Note 1 - Basis of Presentation

The Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (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.

As discussed below, the Company adopted Accounting Standards Update (“ASU”) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, on January 1, 2012 and retrospectively adjusted its financial statements for prior periods for the impact of the adoption. On January 1, 2012, the Company also implemented a new model for allocating capital and net investment income to its business segments. Accordingly, the Company has also reclassified certain amounts in its segment results in the retrospectively adjusted financial statements to conform to the current presentation. The Company accounts for Fireside Auto Finance, Inc. (“Fireside”), formerly known as Fireside Bank, and Kemper’s former Unitrin Business Insurance operations as discontinued operations. See Note 2, “Discontinued Operations,” to the Condensed Consolidated Financial Statements.

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 Kemper’s Annual Report on Form 10-K, filed with the SEC for the year ended December 31, 2011 (the “2011 Annual Report”).

Accounting Standards Not Yet Adopted

The Financial Accounting Standards Board (“FASB”) issues ASUs to amend the authoritative literature in the FASB Accounting Standards Codification (“ASC”). There have been no ASUs issued in 2012 that amend the original text of ASC.

Adoption of New Accounting Standards

In October 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. The standard is effective for interim and annual reporting periods beginning after December 15, 2011. The provisions of the new standard can be applied either prospectively or retrospectively. The standard amends ASC Topic 944, Financial Services—Insurance, and modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. The Company adopted the standard on January 1, 2012 and applied its provisions retrospectively. The adoption of the standard reduced consolidated shareholders’ equity by $99.5 million on January 1, 2012. The Company’s financial statements have been retrospectively adjusted as if ASU 2010-26 had been adopted prior to all periods presented.

Note 1 - Basis of Presentation (continued)

The following line items presented in the Condensed Consolidated Balance Sheet at March 31, 2012 were affected by the adoption of the new accounting standard:



(Dollars in Millions)	As Computed without Change in Accounting		As Reported with Change in Accounting		Effect of Change
Impact on Assets:
Deferred Policy Acquisition Costs	$	455.8	$	297.9	$	(157.9	)
Total Assets	8,128.3		7,970.4		(157.9		)
Impact on Liabilities and Shareholders’ Equity:
Liabilities for Income Taxes	$	74.4	$	18.2	$	(56.2	)
Total Liabilities	5,894.8		5,838.6		(56.2		)
Retained Earnings	1,227.9		1,126.2		(101.7		)
Total Shareholders’ Equity	2,233.5		2,131.8		(101.7		)
Total Liabilities and Shareholders’ Equity	8,128.3		7,970.4		(157.9		)

The following line items presented in the Condensed Consolidated Balance Sheet at December 31, 2011 were affected by the adoption of the new accounting standard:



(Dollars in Millions)	As Originally Reported		As Adjusted		Effect of Change
Impact on Assets:
Deferred Policy Acquisition Costs	$	448.5	$	294.0	$	(154.5	)
Current and Deferred Income Taxes	3.1		6.4		3.3
Total Assets	8,085.9		7,934.7		(151.2		)
Impact on Liabilities and Shareholders’ Equity:
Liabilities for Income Taxes	$	57.9	$	6.2	$	(51.7	)
Total Liabilities	5,869.8		5,818.1		(51.7		)
Retained Earnings	1,208.2		1,108.7		(99.5		)
Total Shareholders’ Equity	2,216.1		2,116.6		(99.5		)
Total Liabilities and Shareholders’ Equity	8,085.9		7,934.7		(151.2		)

Note 1 - Basis of Presentation (continued)

The impact of adoption of the new accounting standard on the presentation of the results of operations in the Condensed Consolidated Statements of Income for the three months ended March 31, 2012 and 2011 is presented below:



	Three Months Ended March 31, 2012
(Dollars in Millions, Except Per Share Amounts)	As Computed without Change in Accounting			As Reported with Change in Accounting			Effect of Change
Total Revenues	$	611.2		$	611.2		$	—
Expenses:
Policyholders’ Benefits and Incurred Losses and Loss Adjustment Expenses	376.6			376.6			—
Insurance Expenses	159.0			162.4			3.4
Interest and Other Expenses	21.8			21.8			—
Total Expenses	557.4			560.8			3.4
Income from Continuing Operations before Income Taxes	53.8			50.4			(3.4		)
Income Tax Expense	(15.3		)	(14.1		)	1.2
Income from Continuing Operations	38.5			36.3			(2.2		)
Income from Discontinued Operations	7.3			7.3			—
Net Income	$	45.8		$	43.6		$	(2.2	)
Income from Continuing Operations per Unrestricted Share:
Basic	$	0.64		$	0.61		$	(0.03	)
Diluted	$	0.64		$	0.60		$	(0.04	)
Net Income Per Unrestricted Share:
Basic	$	0.76		$	0.73		$	(0.03	)
Diluted	$	0.76		$	0.72		$	(0.04	)



	Three Months Ended March 31, 2011
(Dollars in Millions, Except Per Share Amounts)	As Originally Reported			As Adjusted			Effect of Change
Total Revenues	$	641.2		$	641.2		$	—
Expenses:
Policyholders’ Benefits and Incurred Losses and Loss Adjustment Expenses	392.3			392.3			—
Insurance Expenses	161.9			166.1			4.2
Interest and Other Expenses	19.7			19.7			—
Total Expenses	573.9			578.1			4.2
Income from Continuing Operations before Income Taxes	67.3			63.1			(4.2		)
Income Tax Expense	(19.7		)	(18.1		)	1.6
Income from Continuing Operations	47.6			45.0			(2.6		)
Income from Discontinued Operations	6.5			6.5			—
Net Income	$	54.1		$	51.5		$	(2.6	)
Income from Continuing Operations per Unrestricted Share:
Basic	$	0.78		$	0.74		$	(0.04	)
Diluted	$	0.78		$	0.73		$	(0.05	)
Net Income Per Unrestricted Share:
Basic	$	0.89		$	0.85		$	(0.04	)
Diluted	$	0.89		$	0.84		$	(0.05	)

Note 1 - Basis of Presentation (continued)

The following line items presented in the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011 were affected by the adoption of the new accounting standard:



	Three Months Ended March 31, 2012
(Dollars in Millions)	As Computed without Change in Accounting		As Reported with Change in Accounting		Effect of Change
Net Income	$	45.8	$	43.6	$	(2.2	)
Total Comprehensive Income	49.9		47.7		(2.2		)



	Three Months Ended March 31, 2011
(Dollars in Millions)	As Originally Reported		As Adjusted		Effect of Change
Net Income	$	54.1	$	51.5	$	(2.6	)
Total Comprehensive Income	38.3		35.7		(2.6		)

The following line items presented in the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 were affected by the adoption of the new accounting standard:



	Three Months Ended March 31, 2012
(Dollars in Millions)	As Computed without Change in Accounting			As Reported with Change in Accounting			Effect of Change
Impact on Operating Activities:
Net Income	$	45.8		$	43.6		$	(2.2	)
Increase in Deferred Policy Acquisition Costs	(7.3		)	(3.9		)	3.4
Change in Income Taxes	17.4			16.2			(1.2		)



	Three Months Ended March 31, 2011
(Dollars in Millions)	As Originally Reported			As Adjusted			Effect of Change
Impact on Operating Activities:
Net Income	$	54.1		$	51.5		$	(2.6	)
Increase in Deferred Policy Acquisition Costs	(7.7		)	(3.5		)	4.2
Change in Income Taxes	39.5			37.9			(1.6		)

Line items presented in the Investing Activities and Financing Activities sections of the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 were unaffected by the adoption of the new accounting standard.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements. The standard is effective for the first interim or annual period beginning on or after December 15, 2011. The new standard amends the existing fair value definition and enhances disclosure requirements. The Company adopted the standard with these financial statements and, except for the additional disclosure requirements, the initial application of the standard did not have an impact on the Company.

Note 1 - Basis of Presentation (continued)

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment. The standard is effective for the first interim or annual period beginning on or after December 15, 2011. The standard amends ASC Topic 350, Intangibles—Goodwill and Other, and gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company adopted the standard with these financial statements and the initial application of the standard did not have an impact on the Company.

In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The standard deferred certain paragraphs in ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, related to the presentation of reclassification adjustments but also required companies to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The Company adopted the standard with these financial statements. Other than the inclusion of the Condensed Consolidated Statement of Comprehensive Income, the initial application of the standard did not have an impact on the Company.