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.

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…

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…

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…

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?

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.

So is the issue that you just missed that acceleration?

I would say we saw and came faster than we expected.

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.

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%.

The 7 to 8% was that compared to six months ago, was that in the 2 to 3 range?

That would be correct.

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.

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.

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.

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.

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.

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.

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.