Diana Hickert - Hill - VP, IR & Corporate Identity Don Southwell - Chairman, President & CEO Jim Schulte - Property and Casualty Group Executive Dennis Vigneau - SVP & CFO

Paul Newsome - Sandler O'Neill Adam Klauber - William Blair Steven Schwartz - Raymond James & Associates

Welcome to Kemper’s Second Quarter 2012 Earnings Conference Call. My name is Karen and I will be your coordinator today. (Operator Instructions). I would now like to introduce your host for today’s conference, Ms. Diana Hickert-Hill, VP, IR & Corporate Identity. Ms. Hickert-Hill you may begin. Diana Hickert-Hill: Thank you Karen. Good morning, everyone and thank you for joining us. After the markets closed yesterday, we filed our Form 10-Q with the SEC and issued our press release and financial supplement. You can find these documents on the Investors section of our website kemper.com. We would also like to mention that in our financial supplement this quarter we added an additional page of disclosures related to our catastrophe frequency loss and severity performance. you can find this information on page 11. This morning you will hear from three of our business executive, starting with Don Southwell, Kemper's Chairman, President and Chief Executive Officer, Jim Schulte, Kemper’s Property and Casualty Group Executive and finally Dennis Vigneau, Kemper's Senior Vice President and Chief Financial Officer. We will make a few opening remarks to provide some context around our second quarter results. We will then open up the call for our question-and-answer session. Please note that our discussion today may contain forward-looking statements. Our actual results may differ materially from these statements. Please refer to our Form 10-K filed with the SEC on February 17, 2012, as well as our first quarter 2012 Form 10-Q and earnings release for financial information on potential risks associated with relying on forward-looking statement. This morning's discussion also includes non-GAAP financial measures that we believe, may be meaningful to investors. In our 10-Q supplement and earnings release, non-GAAP financial measures have been reconciled to GAAP where required in accordance with SEC rules. And now I will turn the call to Don Southwell.

Thank you Diana, as you heard in the introductions I have asked Jim Schulte to join the call to provide details on our property and casualty business. So I will confine my remarks to the following three topics, first our recent decision about the direct business, second our life, health and investment performance and third our progress on capital. Starting with Kemper Direct, we recently announced that we are reviewing strategic options for the Direct business and that we have seized direct marketing activities. Overtime we had undertaken several significant actions to improve profitability in this segment. We were intentionally shrinking the business until loss ratios and acquisition fundamentals improved but we were not satisfied with the rate of progress. Given the reality we were not getting an appropriate return on capital we decided it was time to take more significant action. We have stopped direct marketing activities; we are evaluating all of our options for Kemper Direct. Since our announcement we have received a number of inquiries which we are actively exploring. Turning now to our business performance, overall we are benefiting from the diversity of our portfolio of companies, the life and health business is once again delivered steady top-lines and good profits. This along with our strong portfolio yield has helped us set losses in P&C. In the life and health segment the top-line held steady despite the discontinuation of sales of our dwelling and hospitalization products. We also delivered strong bottom-line performance and have taken price increases on our life insurance to help offset the difficult interest rate environment. Our Kemper home service company’s flagship entity, United States Insurance Company of America was recognized as one of the top 50 performing life insurance companies by the Ward Group, a leading provider of benchmarking and best practice services for the insurance industry. This was the second consecutive year that our life business was recognized. On the supplemental health side, I am pleased with our reserved national team's performance as it continues its mix shift to products less affected by National Healthcare Reform. The investment portfolio delivered a solid performance as we navigate this low interest rate environment. While returns on our equity method investments were lower than last year’s superior results they were within our range of expectations. Despite the inherent volatility we like the expected life time performance of these assets. As to capital we are in a strong position, we continue to be disciplined as we allocate capital across our four priorities which include funding profitable organic growth, considering acquisitions that have a clear fit and make our existing businesses stronger. Maintaining our competitive dividend and repurchasing shares. On this fourth point, we have repurchased just over $50 million of stock year-to-date through July which is good progress on our plan to repurchase up to 100 million in 2012. I want to be very clear about my views of the quarter. In life and health, investments and capital management we delivered solid results. On the P&C side results were disappointing, our priorities for P&C are the following. Improve margins before growth, increased home owners profitability, achieve overall rate adequacy and continue to leverage our shared services to maximize operational effectiveness. And now I will turn the call over to Jim to provide color on the quarter’s results and explain how his team is addressing these priorities.

Thank you Don. Kemper’s second quarter P&C results fell short of expectations in two primary areas. First, although cat losses declined significantly over the last year losses in the quarter and year-to-date are well above historical averages. On a reported basis the home owners combined ratio was a 135 and a 119 for the current quarter and year-to-date respectively. Second the P&C groups underlying combined ratio of private passenger auto deteriorated 3 percentage points over last year resulting in an overall of a 106% for the quarter. Severity is up in both liability lines and to a lesser degree in physical damage as well some business units are experienced higher claims frequency and physical damage coverage’s. I will provide some prospectus on what we are doing to improve the profits across the group. I will start with an overview of the entire P&C area. Second quarter cat losses were significant for the industry as a whole and we were not immune to that, while cat losses were less than last year’s record levels there is still above our expectations, so we are continuing to take actions to improve profits. Overall while we are not ready to call it a hard market we continued to see signs of improving market environmental conditions in some states in both personal and commercial lines. Turning to Direct, I want to reiterate that we have seized direct marketing activities. We continue to take actions at the same time to improve underlying performance. I will give you an overview of where we stand in Michigan, New York and Florida. We have exited direct auto sales in Michigan and are in the process of now renewing the book of business. We are migrating the New York book to a new platform and we expect to achieve significant rate increases over the next two to three years and finally we decrease the Florida book 37% to $19 million enforce over the last 12 months. On the remaining states we continue to take actions in-line with our indications, overall our current plans project entire direct business to make profit in 2013. I will turn now to our largest P&C segment Kemper Preferred. Like others in the industry we experienced high level of cat losses in the second quarter, although losses were below record levels from last year they are still way above our expectations for the quarter. We are taking a number of steps to improve our results on home or taking significant rate action in most states, increasing deductibles especially in states with tornado and hail exposure and then proving the overall accuracy of our pricing. On auto we have accelerated our current increases and zeroing on any problem business. Preferred business has several ongoing initiatives aimed at increasing HNC engagement and raising customer retention ratios and continuing to increase the mix of both new and renewal target market customers as of the second quarter the target market now represents over a half of our enforce book. over the near term we are addressing the uptick in under relying loss ratio was to achieve pricing targets, in order to improve returns we are taking many actions including addressing distribution relationships, having subpar loss reform trends to develop improvement plans or take other corrective actions. Continuing efforts we are also continuing efforts to reduce the amount in mix of auto line auto business particular in non-target market customers. The target market business has to be more upscale business which has better loss ratios and retention uphold and finally we are reviewing performance metrics and capital allocation plans particularly in home owners. I will note that some of these may result in fluctuations, some of the actions may result in fluctuations in customer retention ratios or earned premiums but ultimately deliver higher profit margins and return to shareholders. We expect returns in the auto line to improve faster and in home owner. Lastly provide an update on the comprehensive rate actions we have in the pipeline to improve profit. On the home owners we continue to file for double digit rate increases in many of the states have already approved them. By the end of 2012 we are expect to achieve country-wide rate increase of 10% to 11% the majority of which will earn during 2013. These 2.5 points above the original plan and we will continue to needed rate actions and if those actions don’t give us adequate returns we will reduce our overall exposures or targeted returns cannot be achieved. On the auto book, we are targeting 7 to 8 points of filed rate on a countrywide basis by the end of 2012, the bulk of which we will earn in next year. This is also two points above our original plan for the year and is largely targeted at the severity trend we see in liability. While these actions will take some time to yield the full benefits they are important steps for our long term business model. As we shift our business mix we are seeing better underlying performance of target market policies, stepping back although we are pleased to see the positive results in the target market mix, new business and policy retention metrics over the last few quarters I want to reiterate Don’s earlier comment. Our primary focus is to improve margins across the product lines and secondary to grow their business. Turning now to Kemper Specialty, our non-standard segment also saw challenges in the quarter particularly in the private passenger auto line. You saw the underlying combined ratio will increase by over 5 point primary drivers include physical damage frequency and higher expenses. The business team is responding on multiple fronts to get ahead of those trends and restore profit including the following. The 2012 countrywide rate action target is increased from 60% to 10% and the timing of these rate actions have been accelerated. We are possible we are restricting new business growth in renewals and lower volume states and customer segments having higher frequency until adequate pricing is achieved or other corrective actions are in place to achieve targeted returns. In California, the business is largest state we had our latest rate increase approved and a new personal auto class slated to be filed later in the third quarter with a targeted implementation date early in 2013 and finally we have several ongoing HNC engagement and customer segmentation initiatives. We are also taking underwriting and marketing actions to improve their results over the coming quarters, the commercial side on the other hand had another solid quarter and continues to grow premium. Turning now to Kemper Services Group, this group supports our P&C businesses for such areas as information, technology, HR, claims and legal initiative, the loss is take advantage of scale we have across the business. Accomplishments to-date include the integration of most aspects of the claims process and ITA effort along with fully consolidated accounting reserving and HR persons (ph). Somewhat we are facing our challenges head-on, we are taking decisive actions in Direct and we are addressing our issues and preferred and specialty. We are committed to improving profit of these lines and I feel good about the plans we have in place. With that I will turn it over to Denise about the financials.

Thanks Jim and good morning everyone. As you have heard the second quarter results were below our expectations in two areas, catastrophe losses in the home owners' book were well above historical averages and elevated, underlying combined ratios were experienced in the P&C group. I will go into details by business on both of these topics as well as other performance drivers in just a few minutes but first let’s walk through Kemper’s consolidated revenues and earnings. Reported revenues for Kemper were $609 million in the second quarter flat with last quarter and 6% lower than the prior year. Earned premiums were 529 million in the quarter down slightly from last year largely from actions taken in Direct. Consolidated net investment income for the company was $75 million this quarter and included 1 million from equity method investments. Last year’s net investment income was 83 million and included 11 million from equity method investments and exceptionally strong quarter. As a reminder this asset class inherently has a less predictable earnings pattern but they also have historically delivered life time returns well above other asset classes and provide important diversification benefits for the overall portfolio. Aside from the 10 million change year-over-year I mentioned net investment income grew 2 million or 3% due to higher average invested assets. The pre-tax equivalent annualized book yield on the portfolio was 5.6% for the period down 50 basis points from last year. And finally net realized gains in the quarter were 4 million pretax lower by 14 million over the last year. On a consolidated net operating basis, Kemper second quarter net loss was just under $1 million or $0.01 per share compared to a net loss of 20 million or $0.33 per share reported in the second quarter of 2011. This year-over-year improvement of 19 million was comprised of the following three items. First, 31 million or $0.51 per share from lower cats partially offset by lower after-tax earnings from equity method investments of 6 million or $0.13 or $0.11 per share and 5 million or $0.08 per share unfavorable impact from the increase in the underlying personal auto loss ratio across the P&C group. Shifting to the details of each of the operating unit's performance I will start with Kemper Preferred. We are net operating loss for the period was 10.3 million, an improvement of 23 million over the second quarter of 2011. This improvement was primarily from 30 million lower weather related losses which was partially offset by 4 million higher frequency and severity of non-cat fire losses, 2 million of higher severity in auto liability and 2 million lower net investment income. On the revenue front net written premiums increased about 4% to 233 million and earned premiums grew 2% compared to the prior year. Overall premium retention in the first half was 88%, up 2 points compared to last year. Shifting to Kemper's specialty. A net operating loss in the period was 2.8 million compared to a net operating gain of 5.3 million a year ago. this result was comprised of a $11 million decline in personal auto, partially offset by 2.8 million higher earnings in commercial auto. Let me add some further color here beginning with the drivers of the $11 million variance for non-standard personal auto. First, the business had a $5 million shift in development, 4 million unfavorable in the current period from higher BI severity, mostly in the 2010 and 2011 accident years, compared to 1 million favorable development in the second quarter of last year. Secondly, 3 million mostly due to higher claims, frequency and physical damage resulting in an increase in the underlying loss ratio of 4 points. Lastly, 2 million of lower investment income, coupled with 2 million higher expenses, the majority of which was related to technology enhancements. Shifting to the commercial book, that performed well during the quarter earning 4.8 million after tax, an increase of 2.8 million over last year. the main driver here was 2.3 million higher favorable prior year development across all accident years related to the mix shift in this product line. Kemper specialist net written premiums were 99 million in the quarter reflecting lower volume on a personal auto side and higher volume in commercial auto. Earned premiums were 107 million in the second quarter lower by approximately 7 million compared to 2011. Policies in force were roughly 306,000 at the end of June down 10% over the same period last year. Let`s shift to direct. The team continues to execute its plans to improve overall profitability and for the second quarter, business reported a net operating loss of 2.9 million, an improvement over last year of 1.9 million. The drivers of that variance included 2 million improvement from actions taken to reduce premium volume, 2 million improvement from lower cat losses and higher favorable development. These favorable items were partially offset by 1 million lower income on equity method investments and 1 million unfavorable impact of increasing severity and liability lines. Let`s shift to life and health. Net operating income increased over 8% and 19.5 million from lower catastrophe losses of 3 million which was partially offset by 1.5 million of lower net investment income. Overall, earned premiums remained relatively stable at 161 million. The teams in life and health continue to respond proactively to the challenging environment with price increases on new business, expanded supplemental product offerings and by maintaining a disciplined approach to expense management. I'll wrap up on book value and capital. Book value per share increased in the quarter to $36.42 up from $35.69 at the end of the first quarter. Statutory solvency and surplus levels in the insurance companies remain strong, risk based capital ratios were 480% in life and 290% for the property and casualty business. On a combined basis, the insurance operating units have a max ordinary dividend capacity of roughly 175 million for 2012. Currently, we anticipate that between 70 and 90 million will be paid as dividends to the holding company during the second half of the year with all of that slated to come from the life business. In terms of liquidities, the holding company ended the quarter with cash and investments of 163 million and a $325 million revolving line of credit remains undrawn. I'll now turn the call back over to Don.

Thank you Dennis and Jim. As you just heard, we did have a challenging quarter that we have solid plans in place to address the issues. So at this time, I would like to turn the call back over to the operator so that Jim, Dennis and I may take your questions. Operator? Paul Newsome - Sandler O'Neill: Actually I have two topics. Let`s start with the claims trend issue. I think when we last discussed, it seemed to be more of a tip issue and fairly small number of states for obvious reasons, this town's much more broad based across all of the businesses and across all your states. Is that true? And can you offer any theories as to why it may be happening?

It is definitely true that we were seeing significant issues on PIP especially in the states of Florida and Michigan and New York on a direct basis. Late last year, we began to recognize other trends beginning to develop, especially on VI and liability lines in general and to some degree on physical damage. Those trends accelerated as the year progressed and we are taking right action to address that. Paul Newsome - Sandler O'Neill: So is the issue that you just missed that acceleration?

I would say we saw and came faster than we expected. Paul Newsome - Sandler O'Neill: I'd like to switch very quickly to the life side of business. Obviously on a year-over-year basis the life business did fine but sort of quarter by quarter, I think as life insurance business, not life for P&C business is being sort of more of a continuous business. The earnings were a lot less than sort of the quarterly run rate we've seen in the past. Perhaps you could talk to that. This is sort of a $90 million business that which is what we should think of from the quarter or is it more of a $100 million plus business?

Paul, there are definitely some things going on in the life business that over the long haul will provide challenge to most obvious is low interest rates. And our portfolio yield is holding up quite well and yet it still is down I think 50 basis points from the same quarter last year and with roughly 3 billion of assets, has an impact. Interest rates in the future, if they stay low they'll continue to have some impact on this business. Short of giving guidance, I will just say that we've been taking actions that help offset these low interest rates. Certainly we've been trying to keep the topline steady and controlling our expenses and in addition to that, we recently took a price increase on our basic life insurance product, to recognize the fact that interest rates aren't what they used to be.

Thank you and our next question comes from the line of Adam Klauber from William Blair. Adam Klauber - William Blair: Just follow-up on Paul's question. So what is in the preferred auto book, what's the rate of severities running now versus say six months ago and what type of rate increases are you putting in now in that preferred auto book just across the board compared to six months ago?

At the end of the year, we have taken approximately two to three points of rate on both home and automobile. Right now our plans are on home, call for about a 10 to 11% rate increase across the country during 2012 and on auto we're going to run at about 7 to 8%. Adam Klauber - William Blair: The 7 to 8% was that compared to six months ago, was that in the 2 to 3 range?

That would be correct. Adam Klauber - William Blair: And how about, what's been the jump in severities compared to six months ago, severity trend?

It's up approximately 2% on the liability lines. Adam Klauber - William Blair: Okay and homeowners, as you've begun to put in some of the higher rate increases, how retention has been running?

Retention has remained pretty strong on homeowners. We really target package business which combines auto and home together and retention has stayed up pretty well on home. Adam Klauber - William Blair: And the non-standard specialty book. What type of rate increases are you putting in that book of business for the higher PD?

We are taking approximately 8 to 9% year-over-year. we intend to have that by year end and that would be up significantly from last year. Adam Klauber - William Blair: As far as the direct business, you mentioned you've already received several inquiries. Are you running a process, is the banker going out to people or is it more just people calling and interested parties calling interested in the division.

Adam we did note that we had several inquiries and let me just expand a little bit on this topic. As Jim indicated, we expect to be profitable in 2013 with a secession of marketing spend and with the actions taking in some of the problem states and where the significant seasoned book. Our internal options include profitability. So any external option will have to be better than our internal option. We are trying to do this on a relatively fast but careful and cautious spaces, thoughtful basis, rather. So we're not going to have a standard option, where we spend a long time trying to round up people that are likely suspects have come to us and will be identified quickly and we should reach a conclusion for what's best for shareholders in the not too distant future. Adam Klauber - William Blair: Great. How much capital supports that business?

We've got roughly 175 million supporting that business line.

Thank you. And our next question comes from the line of Steven Schwartz from Raymond James & Associates. Steven Schwartz - Raymond James & Associates: Don you're renewing, on the direct marketing side of the business, it's just that there is no new sales outside of the three states.

Outside of the three states we're stopping marketing spend but we're fulfilling sales. Some sales continue to come to us through the website, so on (inaudible) cases that are in place, so we are fulfilling sales. We haven't discontinued new sales. We've discontinued marketing spend. Steven Schwartz - Raymond James & Associates: I guess what I don't understand maybe is, if I am a client of Kemper Direct and I want to renew (inaudible) if I can on the life side, I've been well over for a long time that there is seasonality on the loss ratio, although it didn’t seem to show up in this quarter. What I am wondering about on the expense side. Is there seasonality on the expense side because the expense ratio is much higher in the first quarter. I actually see that that's kind of been a pattern for the last couple of years.

Yes, I’d say there any I'd say identifiable seasonality to that business. There are fluctuations quarter-to-quarter but nothing that I point to that would drive any sort of meaningful fluctuation. Steven Schwartz - Raymond James & Associates: There is a lot of talk about ACA coming into 2014 and the potential to maybe arbitrage the cost, arbitrage the penalties, arbitrage the fact that its guaranteed issue with accident, health and in other types of policies. I am kind of wondering if reserve national is looking at that.

When you step back at a high level, here is how we're thinking about reserve national. They've been as you know and we've talked about previously since late '09 they've been repositioning their business, their product suite as well as repositioning their distribution force and away from those products that have been most affected by national healthcare reform and towards a much broader array of supplemental product offerings that should be far less likely to have any negative impacts such that comes into full implementation which quite frankly is still in many ways, just uncertain at this point. So, they've been thinking about the issues that you raised but forging ahead and just really doing all the necessary blocking and tackling on the distribution and product side to continue to move the business forward so that whatever may develop, they are as well positioned as they can be for those changes.

I'll just add that we have discontinued sales of our hospitalization products which are subject to the medical loss ratio requirements and the field forces making the transition very nicely. Steven Schwartz - Raymond James & Associates: And then finally for Jim would be, with the price increases that you're talking about, I think it was Don who said he thought maybe not ready to call it hard market but things are changing. Are you looking at this, are you going to be in line when you are done competitively do you think, Jim?

Yes.

Thank you. And our next question is a follow-up from the line of Paul Newsome from Sandler O'Neill. Paul Newsome - Sandler O'Neill: I just wanted to make sure on the thought, the aggregate price increases were the auto and home businesses, personalized. Is that enough at this point to get you to the level of profitability that you think you should have or are we sort of implying more than one round of price increases above the underlying recurring costs. Because I'm thinking simple math is sort of 110 combined. The all-in price increases are probably 8 or 9 and the underlying loss cost trend is maybe 2 or maybe even 4. So that take you through from 110 to something that's so call we're not breakeven. Am I being too simple on the math or do we need more price increases?

I'll answer it in two ways. One on homeowners, I believe homeowners will take a series of rate increases over the coming years to bring that line back to provide that. As you know, homeowners is favorably driven by weather and weather can change overnight and that picture could clear up very quickly. Auto actions there will show up much quicker but even there it will take a series of rate increases to bring us back in line.

I would just add Paul that 110 is probably not the right starting point for your simple approach because it does include some abnormally high weather.

Thank you. And I see no additional questions in the queue at this time. Diana Hickert-Hill: Thank you operator. This is Diana if anybody has any follow up calls you can contact me directly.

Ladies and gentlemen thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.