger or consolidation continuing to constitute at least a majority of the board of directors of the surviving entity or any parent thereof, or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its

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Affiliate) representing 25% or more of the combined voting power of the Company’s then outstanding securities; or
(iv)
the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets, other than a sale or disposition by the Company of all or substantially all of the Company’s assets immediately following which the individuals who comprise the Board of Directors immediately prior thereto constitute at least a majority of the board of directors of the entity to which such assets are sold or disposed or any parent thereof.
(b)      As used in this Change of Control section:
(i)
“Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”);
(ii)
“Beneficial Owner” shall have the meaning set forth in Rule 13d-3 under the Exchange Act; and
(iii)
“Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified in Sections 13(d)(3) and 14(d)(2) thereof, except that such term shall not include (1) the Company or any entity, more than 50% of the voting securities of which are Beneficially Owned by the Company, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (3) an underwriter temporarily holding securities pursuant to an offering of such securities, (4) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company, (5) any individual, entity or group whose ownership of securities of the Company is reported on Schedule 13G pursuant to Rule 13d-1 promulgated under the Exchange Act (but only for so long as such ownership is so reported) or (6) Singleton Group LLC or any successor in interest to such entity.
ARTICLE V
INVESTMENT OF FUNDS, ACCOUNT MAINTENANCE AND VESTING
5.1      Record Keeper . The Company shall appoint a Plan record keeper which shall establish and maintain an individual bookkeeping Account on behalf of each Participant for purposes of determining each Participant’s benefits under the Plan. Separate sub-accounts shall be established

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for each Participant with respect to each year’s Plan Election and for which a different form of payment or payment start date has been elected.
5.2      Account Adjustments .
(c)      The Plan record keeper shall adjust each Participant’s Account for amounts representing:
(i)      Participant deferrals,
(ii)      Hypothetical investment earnings/losses,
(iii)      Expenses, and
(iv)      Distributions paid to the Participant or beneficiaries.
(d)      Each Participant electing to defer Eligible Compensation pursuant to the Plan shall also specify at the time the Plan Election is made, the hypothetical measure(s) of investment performance from among the choices made available from time to time to Plan participants by the Trust Administrative Committee of the Kemper Corporation 401(k) Savings Plan (the “Trust Administrative Committee”). If the Participant fails to specify the hypothetical measure of investment performance, the Trust Administrative Committee shall do so. The Participant’s bookkeeping account shall be deemed to be invested in the hypothetical investment selected by the Participant, or if none, in the default hypothetical investment preference selected by the Trust Administrative Committee. A Participant’s investment preference shall be communicated to the Company by completion and delivery to the Company of an Investment Preference Form in such form as the Company shall determine from time to time. Participants shall indicate their initial investment preferences by filing an Investment Preference Form with the Company prior to the date on which deferrals commence under the terms of the Participant’s Plan Election. Once elected, investment preferences shall be valid until revoked by filing a new Investment Preference Form. Participants shall have the opportunity to change their investment preferences with respect to (i) new deferrals, (ii) their entire existing balances or (iii) deferrals made for a specific Plan Year, in accordance with such procedures as may be established by the Company.
(e)      The Plan record keeper shall determine the value of all Accounts maintained under the terms of the Plan on each Valuation Date. The Plan record keeper shall provide each Participant with a statement of his or her individual bookkeeping Account reflecting adjustments to such Account during the period from the last statement date. Such statement shall be provided to Participants as soon as administratively feasible following the end of each calendar quarter.
ARTICLE VI
PAYMENT OF BENEFITS
6.1      Distributions . A Participant’s or beneficiary’s benefit payable under the Plan shall be determined by reference to the value of each bookkeeping sub-account balance at the time of distribution. Sub-accounts shall be maintained for each Plan Year’s deferrals. Benefit payments

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from the Plan shall be payable from the general assets of the Company which include any assets held in the Trust.
6.2      Timing of Payments . Subject to Section 6.4 through Section 6.10, each of a Participant’s subaccounts shall be paid or payment shall begin within 30 days following January 1 of the year elected by the Participant on the Participant’s applicable Plan Election. Except as set forth in Section 6.7 through Section 6.10, no Participant or beneficiary shall have any right to receive payment of his or her benefit under the Plan prior to the specific date elected on the applicable Plan Election.
6.3      Form of Payments . Each of a Participant’s subaccounts shall be paid as a lump sum or in installments as elected in the applicable Plan Election. A different form of payment, as to amount and timing, may be elected with respect to each year’s Plan Election. Except as otherwise provided in Section 6.4, once a Plan Election is made with respect to amounts deferred for a Plan Year, it cannot be altered and is irrevocable. A Participant’s account balance shall be distributed to the Participant or his or her beneficiary in the form of cash only. Notwithstanding the foregoing, an election made by a Participant prior to January 1, 2009 to change the specific date for payment and the form of payment for one or more of his or her subaccounts shall be recognized to the extent permitted by IRS Notice 2007-86 and administrative procedures adopted by the Company.
6.4      Subsequent Deferral . A Participant may elect to delay payment or change the form of payment of any of his or her sub-accounts if all of the following conditions are met with respect to such sub-account:
(a)      Such election shall not take effect until at least 12 months after the date on which the election is made;
(b)      Payment must be deferred for a period of not less than five years from the date such payment would otherwise have been paid, unless the election is related to a payment on account of Disability or death; and
(c)      Any election must be made not less than 12 months before the first day of the calendar year in which payment of such sub-account would otherwise be made or commence.
The right to a series of installment payments, as defined in the Regulations, shall be treated as a right to a single payment.
6.5      Acceleration Prohibited . Except as provided in Section 6.7 through 6.10, acceleration of the time of payment of any portion of the balance of a Participant’s Account is prohibited.
6.6      Payments in Violation of Federal Securities Laws . To the extent permitted by the Regulations, the Company may delay a benefit payment where the Company reasonably anticipates that the making of the payment will violate Federal securities laws or other applicable law. Such a benefit payment shall be made at the earliest date at which the Company reasonably anticipates that the making of the benefit payment will not cause such violation and, if the Participant had elected installment payments, the first payment to the Participant shall include the payments that

12    

the Participant would have received had payments begun as of the date such payments were scheduled to begin. Notwithstanding the foregoing, if a benefit payment to a Participant is delayed until the Participant’s Separation from Service, then the benefit payment shall not be made before the first day of the seventh month after the Participant’s Separation from Service or, if earlier, the date of death of the Participant.
6.7      Accelerated Payment Upon Death or Disability . A Participant may elect, on the applicable Plan Election or pursuant to Section 6.4, to have payment of a sub-account made in a single lump sum payment upon the Participant’s death or Disability before the calendar year otherwise selected by the Participant for payment of such sub-account. If a Participant makes such an election, payment shall be made in a single lump sum payment within 90 days of the Participant’s Disability or death, as applicable, and neither the Participant nor the Participant’s beneficiary, as applicable, shall have the right to designate the taxable year of the payment. This provision shall not apply in the event that payment is being made to the Participant in accordance with Section 6.10 or with respect to a sub-account for which payment has begun prior to the Participant’s death or Disability.
6.8      Accelerated Payment for Domestic Relations Orders . To the extent necessary to fulfill a domestic relations order (as defined in Code Section 414(p)(1)(B)) and as permitted by the Regulations, the Company, in its sole discretion, may accelerate the time or schedule of a benefit payment under the Plan to an individual other than the Participant, or a benefit payment under the Plan may be made to an individual other than the Participant.
6.9      Accelerated Payment for Failure to Comply with Code Section 409A . To the extent permitted by the Regulations, at any time the Plan fails to meet the requirements of Code Section 409A and the Regulations, the Company may accelerate the time or schedule of a payment, or a payment under the Plan may be made; provided, however, that such payment shall not exceed the amount required to be included in income as a result of the failure to comply with the requirements of Code Section 409A and the Regulations.
6.10      Small Benefits . If, upon the first day of the seventh month following a Participant’s Separation from Service (“Payment Date”), a Participant’s Account is less than or equal to the applicable dollar limit under Code Section 402(g)(1)(B) and results in the determination and liquidation of the entirety of the Participant’s interest under all agreements, methods, programs or other arrangements with respect to which deferrals of compensation are treated as having been deferred under a single nonqualified deferred compensation plan under Section 1.409A-1(c)(2) of the Regulations, the Company may pay such Account to the Participant or his or her beneficiary in a single lump sum, in lieu of any further benefit payments hereunder, on the Payment Date.
ARTICLE VII
PAYMENTS UPON DEATH
7.1      Payment to Beneficiary . Any benefit which a deceased Participant is entitled to receive under the Plan shall be paid to such Participant’s beneficiary. Such death benefit shall be paid in the form and at the time elected in accordance with the Participant’s Plan Elections.

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7.2      Designation of Beneficiary . A Participant shall have the right to designate a beneficiary on the Beneficiary Designation Form and to amend or revoke such designation at any time in writing. Such designation, amendment or revocation shall be effective only when filed with the Company. Any beneficiary designation, amendment or revocation shall apply to all past and present Plan Elections.
If no Beneficiary Designation Form is filed with the Company, or if the Beneficiary Designation Form is held invalid, or if no beneficiary survives the Participant and benefits remain payable following the Participant’s death, the Company shall direct that payment of benefits be made to the person or persons in the first category in which there is a survivor. The categories of successor beneficiaries, in order, are (a) the Participant’s spouse and (b) the Participant’s estate.
ARTICLE VIII
ADMINISTRATION OF THE PLAN
8.1      Plan Administration . The Plan Administrator is the Committee. The Committee has complete authority to interpret and administer the Plan. The Committee’s responsibilities and obligations may be delegated as deemed necessary by the Committee from time to time. The Committee may establish administrative practices as necessary for the establishment and ongoing maintenance of the Plan. The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. The decisions made by and the actions taken by the Plan Administrator in the administration and interpretation of the Plan shall be final and conclusive for all persons. If, after reading the Plan, Participants have questions about the Plan, such questions should be directed to the designated contact at the Company.
8.2      Claims .
Any Participant or beneficiary who believes that there was an error in the calculation of his or her account balance or in the payment of benefits under the Plan or who desires to enforce his or her rights under the terms of the Plan or clarify his or her rights to future benefits under the terms of the Plan (referred to in this Section as a “claim” or “claims”) shall file a claim with the Plan Administrator. The claim must be filed, signed and dated within 90 days of the date on which the claimant learned of the facts from which such claim arises. The claim must be sent by certified mail or presented in person to the Plan Administrator.
The Plan Administrator, acting through the Company, shall respond in writing to the claimant within a reasonable period of time but not later than 90 days after receipt of the claim unless special circumstances require an extension of time for processing. If such extension of time is required, the Plan Administrator, acting through the Company, shall furnish written notice of the extension to the claimant prior to the termination of the initial 90 day period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator, acting through the Company, expects to render a final decision. In no event shall such extension exceed a period of 90 days from the end of the initial period. If the Plan Administrator,

14    

acting through the Company, does not issue a determination on the claim within the required time period, such claim shall be deemed denied.
8.3      Appeals .
Any claimant not satisfied with the Plan Administrator’s decision of a claim shall have the right to appeal to the Plan Administrator. The appeal must be signed and dated by the claimant and include a copy of the claim submitted to the Plan Administrator as well as a copy of the Plan Administrator’s decision. The appeal should explain why the claimant does not agree with the Plan Administrator’s decision. The appeal must be filed within 60 days of the receipt of the Plan Administrator’s decision. The appeal must be sent by certified mail or presented in person to the Plan Administrator.
The Plan Administrator shall promptly advise the claimant of its decision on the claimant’s appeal. Such decision shall be written in layman’s terms, shall include specific reasons for the decision and shall contain specific references to pertinent Plan provisions upon which the decision is based. The decision on appeal shall be made no later than 60 days after the Plan Administrator’s receipt of the appeal, unless special circumstances require an extension of the time for processing. If such an extension of time is required, the Plan Administrator shall furnish written notice of the extension to the claimant prior to the termination of the 60 day period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render a final decision. If an extension of time is required, a decision shall be rendered as soon as possible, but not later than 120 days following receipt of the appeal. If the Plan Administrator, acting through the Company, does not issue a decision on appeal within the required time period, such appeal shall be deemed denied.
The decision on appeal shall be final and conclusive. A claimant may not bring a lawsuit on a claim under the Plan until he or she has exhausted the internal administrative claim process established under Sections 8.2 and 8.3. No action at law or in equity to recover under the Plan shall be commenced later than one year from the date a determination is made on the request for review or the expiration of the appeal decision period if no determination is issued.
ARTICLE IX
AMENDMENT OR TERMINATION
9.1      Amendment or Termination . The Company intends the Plan to be permanent but reserves the right, subject to Section 9.2, to amend or terminate the Plan when, in the sole opinion of the Company, such amendment or termination is advisable. However, no amendment shall deprive a Participant or beneficiary of any of the benefits which he or she has accrued under the Plan or otherwise adversely affect the Participant’s Account with respect to amounts credited thereto prior to the date such amendment is made. The Administrative Committee of the Kemper Corporation 401(k) Savings Plan (the “Administrative Committee”) shall have the authority, on behalf of the Company, to amend the Plan in any manner permitted by Article IX of the Plan as the Administrative Committee considers desirable, appropriate or necessary, provided that no such amendments, either individually or in the aggregate, have a material adverse financial impact on

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the Company and the Employers. The Board reserves the authority to make any other amendments to the Plan, including, but not limited to, amendments that the Administrative Committee deems desirable, appropriate or necessary which would have a material adverse financial impact on the Company and the Employers.
9.2      Effect of Amendment or Termination . No amendment or termination of the Plan shall, without the express written consent of the affected current or former Participant or beneficiary, reduce or alter any benefit entitlement of such Participant or beneficiary. Upon Plan termination, no further deferrals shall be made. In such event, the Participant or his or her beneficiary, as the case may be, shall be entitled to receive any benefit attributable to the deferrals accrued as of the day preceding the effective date of termination, plus hypothetical investment earnings and less hypothetical investment losses, taxes and expenses chargeable to the Participant’s Account up to the benefit distribution date. The Plan Administrator shall make distributions of the Participant’s benefit (a) in accordance with the Participant elections then in effect, or (b) if permitted by the Regulations and elected by the Company, in a single lump sum payment that is paid at such time as is permitted by Section 1.409A-3(j)(4)(ix) of the Regulations.
ARTICLE X
GENERAL PROVISIONS
10.1      Taxes . The Company shall have the right to (a) require any Participant or beneficiary to pay the Company the amount of any taxes which the Company may be required to withhold with respect to any benefits earned under, or distributions from, the Plan or (b) deduct from all amounts paid the amount of any taxes which the Company may be required to withhold with respect to any such distributions.
10.2      Entire Agreement . The Plan document along with the Plan Election, Investment Preference Form, Beneficiary Designation Form and other administration forms required of Participants, and made known to them by the Company, shall constitute the entire agreement or contract between the Company and the Participant regarding the Plan. No oral statement regarding the Plan may be relied upon by the Participant or any other person claiming through or under the Participant.
10.3      Construction . Any mention of “Articles,” “Sections” and subsections thereof, unless stated specifically to the contrary, refers to Articles, Sections or subsections in the Plan. Headings of Articles, Sections and subsections are for convenient reference. The headings are not part of the Plan and are not to be considered in its construction. All references to statutory sections shall include the section as amended from time to time.
10.4      Employment Rights . Neither the establishment of the Plan nor any modification thereof, nor the creation of any trust or account, nor the payment of any benefits, shall be construed as conferring upon a Participant the right to continue to be employed by the Company in his or her present capacity, or in any capacity, or the right to continue to serve as an Outside Director. The Plan relates to the payment of deferred compensation as provided herein, and is not intended to be an employment contract.

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10.5      Benefit Transfers . Neither the Participant nor his or her designated or other beneficiary under the Plan shall have any right to transfer, assign, anticipate, hypothecate or otherwise encumber all or any part of the amounts payable under the Plan, except as provided in Section 6.8. No such amounts shall be subject to seizure by any creditor of any such Participant or beneficiary, by a proceeding at law or in equity, nor shall any such amounts be transferable by operation of law in the event of bankruptcy, insolvency or death of the Participant, his or her designated beneficiary or any other beneficiary hereunder. Any attempted assignment or transfer in contravention of this provision shall be void.
10.6      Governing Law . Construction, validity and administration of the Plan shall be governed by applicable Federal law and the laws of the State of Illinois.
10.7      Inurement . The Plan shall be binding upon and inure to the benefit of the Company and its successors and assigns, and the Participant, his or her successors, heirs, executors, administrators and beneficiaries.
10.8      Notices . Any notice (other than pursuant to enrollment materials) required or permitted to be given pursuant to the Plan shall be in writing, and shall be signed by the person giving the notice. If such notice is mailed, it shall be sent by United States first class mail, postage prepaid, addressed to such person’s last known address as shown on the records of the Company. The date of such mailing shall be deemed to be the date of notice, but the notice shall not be effective until actually received. The Company or the Participant may change the address to which notice is sent by giving notice of such change in the manner above.
10.9      Corporate Successor . The Plan shall not be automatically terminated by a Change of Control event, but the Plan shall be continued after such Change of Control event only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan. In the event that the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate subject to the provisions of Section 9.2.
10.10      Unclaimed Benefit . Each Participant shall keep the Company informed of his or her current address and the current address of his or her beneficiary. The Company shall not be obligated to search for the whereabouts of any person. The Company is authorized to adopt procedures regarding unclaimed benefits that provide for the irrevocable forfeiture of a benefit if the Company is unable to locate the Participant, or if the Participant is deceased, his or her beneficiary. Such procedures shall be consistent with the Regulations and any other guidance issued by the Internal Revenue Service.
10.11      Limitations on Liability . Notwithstanding any of the preceding provisions of the Plan, neither the Company nor any individual acting as an employee or agent of the Company shall be liable to any Participant, former Participant, beneficiary or any other person for any claim, loss, liability or expense incurred in connection with the Plan.
10.12      No Guaranty of Benefits . Nothing contained in the Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company will be sufficient to pay any benefit hereunder.

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10.13      409A Compliance . The Plan is intended to be a nonqualified deferred compensation plan that complies with the provisions of Code Section 409A and the Regulations, and shall be interpreted and operated consistent with such intent. If any ambiguity exists in the terms of the Plan, it shall be interpreted to be consistent with this purpose.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, a duly appointed member of the Administrative Committee has executed the Plan on this 16 day of March, 2016.
KEMPER CORPORATION
By: Lisa King    
Its: Vice President


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Exhibit 31.1
CERTIFICATIONS
I, Joseph P. Lacher, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kemper Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 

Date: May 5, 2016
 
 
/S/    JOSEPH P. LACHER, JR.
 
Joseph P. Lacher, Jr.
 
President and Chief Executive Officer
 




Exhibit 31.2
CERTIFICATIONS
I, Frank J. Sodaro, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kemper Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 

Date: May 5, 2016
 
 
/S/    FRANK J. SODARO
 
Frank J. Sodaro
 
Senior Vice President and Chief Financial Officer
 




Exhibit 32.1
Certification of CEO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Kemper Corporation (the “Company”) for the quarterly period ended March 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Joseph P. Lacher, Jr., as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
 
 
 
 
/S/    JOSEPH P. LACHER, JR.
 
Name:
 
Joseph P. Lacher, Jr.
 
Title:
 
President and Chief Executive Officer
 
Date:
 
May 5, 2016
 




Exhibit 32.2
Certification of CFO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Kemper Corporation (the “Company”) for the quarterly period ended March 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Frank J. Sodaro, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
 
 
 
 
/S/    FRANK J. SODARO
 
Name:
 
Frank J. Sodaro
 
Title:
 
Senior Vice President and Chief Financial Officer
 
Date:
 
May 5, 2016