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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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FORM 10-Q

(Mark One)

|  |                                                                                            
|- | -------------------------------------------------------------------------------------------
|þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31,
2004




|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|o | 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 033-43462

KEMPER INVESTORS LIFE INSURANCE COMPANY


(Exact name of registrant as specified in its
charter)


|                                                                                         |  |                                                    
|---------------------------------------------------------------------------------------- |  | ---------------------------------------------------
|ILLINOIS
    (State of Incorporation)                                                    |  | 36-3050975
    (IRS Employer Identification Number)
|                                                                                        
|1400 AMERICAN LANE
    SCHAUMBURG, ILLINOIS
    (Address of Principal Executive Offices) |  | 60196
    (ZIP Code)                               

Registrants telephone number, including
area code: (206) 232-8400

Securities registered pursuant to
Section 12(b) of the Act: none

Securities registered pursuant to
Section 12(g) of the Act: none

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.þ Yes  o No

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).  o Yes  þ No

As of April 30, 2004, there were outstanding 250,000 shares of common stock, $10.00 par value
per share, of the registrant.

Documents incorporated by reference: None.

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KEMPER INVESTORS LIFE
INSURANCE COMPANY

FORM 10-Q

PART I. FINANCIAL
STATEMENTS

|ITEM 1. Interim Financial Statements                                                          |  |  |  |    | 
|--------------------------------------------------------------------------------------------- |  |  |  | -- | 
|                                                                                             
|Consolidated Balance Sheets -                                                                 |  |  |  |    | 
|March 31, 2004 and December 31, 2003                                                          |  |  |  | 1  | 
|                                                                                             
|Consolidated Statements of Operations -                                                       |  | 
|Three months ended March 31, 2004 and 2003                                                    |  |  |  | 2  | 
|                                                                                             
|Consolidated Statements of Comprehensive Income (Loss) -                                      |  | 
|Three months ended March 31, 2004 and 2003                                                    |  |  |  | 3  | 
|                                                                                             
|Consolidated Statements of Cash Flows -                                                       |  | 
|Three months ended March 31, 2004 and 2003                                                    |  |  |  | 4  | 
|                                                                                             
|Notes to Consolidated Financial Statements                                                    |  |  |  | 5  | 
|                                                                                             
|ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |  |  |  | 11 | 
|                                                                                             
|ITEM 3. Quantitative and Qualitative Disclosures about Market Risk                            |  |  |  | 20 | 
|                                                                                             
|ITEM 4. Controls and Procedures                                                               |  |  |  | 21 | 

PART II. OTHER INFORMATION

|ITEM 6. Exhibits and Reports on Form 8-K |  |  |  | 22 | 
|---------------------------------------- |  |  |  | -- | 
|                                        
|Signatures                               |  |  |  | 23 | 

---

# PART 1. FINANCIAL
STATEMENTS

ITEM 1. Interim Financial
Statements

Kemper Investors Life Insurance Company and SubsidiariesConsolidated Balance Sheets(in thousands, except
share data)

|                                                                              | March 31, |  |  
|----------------------------------------------------------------------------- | --------- |  | -
|
|
|                                                                              |           |  |  
|Assets                                                                        |           |  |  
|Fixed maturity securities, available for sale, at fair value (amortized cost: |           | 
|March 31, 2004, $598,564; December 31, 2003, $627,793)                        |           |  | $
|Equity securities, at fair value (cost: March 31, 2004 $4,111; December       |           | 
|31, 2003, $2,458)                                                             |           |  |  
|Short-term investments                                                        |           |  |  
|Joint venture mortgage loans                                                  |           |  |  
|Third-party mortgage loans                                                    |           |  |  
|Other real estate-related investments                                         |           |  |  
|Other invested assets                                                         |           |  |  
|                                                                              |           |  |  
|Total investments                                                             |           |  |  
|Cash                                                                          |           |  |  
|Accrued investment income                                                     |           |  |  
|Reinsurance recoverable                                                       |           |  |  
|Deferred insurance acquisition costs                                          |           |  |  
|Deferred income taxes                                                         |           |  |  
|Federal income tax receivable                                                 |           |  |  
|Modified coinsurance receivable related party                                |           |  |  
|Other assets and receivables                                                  |           |  |  
|Assets held in separate accounts                                              |           |  |  
|                                                                              |           |  |  
|Total assets                                                                  |           |  | $
|                                                                              |           |  |  
|Liabilities                                                                   |           | 
|Future policy benefits                                                        |           |  | $
|Other policyholder benefits and funds payable                                 |           |  |  
|Payable to reinsurers                                                         |           |  |  
|Modified coinsurance payable related party                                   |           |  |  
|Deferred income tax liabilities                                               |           |  |  
|Other accounts payable and liabilities                                        |           |  |  
|Liabilities related to separate accounts                                      |           |  |  
|                                                                              |           |  |  
|Total liabilities                                                             |           |  |  
|                                                                              |           |  |  
|Commitments and contingent liabilities                                        |           | 
|Stockholders equity                                                          |           | 
|Capital stock-$10 par value, authorized 300,000 shares; issued and            |           | 
|outstanding 250,000 shares                                                    |           |  |  
|Additional paid-in capital                                                    |           |  |  
|Accumulated other comprehensive (loss) income                                 |           |  |  
|Retained deficit                                                              |           |  |  
|                                                                              |           |  |  
|Total stockholder's equity                                                    |           |  |  
|                                                                              |           |  |  
|Total liabilities and stockholder's equity                                    |           |  | $
|                                                                              |           |  |  

See
accompanying notes to consolidated financial statements.

1

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Kemper Investors Life
Insurance Company and SubsidiariesConsolidated
Statements of Operations(in thousands)(unaudited)

|                                                                     | Three Months Ended | 
|-------------------------------------------------------------------- | ------------------ | 
|
|                                                                     |                    | 
|
|                                                                     |                    | 
|Revenue                                                              |                    | 
|                                                                     |                    | 
|Net investment income                                                |                    | 
|Net realized investment gains                                        |                    | 
|Premium income                                                       |                    | 
|Separate account fees and charges                                    |                    | 
|Broker-dealer commission revenue                                     |                    | 
|Modified coinsurance income-- related party                          |                    | 
|Other income                                                         |                    | 
|                                                                     |                    | 
|Total revenue                                                        |                    | 
|Benefits and Expenses                                                |                    | 
|Interest credited to policyholders                                   |                    | 
|Claims incurred and other policyholder benefits                      |                    | 
|Taxes, licenses and fees                                             |                    | 
|Commissions                                                          |                    | 
|Broker-dealer commission expense                                     |                    | 
|Operating expenses                                                   |                    | 
|Deferral of insurance acquisition cost                               |                    | 
|Amortization of deferred insurance acquisition costs                 |                    | 
|Amortization of value of business acquired                           |                    | 
|Amortization of other intangible assets                              |                    | 
|                                                                     |                    | 
|Total benefits and expenses                                          |                    | 
|Income before income tax expense                                     |                    | 
|Income tax expense (benefit)                                         |                    | 
|Current                                                              |                    | 
|Deferred                                                             |                    | 
|                                                                     |                    | 
|Total income tax expense                                             |                    | 
|                                                                     |                    | 
|Net income before cumulative effect of accounting change, net of tax |                    | 
|                                                                     |                    | 
|Cumulative effect of accounting change, net of tax                   |                    | 
|                                                                     |                    | 
|Net income (loss)                                                    |                    | 
|                                                                     |                    | 

See accompanying
notes to consolidated financial statements.

2

---

Kemper Investors Life
Insurance Company and SubsidiariesConsolidated
Statements of Comprehensive Income (Loss)(in thousands)(unaudited)

|                                                                           | Three Months Ended | 
|-------------------------------------------------------------------------- | ------------------ | 
|
|                                                                           |                    | 
|
|                                                                           |                    | 
|Net income (loss)                                                          |                    | 
|Other comprehensive income (loss), before tax:                             |                    | 
|Unrealized holding gains (losses) on  securities:                          |                    | 
|Unrealized losses on derivatives                                           |                    | 
|Unrealized holding gains on investments                                    |                    | 
|Unrealized holding gains on separate accounts investments, reclassified to |                    | 
|the  general account assets per SOP 03-01                                  |                    | 
|Reclassification adjustment for losses (gains) included in net income      |                    | 
|                                                                           |                    | 
|Net unrealized holding gains (losses) on securities                        |                    | 
|Reclassification adjustments for items included in net income (loss):      |                    | 
|Adjustment to value of business acquired                                   |                    | 
|Adjustment for deferred insurance acquisition costs                        |                    | 
|                                                                           |                    | 
|Other comprehensive income, before related income tax expense              |                    | 
|Related income tax expense                                                 |                    | 
|                                                                           |                    | 
|Other comprehensive income, net of tax                                     |                    | 
|                                                                           |                    | 
|Comprehensive income (loss)                                                |                    | 
|                                                                           |                    | 

See accompanying
notes to consolidated financial statements.

3

---

Kemper Investors Life
Insurance Company and SubsidiariesConsolidated
Statements of Cash Flows(in thousands)(unaudited)

|                                                                         | Three Months Ended | 
|------------------------------------------------------------------------ | ------------------ | 
|
|                                                                         |                    | 
|
|                                                                         |                    | 
|Cash flows from operating activities                                     |                    | 
|Net (loss) income                                                        |                    | 
|Adjustments to reconcile net income (loss) to net cash provided by (used |                    | 
|in) operating activities:                                                |                    | 
|Cumulative effect accounting change                                      |                    | 
|Net realized investment (gains)                                          |                    | 
|Interest credited and other charges                                      |                    | 
|Deferred insurance acquisition costs, net                                |                    | 
|Amortization of value of business acquired                               |                    | 
|Amortization of net discount/premium on investments                      |                    | 
|Amortization of other intangible assets                                  |                    | 
|Deferred income taxes                                                    |                    | 
|Net change in current federal income taxes                               |                    | 
|Benefits and premium taxes due related to separate account business      |                    | 
|owned life insurance                                                     |                    | 
|Modified coinsurancerelated party                                       |                    | 
|Other policyholder benefits and funds payable                            |                    | 
|Payable to reinsurers                                                    |                    | 
|Other accounts and notes receivable                                      |                    | 
|Other, net                                                               |                    | 
|                                                                         |                    | 
|Net cash provided by (used in) operating activities                      |                    | 
|                                                                         |                    | 
|Cash flows from investing activities                                     |                    | 
|Cash from investments sold or matured:                                   |                    | 
|Fixed maturity securities held to maturity                               |                    | 
|Fixed maturity securities sold prior to maturity                         |                    | 
|Mortgage loans, policy loans and other invested assets                   |                    | 
|Cost of investments purchased or loans originated:                       |                    | 
|Fixed maturity securities                                                |                    | 
|Equity securities                                                        |                    | 
|Mortgage loans, policy loans and other invested assets                   |                    | 
|Short-term investments, net                                              |                    | 
|Net change in receivable and payable for securities transactions         |                    | 
|Net change in other assets                                               |                    | 
|                                                                         |                    | 
|Net cash provided by (used in) investing activities                      |                    | 
|                                                                         |                    | 
|Cash flows from financing activities                                     |                    | 
|Policyholder account balances:                                           |                    | 
|Deposits                                                                 |                    | 
|Withdrawals                                                              |                    | 
|Capital contribution                                                     |                    | 
|Cash overdrafts                                                          |                    | 
|                                                                         |                    | 
|Net cash provided by (used in) financing activities                      |                    | 
|                                                                         |                    | 
|Net increase (decrease) in cash                                          |                    | 
|Cash, beginning of period                                                |                    | 
|                                                                         |                    | 
|Cash, end of period                                                      |                    | 
|                                                                         |                    | 

See accompanying
notes to consolidated financial statements.

4

---

Kemper Investors Life
Insurance Company and SubsidiariesNotes to Consolidated Financial Statements
(unaudited)

| | 1.  Basis
of Presentation
| | -------------------------

| | Kemper
Investors Life Insurance Company is licensed in the District of Columbia and all states,
except New York. Zurich Life Insurance Company of New York (ZLICONY), a
wholly-owned subsidiary through September 3, 2003, is licensed to conduct business in the
State of New York. The Company also owned PMG Life Agency, Inc., PMG Marketing, Inc., PMG
Securities Corporation and PMG Asset Management, Inc., collectively referred to as the PMG
group of companies (PMG) and Investors Brokerage Services Insurance Agency,
Inc. through September 3, 2003. The Company is a wholly-owned subsidiary of Kemper
Corporation (Kemper), a non-operating holding company. Kemper is an indirect
wholly-owned subsidiary of Zurich Holding Company of America, Inc. (ZHCA), a
holding company. ZHCA is an indirect wholly-owned subsidiary of Zurich Group Holding
(ZGH or Zurich), a Swiss holding company. ZGH is wholly-owned by
Zurich Financial Services (ZFS), a Swiss holding company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
have prepared the accompanying consolidated financial statements pursuant to the rules and
regulations of the Securities and Exchange Commission (the SEC) for interim
financial reporting. As used herein, the Company, we,
our and similar terms include Kemper Investors Life Insurance Company and its
wholly-owned subsidiaries through September 3, 2003, unless the context indicates
otherwise. These consolidated financial statements are unaudited and, in our opinion,
include all adjustments, consisting of normal recurring adjustments and accruals necessary
for a fair presentation of the consolidated balance sheets, operating results, and cash
flows for the periods presented. Operating results for the periods presented are not
necessarily indicative of the results that may be expected for the year ending December
31, 2004. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the
United States (GAAP) have been omitted in accordance with the rules and
regulations of the SEC. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and accompanying notes
included in our Annual Report on Form 10-K for the year ended December 31, 2003. Certain
prior period amounts have been reclassified to conform to the current period presentation.
The consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Use
of Estimates
| | ----------------

| | The
preparation of financial statements in conformity with GAAP requires estimates and
assumptions that affect the reported amounts of assets and liabilities, revenues and
expenses, and related disclosures of contingent assets and liabilities in the consolidated
financial statements and accompanying notes. Estimates are used for, but not limited to,
deferred insurance acquisition costs, provisions for real estate-related losses and
reserves, other temporary declines in values for fixed maturity and equity securities, the
valuation allowance for deferred income taxes and future policy benefit reserves. Actual
results could differ materially from those estimates.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.   Sales
and Reinsurance Ceded and Assumed
| | --------------------------------------------

| | BANK
ONE. On September 3, 2003 (the Closing Date), the Company transferred
portions of its business through a one hundred percent coinsurance arrangement, as well as
the capital stock of its wholly-owned subsidiaries, to its former affiliate, Federal
Kemper Life Assurance Company (FKLA). Prior to the Closing Date, the Company,
FKLA, Zurich Life Insurance Company of America (ZLICA) and Fidelity Life
Association, a Mutual Legal Reserve Company (FLA) operated under the trade
name Zurich Life and were all, except FLA, direct, wholly-owned subsidiaries
of Kemper. Following the Closing Date, the Company remains a direct, wholly-owned
subsidiary of Kemper.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
transfers were part of a larger transaction pursuant to a Stock and Asset Purchase
Agreement, dated as of May 29, 2003 (the Purchase Agreement), between ZHCA,
Kemper, KILICO, ZFS, Banc One Insurance Holdings, Inc. (BOIH) and Bank One
Corporation (Bank One). Under the Purchase Agreement, Kemper, an indirect
subsidiary of ZFS, agreed to sell the capital stock of FKLA, ZLICA and Zurich Direct, Inc.
to BOIH. BOIH also agreed to acquire indirect control of FLA via its acquisition of FKLA
which, pursuant to a Management Agreement, conducts the day-to-day administration of FLA.
BOIH further agreed to acquire control of the KILICO Subsidiaries.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5

---

| | On
September 3, 2003 the Company transferred 100% of the general account liabilities through
a one hundred percent coinsurance arrangement, ceded 100% of all direct individual life
insurance renewal premiums and ceded a majority of the separate account liabilities on a
modified coinsurance basis to Bank One. Reinsured policies also included certain policies
to be written by the Company through September 3, 2004. Ownership of the underlying
separate account assets was not transferred to Bank One. The Company remains responsible
to its policyholders for all future claims and policyholder benefits related to the blocks
of business ceded to Bank One and is not relieved of its obligations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
consideration of Bank Ones assumption of the General Account Liabilities, the
Company transferred to Bank One the Transferred Coinsurance Assets, less a Ceding
Commission, as described below. Transferred Coinsurance Assets, as calculated
on a statutory accounting basis, were defined as (a)(i) all of the issued and outstanding
shares of the Companys Subsidiaries and certain other assets (software, fixtures,
equipment, etc.), (ii) certain investment assets and (iii) cash or cash equivalents,
having an aggregate market value equal to the amount as of the Closing Date of the General
Account Reserves, as defined in the Coinsurance Agreement, plus (b) the Companys
interest maintenance reserve as of the Closing Date (excluding interest maintenance
reserve as a result of the realization of gain associated with transferring the
Transferred Coinsurance Assets at market value rather than book value) minus (c) the
aggregate amount of accruals with respect to the Reinsured Policies. Pursuant to the
Coinsurance Agreement, Bank One established a trust account (the Security Trust
Account) for the exclusive benefit of the Company funded with assets equal to one
hundred percent of the general account reserves reinsured by Bank One, adjusted on a
quarterly basis. Bank One is required to maintain the Security Trust Account in effect
until the general account reserves are $400 million or less. At March 31, 2004, the
general account reserves were approximately $4.4 billion compared to approximately $4.3
billion at December 31, 2003. At March 31, 2004, the reinsurance recoverable from Bank One
was approximately $3.5 billion compared to approximately $3.6 billion at December 31,
2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company also transferred to Bank One in consideration of Bank Ones reinsurance of
future liabilities and obligations, in respect of the Reinsured Policies, future premiums,
premiums receivable, policy loan receivables, reinsurance recoverables, separate account
revenues, agents debit balances and all other fees, charges and amounts. In addition,
pursuant to the Coinsurance Agreement, the administerial actions required of the Company
with respect to the Bank Owned Life Insurance policies (the BOLI Policies) are
performed by Bank One in exchange for an income stream of 8 to 12 basis points earned on
the value of the invested assets of the BOLI Policies. The Company has also agreed that,
for a period of three years following the Closing Date, it will not, except under
specified circumstances, issue any new BOLI Policies going forward.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Ceding Commission, discussed above, was $120 million, subject to a market
value adjustment with respect to the Transferred Coinsurance Assets. The Ceding Commission
was not transferred from Bank One to the Company, but rather was withheld from the
investment assets transferred from the Company to Bank One as part of the Transferred
Coinsurance Assets. Both the Company and Bank One finalized their settlement in February
2004. The resulting closing adjustment resulted in a decrease of $9.3 million in payable
to reinsurers in the balance sheet as of February 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company previously assumed from Bank One $100.0 million in premiums related to a Funding
Agreement. Funding Agreements are insurance contracts similar to structured settlements,
immediate annuities and guaranteed investment contracts (GICs). The contracts
qualify as insurance under state laws and are sold as non-surrenderable immediate
annuities to a trust established by a securities firm. The securities firm sold interests
in the trust to institutional investors. This Funding Agreement has a variable rate of
interest based upon LIBOR, is an obligation of the Companys general account, is
recorded as a future policy benefit, and will expire in November 2004. At March 31, 2004,
the Funding Agreement balance was approximately $100.5 million compared to approximately
$100.2 million at December 31, 2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FNWL.The Company entered into a modified coinsurance treaty (the Modified
               Coinsurance Agreement) on December 1, 2003 with an affiliate, Farmers New
               World Life Insurance Company (FNWL). FNWL is a Washington domiciled
               stock life insurance company. Initially, the Company assumed all existing
               Non-Qualified Individual Flexible Payment Deferred (NQ-FPDA) and
               Non-Qualified Individual Single Premium Deferred (NQ-SPDA) annuities
               from FNWL. No portion of the assets constituting the consideration was
               transferred to the Company. Subsequent new issues by FNWL of NQ-FPDA and NQ-SPDA
               annuities will be assumed by the Company. In exchange, the Company will receive
               all reinsurance premiums and pay benefits to the policyholders relating to these
               contracts. The Company has a management and service agreement with FNWL to
               receive services reasonably necessary pursuant to this agreement. The Modified
               Coinsurance Agreement requires the separate
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6

---

| | recording of an embedded derivative
               in the financial statements of the Company per SFAS 133, DIG B36 and was valued
               at approximately $19.2 million at March 31, 2004. The modified coinsurance
               receivable from FNWL was approximately $789.5 million and approximately $762.5
               million at March 31, 2004 and December 31, 2003, respectively and the modified
               coinsurance payable was approximately $766.0 million and approximately $758.9
               million, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FLA.The Companys ceded future policy benefits reflect coinsurance
               (indemnity reinsurance) transactions where the Company insured liabilities in
               1991 and 1992 with FLA. The reinsurance recoverables were approximately $204.8
               million and approximately $207.7 million at March 31, 2004 and December 31,
               2003, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | TRANSAMERICA
RE.        The net amount at risk of the GMDB and GRIB on certain variable annuity contracts
issued between March 1, 1997 and April 30, 2000 were ceded to outside reinsurers. As of
March 31, 2004 and December 31, 2003, the reinsurance recoverable related to reinsuring
the net amount at risk on these contracts with Transamerica Re amounted to approximately
$50.7 million and approximately $26.3 million, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ZICBB.The Company is also a party to a reinsurance agreement with an affiliated
               company, Zurich Insurance Company, Bermuda Branch (ZICBB). Under the
               terms of this agreement, the Company cedes, on a yearly renewable term basis,
               100% of the net amount at risk (death benefit payable to the insured less the
               insureds separate account cash surrender value) related to separate
               account business owned universal life insurance (BOLI). As
               consideration for this reinsurance coverage, the Company cedes separate account
               fees (cost of insurance charges) to ZICBB. At March 31, 2004 and December 31,
               2003, reinsurance recoverables totaling approximately $256.9 million and
               approximately $206.2 million, respectively, were secured by a trust agreement,
               which was supported by cash and invested assets with a fair value of
               approximately $278.3 million and $235.4 million at March 31, 2004 and December
               31, 2003, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.  Accounting
Pronouncement
| | ----------------------------

| | SOP
03-01
| | ---------

| | In
July 2003, the Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants (AcSEC) issued a final Statement of Position
03-01, Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts (the
SOP). The SOP was adopted effective January 1, 2004. The SOP addresses a wide
variety of topics, some of which have a significant impact on the Company. The major
provisions of the SOP require the Company to:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Recognize expenses for a variety of contracts and contract features, including guaranteed
minimum death benefits (GMDB) and guaranteed retirement income benefits
(GRIB), certain death benefits on universal-life type contracts and
annuitization options, on an accrual basis versus the previous method of recognition upon
payment;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Report and measure assets and liabilities of certain separate account products as general
account assets and liabilities when specified criteria are not met;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Report and measure the Companys interest in its separate accounts as general account
assets based on our proportionate beneficial interest in the separate accounts
underlying assets; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Capitalize sales inducements that meet specified criteria and amortize such amounts over
the life of the contracts using the same methodology as used for amortizing deferred
policy acquisition costs (DAC).
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

---

| | On
January 1, 2004, the Company recorded a $157.9 million cumulative effect adjustment to
earnings equal to the revaluation of the liabilities from fair value to account value. The
cumulative adjustments to earnings and other comprehensive income were recorded net of
amortization of deferred acquisition costs and income taxes. At January 1, 2004, the date
of initial application, the cumulative effect of the adoption of the SOP was comprised of
the following individual impacts:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                       |  | Other |  
|-------------------------------------- |  | ----- | -
|
|
|Establishing GMDB and GRIB             |  |       | $
|reserves for annuity contracts         |  |      
|Amortization of insurance              |  |       |  
|acquisition costs (DAC)                |  |      
|Subtotal                               |  |       |  
|Related income tax benefit             |  |       |  
|Total cumulative effect of adoption,   |  |       | $
|net of tax                             |  |      
|                                       |  |       |  
|Unrealized gains of certain separate   |  |      
|account assets reclassified to general |  |       |  
|accounts, net of tax                   |  |      
|                                       |  |      
|Total other comprehensive net loss     |  |       |  
|                                       |  |      



| | GMDB
and GRIB Reserves for Annuity Contracts.The Company sold variable annuity contracts
that offer various guaranteed death benefits. For certain GMDB and GRIB, the Company pays
the greater of (1) the account value at death; (2) the sum of all premium payments less
prior withdrawals accumulated at 5%; or (3) the maximum anniversary value of the contract,
plus any premium payments since the contract anniversary, minus any withdrawals following
the contract anniversary. The Company currently reinsures approximately 35% of the benefit
guaranties associated with its in-force block of business. As of December 31, 2003, prior
to the adoption of SOP 03-01, the Company had recorded a liability for GMDB and GRIB
benefits sold with variable annuity products of approximately $46.6 million. Subsequent to
the adoption of the SOP, the Company recorded an additional liability for GMDB and GRIB
benefits of approximately $6.4 million. As of March 31, 2004, $7.1 million of additional
future policyholder liabilities related to the GMDB and GRIB benefits were recorded. The
determination of the GMDB and GRIB liability and related reinsurance recoverable is based
on models that involve a range of scenarios and assumptions, including those regarding
expected market rates of return and volatility, contract surrender rates, annuitization
elections and mortality experience. The models use 1,000 stochastic equity scenarios
selected from the American Academy of Actuaries C3 Phase 2 Report. The assumptions
used are consistent with those used in determining estimated gross profits for purposes of
amortizing deferred acquisition costs. SOP 03-01 modified how liability reserves are
calculated for the variable annuity contracts issued by the Company. Prior to SOP 03-01, a
GMDB reserve was established for all contracts and a GRIB reserve was established only for
contracts deemed to have annuitized. These reserves reflected the present value of future
benefits with no offset against future revenues. Under SOP 03-01, a reserve is established
for all contracts, resulting in additional recognition of future policy benefits. However,
the reserve is reduced by a percentage of future revenues, resulting in a relatively small
reserve increase at implementation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amortization
of Deferred Insurance Acquisition Costs.The Company has deferred certain acquisition
costs (DAC) in accordance with FAS 97 and amortizes those costs over the term
of the policies. With the initial adoption of the SOP, $236.5 million of DAC was amortized
to reflect the reduction in future estimated gross profits (EGPs) in the amount by which
future revenues offset future benefits in the reserve calculation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
both December 31, 2003 and March 31, 2004, the Company held approximately $3.6 billion of
variable annuities that contained GMDB and GRIB benefits. The Companys total gross
exposure (i.e. before reinsurance), or net amount at risk (the amount by which current
account values in the variable annuity contracts are not sufficient to meet its GMDB and
GRIB commitments), related to these guaranteed death and annuitization benefits as of
December 31, 2003 was approximately $739 million and was approximately $807 million at
March 31, 2004. After reinsurance, the Companys net exposure was approximately $463
million and approximately $510 million at December 31, 2003 and March 31, 2004,
respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

---

| | Separate
Account Presentation.The Company had recorded certain market value adjusted
(MVA) fixed annuity products as separate account assets and liabilities
through December 31, 2003. Notwithstanding the MVA feature in this product, all of the
investment performance of the separate account assets is not being passed to the
contractholder, and it therefore, does not meet the conditions for separate account
reporting under the SOP.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 1, 2004, market value reserves of approximately $64.1 million included in separate
account liabilities were revalued at their current account value to the general account,
and the related separate account assets were also reclassified to the general account.
Fixed maturities and equity securities were reclassified to the general account, as
available for sale securities, and will continue to be recorded at fair value; however,
subsequent changes in fair value, net of amortization of deferred acquisition costs and
income taxes, are recorded in other comprehensive income rather than net income. Net
investment income was increased by those investments reclassified to the general account
and change in claims and other policyholder benefits were increased due to changes in
reserves, with a corresponding decrease in separate account fees.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.  Securities
Lending
| | ----------------------

| | The
Company has a security lending agreement with a lending agent. The agreement authorizes
the agent to lend securities held in the Companys portfolio to a list of authorized
borrowers. Concurrent with delivery of the securities, the borrower provides the Company
with cash collateral equal to at least 102% of the market value of the loaned securities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
securities are marked-to-market on a daily basis, and the collateral is adjusted on the
next business day. The collateral is invested in highly liquid, fixed income investments
with a maturity of less than one year. Income earned from the security lending arrangement
is shared 25% and 75% between the agent and the Company, respectively. Income earned by
the Company was approximately $11,000 in the first quarter of 2004 and was approximately
$110,000 in the first quarter of 2003. The Companys securities on loan at March 31,
2004 consisted of corporate fixed income securities and had an estimated fair value of
approximately $3.1 million. There were not any securities on loan at December 31, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5.  Off-Balance
Sheet Transactions
| | ----------------------------------

| | In
1994, the Company entered into a commitment to provide a financial guaranty in the form of
an extended standby credit enhancement to a third party letter of credit supporting the
purchase of bonds issued to finance the development of a certain retirement property in
Texas. The amount of the secured guaranty was $25.0 million with an expiration date of
March 22, 2004. On March 15, 2004, the agreement was extended to September 30, 2004 in
exchange for a nominal fee.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
guaranty is expected to be retired without being funded; therefore, the contract amounts
are not estimates of future cash flows. At March 31, 2004, a fixed maturity security with
a carrying amount of approximately $28.4 million was pledged as collateral to secure the
letter of credit.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
part of the guaranty agreement, upon the expiration of the guaranty period and in the
event the third party cannot find an alternate guarantor, the bond indebtedness will be
accelerated to mature immediately and the Company will be directly and contingently liable
to purchase the bonds from the issuer of the letter of credit. In connection with the
acceleration of the contingent liability, the Company will have full recourse to a
collateral pool and the real property. The fair value of the recourse collateral pool was
approximately $18.0 million, which was based upon the fair market value at March 31, 2004.
The estimated fair value of the real property was approximately $9.0 million, based upon
the most recent independent appraisal at September 9, 2003.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
1997, the Company entered into a separate agreement with a third party to guaranty certain
indemnity obligations of an affiliated company, including environmental claims over a
period of 20 years. The maximum liability exposure would not exceed $4 million. The
Company is fully insured for losses and liabilities related to the potential environmental
claims for a period of 10 years. Additionally, KFC Portfolio Corp, an affiliated company,
has agreed to guaranty and indemnify the Company from all liabilities and costs incurred
related to this transaction.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

| | 6.  Derivatives
| | ---------------

| | In
April 2003, the FASB released Statement 133 (SFAS 133) Implementation Issue
B36, Embedded Derivatives: Modified Coinsurance Arrangements and Debt
Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only
Partially Related to the Creditworthiness of the Obligor under Those Instruments
(DIG B36). DIG B36 addresses the need to separately account for an embedded
derivative within a reinsurers receivable and ceding companys payable arising
from modified coinsurance or similar arrangements. Paragraph 12.a. of SFAS 133 indicates
that an embedded derivative must be separated from the host contract (bifurcated) if the
economic characteristics and risks of the embedded derivative instrument are not clearly
and closely related to the economic characteristics and risks of the host contract. DIG
B36 concludes that bifurcation is necessary in a modified coinsurance arrangement because
the yield on the receivable and payable is based on a specified proportion of the ceding
companys return on either its general account assets or a specified block of those
assets, rather than the overall creditworthiness of the ceding company. The effective date
of implementation is the first day of the first fiscal quarter beginning after September
15, 2003 (October 1, 2003 for the Company), with earlier application as of the beginning
of a fiscal quarter permitted. The Company adopted DIG B36 on October 1, 2003.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 1, 2003, the Company entered into a Modified Coinsurance Agreement with
FNWL which was impacted by the provisions of DIG B36. The Modified Coinsurance
Agreement requires the separate recording of an embedded derivative. At March
31, 2004 and December 31, 2003, the Company had an embedded derivative of $19.2
million and $3.6 million, respectively, recorded in modified coinsurance
receivable  related party with the corresponding income recorded in
modified coinsurance incomerelated party during the respective reporting
periods.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7.  Operations
by Business Segment
| | ----------------------------------

| | The
Company has two primary operating segments, life insurance and annuities. In the following
table, the Company uses the captions net operating income (loss) and
operating income (loss) as operating measures of segment performance. Net
operating income (loss) is calculated by deducting realized investment gains or losses,
net of related income taxes, from net income (loss). Operating income (loss) is calculated
by excluding amortization of intangibles and cumulative effect of accounting changes in
addition to the removal of net realized gains and losses on investments, after tax, from
net income. Net realized investment gains or losses are excluded from net operating income
(loss) because they can, in part, be discretionary and are not indicative of operational
trends.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | It
is important to note that operating income (loss) and net operating income (loss) should
not be viewed as substitutes for income from continuing operations before federal income
taxes or net income determined in accordance with GAAP, rather they are considered
supplementary measures the Company believes are useful in analyzing its results of
operations. Also, the Companys definitions of these non-GAAP financial measures may
differ from those used by other companies.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                    | Three Months Ended |  | Three Months Ended |           
|--------------------------------------------------- | ------------------ |  | ------------------ | ----------
|(in thousands)                                     
|                                                    |                    | 
|                                                    |                    |  |                    |           
|                                                    |                    | 
|Net income (loss)                                   |                    |  | $                  | 16,037    
|                                                    |                    |  |                    |           
|Net realized investment gains                       |                    | 
|net of tax                                          |                    |  |                    | 2,325     
|                                                    |                    |  |                    |           
|Net operating income (loss)                         |                    |  | $                  | 13,712    
|                                                    |                    |  |                    |           
|                                                    |                    | 
|Amortization of intangibles                         |                    |  |                    |          
|Cumulative effect of accounting  change, net of tax |                    |  |                    |          
|                                                    |                    |  |                    |           
|Operating income (loss)                             |                    |  | $                  | 13,712    
|                                                    |                    |  |                    |           
|                                                    |                    | 
|Total assets                                        |                    |  | $                  | 10,705,863
|                                                    |                    |  |                    |           
|                                                    |                    |  |                    |           
|Total reserve for policyholder                      |                    | 
|benefits in the general account                     |                    |  | $                  | 879,380   
|                                                    |                    |  |                    |           
|Total separate account liabilities                  |                    |  |                    | 9,650,539 
|                                                    |                    |  |                    |           
|Total reserve for policyholder                      |                    | 
|benefits                                            |                    |  | $                  | 10,529,919
|                                                    |                    |  |                    |           

10

---

# ITEM 2.  
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

# Forward-looking
statements

All
statements, trend analyses and other information contained in this report and elsewhere
(such as in other filings by the Company with the SEC, press releases, presentations by
the Company or its management or oral statements) about markets for our products and
trends in our operations or financial results, as well as other statements including, but
not limited to, such words as anticipate, believe,
include, plan, estimate, assume,
expect, project, intend, and other similar
expressions, constitute forward-looking statements under the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are subject to known and unknown
risks, uncertainties and other factors which may cause actual results to be materially
different from those contemplated by the forward-looking statements.

All
forward-looking statements included in this document are based on information available to
the Company on the date hereof, and the Company assumes no obligation to update any
forward looking statements. The Company undertakes no obligation to publicly update or
revise any forward-looking statement, whether as a result of new information, future
results or otherwise.

# Critical Accounting
Policies

Our
Managements Discussion and Analysis is based upon our consolidated financial
statements that have been prepared in conformity with GAAP. The preparation of these
financial statements in conformity with GAAP requires estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, expenses, and related
disclosures of contingent assets and liabilities in the consolidated financial statements
and accompanying notes. As a result, actual results reported as revenue and expense could
differ from the estimates reported in the financial statements under different
assumptions, judgments or conditions. For additional information regarding our accounting
policies, refer to our December 31, 2003 Form 10-K. Although we believe that our
estimates, assumptions, and judgments are reasonable, they are based upon information
currently available.

# Business Description

On
September 3, 2003 (the Closing Date), the Company transferred portions of its
business through a one hundred percent coinsurance arrangement, as well as the capital
stock of its wholly-owned subsidiaries, to its former affiliate, Federal Kemper Life
Assurance Company (FKLA). Prior to the Closing Date, the Company, FKLA, Zurich
Life Insurance Company of America (ZLICA) and Fidelity Life Association, a
Mutual Legal Reserve Company (FLA) operated under the trade name Zurich
Life and were all, except FLA, direct, wholly-owned subsidiaries of Kemper.
Following the Closing Date, the Company remains a direct, wholly-owned subsidiary of
Kemper.

These
transfers were part of a larger transaction pursuant to a Stock and Asset Purchase
Agreement, dated as of May 29, 2003 (the Purchase Agreement), between ZHCA,
Kemper, KILICO, ZFS, Banc One Insurance Holdings, Inc. (BOIH) and Bank One
Corporation (Bank One). Under the Purchase Agreement, Kemper, an indirect
subsidiary of ZFS, agreed to sell the capital stock of FKLA, ZLICA and Zurich Direct, Inc.
to BOIH. BOIH also agreed to acquire indirect control of FLA via its acquisition of FKLA
which, pursuant to a Management Agreement, conducts the day-to-day administration of FLA.
BOIH further agreed to acquire control of the KILICO Subsidiaries.

As
of the Closing, the Company ceased issuing new business with the exception of certain
policies to be written and reinsured pursuant to the Coinsurance Agreement and certain
BOLI policies which were in negotiation or active discussion at the time of the Closing.
Up until that time, we offered both individual and group fixed-rate (general account) and
variable (separate account) annuity contracts, as well as individual and group term life
(general account) and group variable (separate account) life insurance products through
various distribution channels. We offered investment-oriented products, guaranteed returns
or a combination of both, to help policyholders meet multiple insurance and financial
objectives. Financial institutions, securities brokerage firms, insurance agents and
financial planners were important distribution channels for our products. Our sales mainly
consisted of deposits received on certain long duration fixed and variable annuities and
BOLI contracts.

While the majority of our business is coinsured, we retain the majority of our
DESTINATIONSSMbusiness. The DESTINATIONSSM product is a registered
individual and group variable, fixed and market value adjusted deferred annuity product
that offers 40 variable subaccount investment options with various investment managers,
ten guaranty periods, a fixed account option, dollar cost averaging, Guaranteed Minimum
Death Benefit (GMDB) and Guaranteed Retirement Income Benefit
(GRIB) options. The GRIB was an optional benefit to the
DESTINATIONSSM variable

11

---

annuity for an additional asset-based fee. It allows
for a proxy account value, called the GRIB Base, to be applied to the guaranteed annuity
factors (settlement option purchase rates) in the contract. The GRIB and GMDB Base prior
to attained age 80 is the greatest of:

- the contract value (account value),
- the greatest anniversary value before the exercise (annuitization) date, or
- purchase payments minus previous withdrawals, accumulated at 5% interest per year to the
annuitization date.

The
DESTINATIONSSM product was discontinued in the first quarter of 2003; however,
we continue to receive renewal premiums for this product.

Our
fixed and variable annuities generally have surrender charges that are a specified
percentage of policy values or premiums which decline as the policy ages. General account
annuity and interest-sensitive life policies are guaranteed to accumulate at specified
interest rates but allow for periodic crediting rate changes.

# Non-GAAP Financial
Measures

We
quantify segment operating performance using non-GAAP financial measures titled operating
income (loss) and net operating income (loss). Net operating income (loss) is calculated
by adjusting net income (loss) to exclude net realized gains and losses on investments,
after tax. Operating income (loss) is calculated by excluding amortization of intangibles
and cumulative effect of accounting changes in addition to the removal of net realized
gains and losses on investments, after tax, from net income (loss). Operating income
(loss) and net operating income (loss), or similar measures are commonly used in the
insurance industry as measures of ongoing earnings performance. Other non-GAAP financial
measures used by management include Policyholder surrenders, withdrawals and death
benefits (see Claims Incurred and Other Benefits section).

The
excluded items are important in understanding the Companys overall results of
operations. It is important to note that operating income (loss) and net operating income
(loss) should not be viewed as substitutes for income from continuing operations before
federal income taxes or net income (loss) determined in accordance with GAAP, rather they
are considered supplementary measures the Company believes are useful in analyzing its
results of operations. Also, the Companys definitions of these non-GAAP financial
measures may differ from those used by other companies

We
exclude net realized gains and losses on investments, after tax, from these non-GAAP
financial measures because such items are often the result of specific events, and may or
may not be at managements discretion. We believe that analyzing data excluding these
transactions helps depict trends in the underlying revenues and profitability drivers of
our business.

The
following tables reconcile our reported net income (loss) to net operating income (loss)
and net income (loss) to operating income (loss) for the first quarters of 2004 and 2003,
respectively.

|March 31,                                          | 
|-------------------------------------------------- | 
|
|                                                   | 
|Net income (loss)                                  | 
|Less:  Net realized investment gains, net of tax   | 
|                                                   | 
|Net operating income (loss)                        | 
|                                                   | 
|Remove impact:                                     | 
|Amortization of intangibles                        | 
|Cumulative effect of accounting change, net of tax | 
|                                                   | 
|Operating income (loss)                            | 
|                                                   | 

12

---

# RESULTS OF OPERATIONS

Net income (loss)

During
the first quarter of 2004, we had a net loss of approximately $146.8 million, compared to
net income of approximately $5.8 million in the first quarter of 2003. Net income before
the cumulative effect of accounting change, net of tax was approximately $11.1 million for
the first quarter of 2004 compared to approximately $5.8 million for the first quarter of
2003. Revenues were approximately $47.2 million lower than in the first quarter of 2003,
while benefits and expenses were approximately $55.1 million lower due to the
significantly different structure of the Company following the Closing of the Reinsurance
and Purchase agreements with Bank One. Operating income improved approximately $4.4
million during the quarter compared to the first quarter of 2003.

The
following table reflects the components of net income (loss) during the quarters ended
March 31, 2004 and 2003, respectively.

|March 31,                                          | 
|-------------------------------------------------- | 
|
|                                                   | 
|Total revenue                                      | 
|Total benefits and expenses                        | 
|                                                   | 
|Income before income tax expense                   | 
|Income tax expense                                 | 
|Cumulative effect of accounting change, net of tax | 
|                                                   | 
|Net income (loss)                                  | 
|                                                   | 

# REVENUE

# Net Investment Income

Pre-tax
net investment income decreased approximately $49.2 million, or 87%, to approximately $7.2
million for the quarter ended March 31, 2004 from approximately $56.4 million for the
quarter ended March 31, 2003. The decrease in investment income in 2004 was primarily due
to the Coinsurance Agreement with Bank One, which resulted in the transfer of invested
assets in the third quarter of 2003. Investment income also declined due to a lower yield
in our investment portfolio.

# Net Realized Investment
Gains

Net
realized investment gains, before tax increased approximately $1.0 million, or 34%, to
approximately $4.2 million for the quarter ended March 31, 2004 from approximately $3.2
million for the quarter ended March 31, 2003. Net realized investment gains as of March
31, 2004 were primarily due to sales of certain fixed maturity securities which were sold
to fund settlement of the Bank One Purchase Agreement. The following table provides the
breakdown by type of investment sold for net realized investment gains.

Net realized investment gains

|March 31,                                 | 
|----------------------------------------- | 
|
|                                          | 
|Fixed maturity securities                 | 
|Fixed maturity write-downs                | 
|Other losses, net                         | 
|                                          | 
|Net realized investment gains, before tax | 
|Income tax expense                        | 
|                                          | 
|Net realized investment gains, net of tax | 
|                                          | 

Unrealized
gains and losses on fixed maturity investments that are available-for-sale are not
reflected in net income. Such changes in unrealized value are recorded as a component of
accumulated other comprehensive income, net of any applicable income taxes. If, and to the
extent, a fixed maturity investment suffers an other-than-temporary decline in value, the
security is written down to net realizable value, and the write-down adversely impacts net
income.

13

---

# Premium Income

We
discontinued all new sales of our products during 2003 and do not offer any products for
new business but continue to receive premium income from renewal business. Total deposits
received are not recorded as revenue within the consolidated statements of operations.
Premiums decreased approximately $435,000 from the first quarter of 2003 to $0 during the
first quarter of 2004 due to the Coinsurance Agreement with Bank One.

Premium
income was generated from both current and previous sales that are in-force during the
reporting period and were reported as policy charges and life insurance premiums. Premium
income was generated primarily based on charges against the in-force or surrendering
contracts based on a fraction of the value of the contract.

# Separate Account Fees
and Charges

Separate
account fees and charges are generated by both BOLI and non-BOLI variable life insurance
and annuity products. Separate accounts generally pose minimal investment risk to the
Company as policyholders direct their premium to one or more subaccounts that invest in
underlying investment funds which invest in stocks and bonds. The customer bears the
investment risk on these stocks or bonds; however, the risk is subject to any underlying
guaranties provided in the contract. We receive premium tax and DAC tax expense loads from
certain policyholders, as well as administrative fees and cost of insurance charges. These
fees and charges are compensation for providing life insurance coverage to the
policyholders potentially in excess of their cash surrender values. Additional fees are
charged to cover specific benefit options elected by the policyholders, such as the GRIB
option.

Separate account fees and charges

|Three months ended                                  | 
|--------------------------------------------------- | 
|                                                   
|
|                                                    | 
|Separate account fees on non-BOLI variable life and | 
|annuitiesdirect                                    | 
|BOLI cost of insurance charges and feesdirect      | 
|BOLI cost of insurance charges and feesceded       | 
|BOLI premium tax expense loads                      | 
|                                                    | 
|Total                                               | 
|                                                    | 

Separate
account fees and charges decreased approximately 26%, or $5.8 million, in the quarter
ended March 31, 2004 compared to 2003. The decrease was primarily due to lower fees
collected on new direct variable life and annuities in large part because we have ceased
issuing new policies. The implementation of SOP 03-01 required that the Company reclassify
approximately $0.2 million in separate account fees to income within the general accounts.

# Broker-dealer Commission
Revenue

Broker-dealer
commission revenue declined approximately $7.1 million to $0 for the period ended March
31, 2004. We no longer receive broker-dealer commission revenues as the subsidiaries that
generated these revenues were sold in September 2003 in connection with the Purchase
Agreement with Bank One.

# Modified Coinsurance
Income  Related Party

Modified
coinsurance income  related party was approximately $18.5 million for the period
ended March 31, 2004. This income was primarily due to the increased value of the
embedded derivative associated with the FNWL modified coinsurance agreement.

# Other Income

Other
income decreased approximately $4.2 million for the first quarter of 2004 as compared to
the first quarter of 2003. This decrease was primarily due to lower surrender charges
during the period ended March 31, 2004 than the period ended March 31, 2003.

14

---

# BENEFITS AND EXPENSES

Interest credited to policyholders

Interest
credited to policyholders decreased approximately $36.2 million, or 93%, in the first
quarter of 2004 compared to 2003. Interest credited in the first quarter of 2004 decreased
to $2.9 million primarily due to the Coinsurance Agreement with Bank One as the majority
of interest credited was ceded to Bank One.

# Claims Incurred and
Other Benefits

Claims
incurred and other policyholder benefits decreased approximately $2.0 million, or 16%, to
approximately $10.9 million in the first quarter of 2004, compared with 2003, primarily
due to changes in reserves resulting from the Coinsurance Agreement with Bank One. Other
policyholder benefits increased slightly during the first quarter of 2004, matching the
slight increase in equity markets at March 31, 2004 from December 31, 2003.

Commencing
January 1, 2004, additional liabilities for future policy benefits related to GMDB and
GRIB were recorded with the implementation of SOP 03-01 Accounting and Reporting
by Insurance Enterprises for Certain Non Traditional Long Duration Contracts and for
Separate Accounts. For the first quarter of 2004, we increased the liability for
future policy benefits related to GMDB and GRIB benefits by $7.1 million.

Premiums
paid by and benefits paid to policyholders related to annuity and certain life insurance
products are treated as investment contract deposits and payments, respectively, per GAAP.
Benefits are treated as payments and decrease policyholders account balances.
Changes in reserves primarily represent estimated future guaranteed policyholder benefits.
Interest that accrues on annuity benefits and death benefits before pending claims are
settled comprises the majority of the other policyholder benefits.

Policyholder surrenders, withdrawals
and death benefits

|For the period ended | 
|-------------------- | 
|                    
|
|                     | 
|General account      | 
|Separate account     | 
|                     | 
|Total                | 
|                     | 

General
account surrenders, withdrawals and death benefits decreased approximately $81.1 million
during the first quarter of 2004, compared with 2003, due to ceding these benefits in
accordance with the Coinsurance Agreement with Bank One. Surrenders, withdrawals and death
benefits on separate account products decreased approximately $61.0 million, or 38%,
during the first quarter of 2004, compared with 2003. The decrease reflects lower
surrenders and withdrawals as equity markets were relatively unchanged at March 31, 2004
from December 31, 2003. The following table reconciles our policyholder surrenders,
withdrawals and death benefits with claims incurred and other policyholder benefits, as
reported in our Consolidated Statements of Operations:

Reconciliation ofClaims
incurred and other policyholder benefits toPolicyholder surrenders,
withdrawals and death benefits

|For the three months                                                   | 
|---------------------------------------------------------------------- | 
|                                                                      
|
|                                                                       | 
|Claims incurred and other policyholder benefits, per the Statements of | 
|Operations                                                             | 
|Reclass deposit-type surrenders, withdrawals and death benefits from   | 
|balance sheet                                                          | 
|Less:  (Increase) decrease in reserves                                 | 
|Less:  Interest on benefits and other                                  | 
|                                                                       | 
|Total policyholder surrenders, withdrawals and death benefits          | 
|                                                                       | 

15

---

# Taxes, Licenses
and Fees

Taxes, licenses
and fees primarily reflect taxes assessed on premiums related to BOLI. Taxes, licenses and
fees increased to approximately $1.8 million in the first quarter of 2004 compared to a
credit of approximately $0.2 million for the first quarter of 2003. The increase was
primarily due to a credit during the first quarter 2003 from premium tax overpayment in
prior periods.

Commissions and Broker-Dealer
Commissions

Commissions
decreased approximately $14.1 million, or 73%, to approximately $5.2 million during the
period ended March 31, 2004, compared with approximately $19.2 million in the period ended
March 31, 2003. The decrease was primarily due to the Sale and Coinsurance Agreements with
Bank One in 2003. The Company no longer utilizes broker-dealers as those subsidiaries
utilizing broker-dealers were sold in the Sale and Coinsurance Agreements with Bank One.
Thus there were no broker-dealer commissions during the first quarter of 2004 as compared
to approximately $7.1 million in broker-dealer commissions during the first quarter of
2003.

# Operating Expenses

Operating
expenses decreased approximately $9.4 million, or 79%, to approximately $2.6 million
during the quarter ended March 31, 2004, compared with approximately $12.0 million during
the quarter ended March 31, 2003. The decrease was primarily attributed to lower salaries
and benefits, overhead, and sales and distribution expenses due in large part to the
businesses sold and transferred in the Purchase Agreement with Bank One in September 2003.

# Deferral of Insurance
Acquisition Costs

As
the Company has ceased selling new policies, there were not any affiliated insurance
acquisition costs to be deferred during the first quarter of 2004. This compares to
approximately $21.0 million in deferred insurance acquisition costs during the three
months ended March 31, 2003.

# Amortization of
Insurance Acquisition Costs

Amortization
of insurance acquisition costs during the first quarter of 2004 decreased approximately
$5.9 million, or 51%, to approximately $5.7 million from approximately $11.5 million
during the first quarter of 2003 primarily due to the write-off of deferred insurance
acquisition costs related to the blocks of business ceded to Bank One in the third quarter
of 2003. Appreciation of the stock market results in increases in separate account assets,
which also increases asset-based separate account fees and future estimated gross profits
(EGP) and slows amortization in the current period. Implementation of SOP 03-01
established different EGPs than in the prior year. During the first quarter of 2004,
approximately $1.7 million of insurance acquisition costs were amortized due to SOP 03-01.

# Amortization of Value of
Business Acquired

There
was no amortization of value of business acquired during the first quarter of 2004 since
all value of business acquired had been written off in 2003 due to the transfer of the
underlying acquired business to Bank One as part of the Purchase Agreement.

# Amortization of Other
Intangibles

There
was no amortization of other intangibles during the first quarter of 2004 as compared to
approximately $0.2 million during the first quarter of 2003. Other intangible assets
related to the purchase of PMG Life Agency, Inc., PMG Marketing, Inc., PMG Securities
Corporation and PMG Asset Management, Inc., (collectively PMG) were amortized
on a straight-line basis through August 2003, until PMG was sold to Bank One as part of
the Purchase Agreement.

# Income Tax Expense

Income
tax expenses for the first quarter of 2004 increased by approximately $2.6 million, or
75%, compared with the first quarter of 2003, primarily due to higher pre-tax income.
Pre-tax income was approximately $17.1 million compared to approximately $9.2 million for
the first quarter of 2004 and 2003, respectively. The effective tax rate for the first
quarter of 2004 was 35% as compared to 37% for the first quarter of 2003.

# Cumulative Effect of
Accounting Change, Net of Tax

On
January 1, 2004, the Company recorded a $(157.9) million cumulative effect adjustment to
earnings equal to the revaluation of its GMDB and GRIB liabilities in accordance to SOP
03-01 (see Accounting Pronouncement in the

16

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Notes to Consolidated Financial
Statements). The cumulative adjustments to earnings were recorded net of deferred
acquisition cost and income taxes. GMDB and GRIB reserve increased $6.4 million and we
wrote down our DAC by $236.5 million to reflect the reduction of our future estimated
gross profit as a result of implementing the new SOP.

# ASSETS UNDER MANAGEMENT

The following table reflects our
assets under management:

Assets under management

|March 31,                       |  | December 31, |  
|------------------------------- |  | ------------ | -
|
|                                |  |              |  
|General account                 |  |              | $
|Separate accountBOLI           |  |              |  
|Separate accountDESTINATIONSSM |  |              |  
|Separate accountOther          |  |              |  
|                                |  |              |  
|Total                           |  |              | $
|                                |  |              |  

Total
assets under management are affected by equity market and interest rate fluctuations. The
level of policyholder surrenders, withdrawals and death benefits also directly impact the
level of assets under management from quarter to quarter. Total assets under management
decreased approximately $0.2 million at March 31, 2004, compared with December 31, 2003.
Due to SOP 03-01, general account assets increased approximately $64.4 million due to
reclassification during the first quarter of 2004. There was a corresponding decrease in
total separate accounts, with DESTINATIONSSM decreasing approximately $19.4
million, and other separate account assets decreasing approximately $45.0 million due to
reclassification. Increased deposits in DESTINATIONSSM products partially
offset the decrease from the SOP reclassification. Additionally, other separate account
assets decreased approximately $23.7 million due to unfavorable market performance and
redemptions in these other separate account funds. BOLI separate account assets increased
approximately $92.0 million, largely attributable to increased deposits and favorable
market performance in the BOLI funds.

# Investments

Our
principal investment strategy is to maintain a balanced, well-diversified portfolio
supporting the insurance contracts written. We adjust our investment portfolio depending
on various factors, including:

- our evaluation of risk and return in various markets
- the interest rate environment
- liability durations, and
- changes in market and business conditions.

Invested Assets and Cash

|March 31,                                          |  | December 31, |  
|-------------------------------------------------- |  | ------------ | -
|
|
|Cash and short-term investments                    |  |              | $
|Fixed maturity securities:                         |  |             
|Investment-grade:                                  |  |             
|NAIC(1) Class 1                                    |  |              |  
|NAIC(1) Class 2                                    |  |              |  
|Below investment-grade (NAIC classes 3 through 6): |  |             
|Performing                                         |  |              |  
|Non-performing                                     |  |              |  
|Equity securities                                  |  |              |  
|Joint venture mortgage loans                       |  |              |  
|Third-party mortgage loans                         |  |              |  
|Other real estate-related investments              |  |              |  
|Other                                              |  |              |  
|                                                   |  |              |  
|Total                                              |  |              | $
|                                                   |  |              |  

|(1) |  | National Association of Insurance Commissioners (NAIC).
                Class 1 = A and above  Class 2 = BBB through BBB+
|--- |  | -------------------------------------------------------------------------------------------------------------------------------

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# Fixed Maturity Securities

We
carry our fixed maturity securities investment portfolio, which is considered available
for sale, at estimated fair value. Fair values are sensitive to movements in interest
rates and other economic developments and can be expected to fluctuate, at times
significantly, from period to period.

Fixed
maturity securities decreased approximately $13.8 million, or 2% at March 31, 2004 from
December 31, 2003, primarily due to sales of certain fixed maturity securities which were
sold to fund the settlement of the Bank One Purchase Agreement. At March 31, 2004,
investment-grade fixed maturity securities, cash and short-term investments accounted for
approximately 89% of invested assets and cash, compared with 90% at December 31, 2003.

At
March 31, 2004, approximately 12% of investment-grade fixed maturity securities were
residential mortgage-backed securities, down from approximately 14% at December 31, 2003.
Approximately 8% of investment-grade fixed maturity securities were commercial
mortgage-backed securities at March 31, 2004 compared with 9% at December 31, 2003.
Approximately 15% of the investment-grade fixed maturity securities at March 31, 2004
consisted of asset-backed securities, compared with 14% at December 31, 2003. The majority
of investments in asset-backed securities were backed by home equity loans, automobile
loans, manufactured housing loans and credit card receivables.

# Nonaccrual Loans

Nonaccrual
loans are real estate-related investments, or mortgage loans, for which the likelihood of
collection of principal or interest is doubtful. Interest does not accrue on real
estate-related investments when it is judged that the likelihood of interest collection is
doubtful. Troubled real estate-related investments consisted of loans on nonaccrual status
primarily related to mortgage loans on properties located in Hawaii, totaling
approximately $7.1 million before reserves and write-downs at both March 31, 2004 and
December 31, 2003. There were no write-downs of nonaccrual loans during the first three
months of 2004. Loans on nonaccrual status after reserves amounted to approximately $5.0
million at March 31, 2004 and December 31, 2003.

# Derivative Instruments

A
floating rate funding agreement was reinsured in 2000 and the Company subsequently entered
into an interest rate swap agreement with a notional value of $100.0 million which expires
in November 2004 with Zurich Capital Markets, Inc., an affiliated counterparty. The
interest swap is a cash flow hedge of the floating rate funding agreement. Each period,
gains and losses resulting from changes in the fair value of the swap contract are
recorded to accumulated other comprehensive income (loss). The terms of the swap contract
have been structured to match the terms of the hedged item. No net gains or losses,
resulting from hedge ineffectiveness, were recognized in results of operations, during the
quarter ended March 31, 2004 or year ended December 31, 2003.

At
March 31, 2004 and December 31, 2003, the swap agreement had a negative market value of
approximately $4.7 million and approximately $4.5 million, respectively. The negative
market value was included as a component of other accounts payable and liabilities in the
accompanying consolidated balance sheets. A single net payment is made by one counterparty
at each due date. The Company paid approximately $1.2 million and approximately $4.6
million year to date through March 31, 2004, and December 31, 2003, respectively, as
settlement for the difference between the fixed-rate and floating-rate interest.

The
Company entered into a Modified Coinsurance Agreement with FNWL in December 2003 which
requires the separate recording of an embedded derivative in the financial statements. At
March 31, 2004 and December 31, 2003, the Company had an embedded derivative of
approximately $19.2 million and approximately $3.6 million included as a component of
modified coinsurance receivable  related party in the accompanying consolidated
balance sheet. The increase in the embedded derivative was due to market gains on the
supporting assets during the first quarter of 2004.

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# Future Policy Benefits

The
following table provides a breakdown of our reserves for future policy benefits:

Future Policy Benefits

|March 31,                                   |  | December 31, |  
|------------------------------------------- |  | ------------ | -
|
|
|General account annuities                   |  |              | $
|Interest-sensitive life insurance and other |  |              |  
|Ceded future policy benefits                |  |              |  
|                                            |  |              |  
|Total                                       |  |              | $
|                                            |  |              |  

Future
policy benefits increased $74.6 million, or 2%, at March 31, 2004 from December 31, 2003.
The increase in general account annuities was due to the increase in GMDB and GRIB
liabilities of $7.1 million in accordance with SOP 03-01 and equity market improvements.
The increase in ceded future policy benefits in the first quarter of 2004, compared with
2003, was primarily due to the transfer of reserves as part of the Coinsurance Agreement
with Bank One.

# Other Policyholder
Benefits and Funds Payable

Other
policyholder benefits and funds payable decreased approximately $1.7 million, or 1%, to
approximately $148.4 million at March 31, 2004 from approximately $150.1 million at
December 31, 2003, primarily due to a decrease in unearned BOLI revenue of $1.6 million
and a decrease in funds held for the accounts of others of approximately $0.1 million.

# Stockholders Equity

Stockholders
equity totaled approximately $505.1 million at March 31, 2004 compared with approximately
$638.3 million at December 31, 2003, a decrease of approximately $133.2 million. The
decrease in stockholders equity in the first quarter of 2004 was primarily due to an
increase of approximately $146.8 million in retained deficit due to the net loss, offset
in part by an increase in accumulated other comprehensive income of approximately $13.6
million. The increase in retained deficit was mainly due to the adoption of SOP 03-01,
which resulted in a $(157.9) million cumulative effect of accounting change, net of tax,
and a $1.2 million offset related to the unrealized gains from our MVA products being
reclassified from the separate account to the general account. The increase in accumulated
other comprehensive income was primarily related to unrealized gains in the fixed maturity
investment portfolio.

# LIQUIDITY AND CAPITAL
RESOURCES

We
carefully monitor cash and short-term investments to maintain adequate balances for timely
payment of policyholder benefits, expenses, taxes and policyholders account
balances. In addition, regulatory authorities establish minimum liquidity and capital
standards. The major ongoing sources of liquidity are deposits for fixed annuities,
premium income, investment income, separate account fees, other operating revenue and cash
provided from maturing investments or investments sold from a large, publicly traded
investment portfolio. For a complete discussion of the Companys liquidity and
capital resources, refer to the Companys 2003 Annual Report on Form 10-K.

Our
total adjusted capital and surplus on a statutory accounting basis is compared with
required capital under the National Association of Insurance Commissioners risk-based
capital (RBC) approach. During the first three months of 2004, our RBC ratio
was 353% compared to the year end RBC ratio of 337% at December 31, 2003. The RBC ratio
remains above the level that would require regulatory action.

Given
the Companys historic cash flow and current financial results, management of the
Company believes that the cash flow from operating activities over the next year will
provide sufficient liquidity for operations.

19

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# Ratings

As
of March 31, 2004, our A.M. Best rating  was A (Excellent)
and was under review. Subsequently, on May 4, 2004, the rating was downgraded to
A (Excellent), with a stable outlook. Our rating from Moodys Investors
Service (Moodys) was A3 (Good) at March
31, 2004. The Moodys rating is on CreditWatch for a possible downgrade. Our
Standard&Poors (S&P) rating at March 31, 2004
was A (Strong) with a stable outlook.

# ITEM 3.  Quantitative and
Qualitative Disclosures about Market Risk

For
additional information, please refer to the Companys Annual Report on Form 10-K for
the year ended December 31, 2003.

General

The
following discussion covers market risks associated with investment portfolios that
support the Companys general account liabilities. We do not address market risks
associated with investment portfolios that support separate account products. For those
products, the policyholder, rather than the Company, assumes any market risks. The
following is a discussion of our primary market risk exposures and how those exposures are
currently managed as of December 31, 2003 and March 31, 2004.

The
Company is subject to potential fluctuations in earnings and the fair value of certain of
its assets and liabilities, as well as variations in expected cash flows due to changes in
market interest rates and equity prices.

A
rising interest rate environment can increase net investment income as well as contribute
to both realized and unrealized fixed maturity investment losses. A declining interest
rate environment can decrease net investment income as well as contribute to both realized
and unrealized fixed maturity investment gains. Also, lower renewal crediting rates on
annuities, compared with competitors higher new money crediting rates, have
influenced certain annuity holders to seek alternative products. We mitigate this risk
somewhat by charging surrender fees, which decrease over time, when annuity holders
withdraw funds prior to maturity on certain annuity products.

Market Risk

Market
risk represents the risk of loss that may occur due to potential changes in a financial
instruments valuation of cash flows due to changes in interest rates, currency
exchange rates, equity prices or commodity prices. Market risk is directly influenced by
the volatility and liquidity in the markets in which the related underlying assets are
traded. Our primary market risk exposures are to changes in interest rates and equity
prices. There have been no material changes in market risk exposures that affect the
quantitative and qualitative disclosures presented in the Companys Annual Report on
Form 10-K for the year ended December 31, 2003.

Interest Rate Risk

Interest
rate risk is the risk that we will incur economic losses due to adverse changes in
interest rates. This risk arises from many of our primary activities, as we invest
substantial funds in interest-sensitive assets and carry significant interest-sensitive
liabilities. There have been no material changes in interest rate risk that affect the
quantitative and qualitative disclosures presented in the Companys Annual Report on
Form 10-K for the year ended December 31, 2003.

Equity Price Risk

Equity
price risk is the risk that we will incur economic losses due to adverse changes in a
particular stock, mutual fund or stock index. The Company does not have a significant
equity risk exposure from invested assets. The Companys primary exposure to equity
risk relates to certain guaranteed benefits associated with variable annuity products,
which increases the Companys benefit exposure as the equity markets decline.

Between
mid-1998 and 2003, we issued DESTINATIONSSM, a registered individual and group
variable, fixed and market value adjusted deferred annuity product. Two types of
guaranties subject us to additional equity risk as the

20

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beneficiary or contractholder may
receive a benefit for an amount greater than the fund balance under contractually defined
circumstances and terms. All contractholders received a GMDB and many purchased a GRIB. We
charged a fee for the GRIB rider. GMDBs are payable upon death, while GRIBs may be payable
on or after the seventh year anniversary of the contract if the contractholder elects to
receive a defined stream of payments (annuitize).

The GMDB and GRIB benefit is the
greatest of:

- The contract value (account value);
- The greatest anniversary value before the exercise (annuitization date or date of death),
reset up to age 80; or
- Purchase payments minus previous withdrawals, accumulated at
5.0% interest annually to age 80.

At
March 31, 2004 and December 31, 2003, the guaranteed value in excess of the contract
values for GMDB benefits was approximately $510.1 million and $462.8 million,
respectively; the comparable GRIB rider values were approximately $489.7 million and
$442.8 million, respectively. The decrease in guaranteed value was primarily due to
increases in the separate account contract values in relation to the guaranties.

FAS
97 only allowed GRIB reserves for policyholders that were deemed to have elected
annuitization because their contract values were substantially below the guaranteed
values. GMDB reserves were held for all policies. Prior to implementation of SOP 03-01, no
additional liabilities for future policy benefits related to the GMDB or GRIB were
established. The combined GMDB and GRIB reserves at December 31, 2003 were approximately
$46.6 million. Subsequent to SOP 03-01, the combined GMDB and GRIB reserves at March 31,
2004 were approximately $60.2 million.

Management
also estimates the impact to its expected future GMDB and GRIB payments in the event of
extreme adverse market conditions. For example, in the event of an immediate decline of
10% in contractholders account values as of March 31, 2004 and December 31, 2003 due to equity market
declines, the reserves for GMDB and GRIB would increase by $5.2 million and $0.4 million,
respectively. At March 31, 2004, in the event of an immediate decline of 10% in
contractholders account values due to equity market declines, the reserves for GMDB
and GRIB would increase by approximately $24 million. The selection of a 10% immediate
decrease should not be construed as a prediction by management of future market events,
but only as an example to illustrate the potential impact to earnings and cash flows of
equity market declines as a result of this guaranty. Our actual payment experience in the
future may not be consistent with the assumptions used in our model.

We
also are exposed to equity risk in DAC, as equity portfolio valuation fluctuations impact
DAC amortization, because projected fee income and guaranteed benefits payable are
components of the EGP for variable life and annuity contracts. At March 31, 2004 and
December 31, 2003, in the event of a 10% decrease in the separate account assets, the DAC
amortization would increase by approximately $6 million and approximately $970,000,
respectively. The selection of a 10% immediate decline of separate account assets should
not be construed as a prediction by management of future events, but only as illustration
of the potential impact of such an event.

# ITEM 4.  Controls and
Procedures

We
evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of March 31, 2004. Based on this evaluation, our principal executive officer
and principal financial officer concluded that our disclosure controls and procedures are
effective in alerting them to material information, including information required to be
included in our periodic SEC reports on a timely basis. It should be noted that any system
of controls is based in part upon certain assumptions designed to obtain reasonable (and
not absolute) assurance as to its effectiveness, and there can be no assurance that any
design will succeed in achieving its stated goals.

During
the first quarter of 2004, there has not occurred any change in our internal control over
financial reporting that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.

There
have been no significant changes in our internal controls, or in other factors affecting
our internal controls, since March 31, 2004.

21

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PART II.    OTHER INFORMATION

ITEM
6.  Exhibits and Reports on Form 8-K.

(a)    
          EXHIBITS.

| | Exhibit No. |  | Description
| | ----------- |  | -----------

| | 31.1 |  | Certification
of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- |  | -------------------------------------------------------------------------------

| | 31.2 |  | Certification
of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- |  | -------------------------------------------------------------------------------

| | 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.
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

(b)    
          REPORTS ON FORM 8-K.

None.









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Kemper Investors Life
Insurance Company FORM 10-Q For the fiscal period ended
March 31, 2004

_________________



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 Investors Life
Insurance Company (Registrant)

|Date: |  |  | May 14, 2004 |  |  | By: /s/ Diane C. Davis  |  | 
|----- |  |  | ------------ |  |  | ----------------------- |  | 
|      |  |  |              |  |  |                         |  | 
|      |  |  |              |  |  | Diane C. Davis          |  | 
|      |  |  |              |  |  | Chief Executive Officer |  | 
|      |  |  |              |  |  |                         |  | 



|      |  | 
|----- |  | 
|Date: |  | 
|      |  | 
|      |  | 
|      |  | 
|      |  | 

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