Zurich American Life Insurance Co – ‘10-K’ for 12/31/02

On:  Thursday, 3/27/03, at 4:58pm ET   ·   For:  12/31/02   ·   Accession #:  950131-3-1710   ·   File #:  33-43462

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Annual Report   —   Form 10-K
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 1: 10-K        Annual Report                                         73    383K 

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================================================================================

UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION  
Washington, D. C. 20549 

----------------- 

FORM 10-K 

                                                                [Download Table]
                                                        
(Mark One)                                              
   [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
              OF THE SECURITIES EXCHANGE ACT OF 1934    

For the fiscal year ended December 31, 2002.  

                                                                [Download Table]
                                                            
[_] 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 333-02491*.  

KEMPER INVESTORS LIFE INSURANCE COMPANY 
(Exact name of registrant as specified in charter)  

ILLINOIS                  36-3050975  
(State of Incorporation)       (I.R.S. Employer       
                        Identification Number)

1600 McCONNOR PARKWAY                             
SCHAUMBURG, ILLINOIS            60196-6801        
(Address of Principal           (Zip Code)        
Executive Offices)                              

Registrant's telephone number, including area code: (847) 874-4000  

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 and (2) has been subject to such filing     
requirements for the past 90 days. Yes _(check mark)  No __.                    

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

The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity 
was last sold, or the average bid and asked price of such common equity, as of  
the last business day of the registrant's most recently completed second fiscal 
quarter was $0.                                                                 

  * Pursuant to Rule 429 under the Securities Act of 1933, this Form 10-K also
relates to Commission file numbers 333-22389, 333-32632, 333-54252 and
333-86044.                                                            

================================================================================

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PART I  

Item 1. Business                                                                

Corporate structure                                                             

Kemper Investors Life Insurance Company, founded in 1947, is incorporated 
under the insurance laws of the State of Illinois and is licensed in the        
District of Columbia and all states except New York. Zurich Life Insurance      
Company of New York ("ZLICONY"), formerly Zurich Kemper Life Insurance Company  
of New York, a wholly-owned subsidiary, received its license from the State of  
New York early in 2001 and began writing business in May of 2001. Kemper        
Investors Life Insurance Company and its subsidiaries (collectively, "KILICO",  
"the Company", "we", "our" or "us") are wholly-owned by Kemper Corporation      
("Kemper"), a non-operating holding company. Kemper is a wholly-owned           
subsidiary of Zurich Holding Company of America ("ZHCA"), a holding company.    
ZHCA is a 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.                                               

Strategic initiatives                                                           

Our management, operations and strategic directions are integrated with   
those of several other Kemper subsidiaries:                                     

.  Federal Kemper Life Assurance Company ("FKLA"),                          

.  Zurich Life Insurance Company of America ("ZLICA"), and                  

.  Zurich Direct, Inc. ("ZD").                                              

This integration streamlines management, controls costs, improves         
profitability, increases operating efficiencies and productivity, and helps to  
expand the companies' distribution capabilities. Headquartered in Schaumburg,   
Illinois, FKLA markets term and interest-sensitive life insurance, as well as   
certain annuity products, primarily through brokerage general agents and other  
independent distributors. ZLICA markets term life insurance products primarily  
through ZD. ZD is an affiliated direct marketing life insurance agency          
currently marketing term life insurance directly to consumers primarily through 
various marketing media. The Company, FKLA, ZLICA and Fidelity Life             
Association, A Mutual Legal Reserve Company ("FLA"), collectively operate under 
the trade name Zurich Life, formerly Zurich Kemper Life. FLA shares directors,  
management, operations and employees with FKLA pursuant to an administrative    
and management services agreement. FLA issues policies not issued by FKLA or    
KILICO as well as other policies similar to certain FKLA policies.              

During 2002, Zurich Life completed a project to optimize the portfolio of 
businesses, the distribution channels and the products that Zurich Life sells.  
This strategic initiative was named FOCUS and was implemented in two phases.    

 The objective of phase I of FOCUS was to identify those businesses with the
potential to be significant generators of embedded value through strong present 
value of distributable earnings margins and future growth. As a result of this  
analysis, the decision was made to exit the individual variable universal life  
line of business due to lack of scale and profitability. We also chose not to   
build out a separate marketing and wholesaling group to exclusively target the  
bank distribution channel.                                                      

The objective of phase II of FOCUS was and is to aggressively look at the 
operating and cost structures necessary to support those businesses that our    
portfolio review determined will deliver the greatest profitability. Zurich     
Life dramatically improved its processes and reduced its overall operating      
expenses. Phase II work continues today and continues to be about fundamentally 
changing Zurich Life's cost structure in order to                               

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compete and win in the markets it has chosen. We benefited significantly from   
the cost reductions generated by the phase II work and expect to continue to    
benefit in future periods.                                                      

Over the last several years, we have increased the competitiveness of our 
variable annuity portfolio by adding new products with additional benefit       
options, adding multiple variable subaccount investment options and adding      
investment managers to existing variable annuity products. In 1997, we          
introduced a non-registered individual and group variable business-owned life   
insurance contract ("BOLI") and a series of individual variable life insurance  
contracts. In 1998, we introduced a new registered individual variable annuity  
product with thirty-seven variable subaccount investment options and various    
investment managers.                                                            

In 2000, as part of our plan to sharpen our focus on the group retirement 
market, we purchased PMG Securities Corporation, PMG Asset Management, Inc.,    
PMG Marketing, Inc., and PMG Life Agency, Inc. (collectively "PMG"). The total  
cost was $8.2 million, resulting in the recording of definite-lived intangible  
assets in the amount of $7.6 million. PMG is a well-respected broker-dealer     
located primarily in the eastern part of the country. We own 100 percent of the 
stock of PMG.                                                                   

 Also in 2000, we transferred $63.3 million in fixed maturity securities and
cash to fund the operations of ZLICONY.                                         

Throughout 2001 and 2000, we introduced a number of new annuity and life  
insurance products, all designed to meet the demands of our customers in an     
ever-changing marketplace. In addition, in 2002 we introduced two new variable  
annuity products. However, with the continued turbulent equity markets, we      
focused more in 2002 on sales of our fixed annuity products, which provide      
investors a more stable return on their investment.                             

Narrative description of business                                               

  We offer both individual and group fixed-rate (general account) and variable
(separate account) annuity contracts, as well as individual and group term life 
and group variable (separate account) life insurance products through various   
distribution channels. We offer 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 are important distribution channels for 
our products. Our sales mainly consist of deposits received on certain long     
duration fixed and variable annuities and BOLI contracts.                       

  Our fixed and variable annuities generally have surrender charges that are a
specified percentage of policy values or premiums and 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.                                                         

Over the last several years, in part reflecting the equity market         
environment, we have increased our emphasis on marketing our existing and new   
separate account products. Unlike the fixed-rate annuity business where we      
manage spread revenue, we receive administrative fee revenue on variable        
products, which compensates us for providing death benefits potentially in      
excess of cash surrender values. In addition, on variable life insurance        
contracts, cost of insurance charges are designed to compensate us for          
providing death benefit coverage substantially in excess of surrender values.   

As a result of this strategy, our separate account assets have increased  
over the last few years, despite a decrease in sales of our DESTINATIONS/SM/    
product (discussed below) in 2002 due the discontinuation of the                

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guaranteed retirement income benefit ("GRIB") option in November 2001. Our      
separate account assets and variable product sales were as follows (in          
millions):                                                                      

                                                                [Download Table]

                                            December 31,         
                                    -----------------------------
                                      2002      2001      2000   
                                    --------- --------- ---------
                                                                 
Separate account assets............ $13,547.4 $13,108.8 $11,179.6
                                    ========= ========= =========

                                       Year Ended December 31,   
                                    -----------------------------
                                      2002      2001      2000   
                                    --------- --------- ---------
Variable annuity sales (1)......... $   979.3 $ 2,547.5 $ 1,160.5
Variable life sales, primarily BOLI     881.4     544.9     856.1
                                    --------- --------- ---------
Total variable product sales....... $ 1,860.7 $ 3,092.4 $ 2,016.6
                                    ========= ========= =========

--------                                                                        
(1) Includes the fixed account option of the variable contracts totaling $172.9 
million, $536.8 million and $339.6 million in 2002, 2001 and 2000,      
 respectively. The fixed account option has been primarily used for dollar
cost averaging into the separate account investment options. This allows
  contractholders the option to allocate amounts to the fixed account option
and authorize pro-rated amounts to be automatically transferred into the
separate account investment options over a specified period of time.    
   Theoretically, this reduces the effects of significant market fluctuations.
However, this result is not guaranteed.                                 

In 2002, with the continued turbulent equity markets, sales of our fixed  
annuity products increased significantly. However, these sales occurred during  
a period of declining interest rates which makes managing spread revenue more   
difficult.                                                                      

Our fixed annuity sales were as follows (in millions):                    

                                                                [Download Table]

                    Year Ended December 31,
                    -----------------------
                     2002    2001    2000  
                    ------  ------  ------ 
                                           
Fixed annuity sales $370.3  $142.0  $168.6 
                    ======  ======  ====== 

Our fixed annuity sales increased $228.3 million in 2002, compared with   
2001. This increase is primarily the result of investors seeking a more stable  
return on their investments during a time of stock market volatility.           

In 2002, several new products were introduced. Archway/SM/ and Scudder ZS4
are registered individual and group variable and market value adjusted deferred 
annuities. Archway/SM/ offers contractholders 26 different variable subaccount  
investment options with various investment managers while Scudder ZS4 offers a  
total of 39 different variable subaccount investment options with various       
investment managers. These products have a four-year surrender charge period    
and a 10% free withdrawal option. In addition, there are two optional death     
benefit riders that allow contractholders to allocate contract value to the     
equity market, while still providing valuable family protection. In addition,   
modifications were made to certain existing annuity products in 2002 to either  
enhance their attractiveness to the marketplace or improve their profitability. 

In 2002 and 2001, after extensive reviews of our product portfolio, we    
exited the high net worth business and the individual variable universal life   
product line due to lack of scale and profitability. In addition, we chose not  
to build out a separate marketing and wholesaling group to exclusively target   
the bank distribution channel. We have in the past and we will continue to      
assess the various markets in which we operate as well as our product offerings 
in each such market.                                                            

In 2001, several new products were also introduced. Zurich Classic II, an 
individual and group fixed annuity, offers contractholders a number of          
guaranteed interest periods from which to choose. Zurich Preferred Plus, an     
individual and group variable annuity and market value adjusted deferred        
annuity, offers contractholders twenty-seven different variable subaccount      
investment options with various investment managers and offers a four percent   
bonus on all premiums paid. Also in 2001, ZLICONY introduced two new term life  
insurance products in the State of New York.                                    

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In 2000, several new products were also introduced. Zurich Preferred, a   
registered individual and group variable and market value adjusted deferred     
annuity, offers contractholders twenty-seven different variable subaccount      
investment options with various investment managers. Zurich Kemper              
Lifeinvestor, a registered flexible premium variable universal life product,    
permits policyholders to allocate premiums among forty-one different subaccount 
investment options with various investment managers. We also introduced a new   
individual and group fixed annuity, Zurich Classic.                             

  During mid-1998, we introduced DESTINATIONS/SM/, a registered individual and
group variable, fixed and market value adjusted deferred annuity product.       
DESTINATIONS/SM/ currently offers forty-two variable subaccount investment      
options with various investment managers, ten guarantee periods, a fixed        
account option, dollar cost averaging and, prior to November 2001, a GRIB       
option. The GRIB is an optional benefit to the DESTINATIONS/SM/ variable        
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 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 percent   
interest per year to the annuitization date.                          

  In the fourth quarter of 2001, we discontinued offering the GRIB option with
the DESTINATIONS/SM/ product due to the continued decline in the stock market,  
particularly in the wake of the tragedy of September 11th and in the first      
quarter of 2003 we discontinued all sales of DESTINATIONS/SM/. While we         
continued to receive renewal premiums and Section 1035 premium (tax-free        
exchange of certain insurance policies) during 2002, sales of the               
DESTINATIONS/SM/ product will continue to be substantially lower in future      
years because of these decisions.                                               

During mid-1997, we introduced variable BOLI, a group variable life       
insurance contract that is primarily marketed to banks and other large          
corporate entities. Also in 1997, we issued a series of non-registered variable 
individual universal life insurance contracts that were marketed primarily to   
high net worth individuals. Significant fluctuations in our sales of the        
variable life products are due mainly to the nature of the BOLI product--high   
dollar volume per sale, low frequency of sales.                                 

Investors Brokerage Services, Inc., ("IBS"), our wholly-owned subsidiary, 
and our affiliated broker-dealer, BFP Securities, LLC, are the principal        
underwriters of our registered variable annuity and variable life products. BFP 
Securities, LLC, is also the primary wholesaling distributor of our BOLI        
products.                                                                       

NAIC ratios                                                                     

The National Association of Insurance Commissioners (the "NAIC") annually 
calculates certain statutory financial ratios for most insurance companies in   
the United States. These calculations are known as the Insurance Regulatory     
Information System ("IRIS") ratios. Currently, thirteen IRIS ratios are         
calculated. The primary purpose of the ratios is to provide an "early warning"  
of potential negative developments. The NAIC reports a company's ratios to      
state regulators who may then contact the company if three or more ratios fall  
outside the NAIC's "usual ranges".                                              

  Based on statutory financial data as of December 31, 2002, we had six ratios
outside the usual ranges: the net change in capital and surplus ratio, the net  
income to total income (including realized capital gains and losses) ratio, the 
adequacy of investment income ratio, the change in premium ratio, the change in 
product mix ratio and the change in reserving ratio.                            

The results for the net change in capital and surplus ratio and the net   
income to total income ratio were primarily caused by the $84.9 million         
statutory net loss reported that was caused by the significant downturn in the  
stock market during 2002. The result for the adequacy of investment income      
ratio was primarily due to                                                      

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compressed spread income due to the current low interest rate environment and   
the use of conservative tabular interest rates. The result for the change in    
premium ratio and the change in the product mix ratio was primarily caused by a 
decrease in sales of our DESTINATIONS/SM/ product in 2002 due to the            
discontinuation of the GRIB option in November 2001. The result for the change  
in the reserving ratio was primarily due to the level of individual variable    
universal life premiums, which carry marginal reserves in the general account,  
versus the change in reserves which primarily reflects a matured block of       
universal life policies with minimal premium volume.                            

  Based on statutory financial data as of December 31, 2002, ZLICONY had three
ratios outside the usual ranges: the adequacy of investment income ratio, the   
change in premium ratio and the change in reserving ratio. The result for the   
adequacy of investment income ratio was due to ZLICONY's small amount of        
reserves relative to its total invested assets. The result for the change in    
premium ratio is due to the relatively significant increase in premium in 2002  
over 2001 as ZLICONY began writing business in 2001. The result for the change  
in reserving ratio reflects the fact that ZLICONY began writing business in     
2001 and had no single premiums in either 2001 or 2002 and had negligible       
renewal premiums in 2001.                                                       

Other than certain states requesting routine quarterly financial reporting
and/or explanations of the underlying causes for certain ratios, no state       
regulators have taken any action due to our IRIS ratios for 2002 or earlier     
years.                                                                          

Risk-based capital, asset adequacy and codification                             

 Under Illinois' and New York's asset adequacy and risk-based capital rules,
state regulators may mandate remedial action for inadequately reserved or       
inadequately capitalized companies. The asset adequacy rules are designed to    
assure that assets supporting reserves are adequate to cover liabilities under  
a variety of economic scenarios. The focus of risk-based capital rules is a     
risk-based formula that applies prescribed factors to various risk elements in  
an insurer's business and investments to develop a minimum capital requirement  
designed to be proportional to the amount of risk assumed by the insurer. We    
have capital levels exceeding any that would mandate action under the           
risk-based capital rules and are in compliance with applicable asset adequacy   
rules.                                                                          

As of January 1, 2001, the Company adopted the Codification of Statutory  
Accounting Principles ("Codification") guidance. The NAIC Accounting Practices  
and Procedures Manual is the NAIC's primary guidance on statutory accounting.   
Codification provides guidance for areas where statutory accounting had been    
silent and changes current statutory accounting in some areas. The Illinois     
Insurance Department adopted Codification, effective January 1, 2001. The       
Company's statutory surplus was positively impacted by $16.7 million upon       
adoption as a result of the net effect of recording a deferred tax asset, of    
nonadmitting non-operating system software, of nonadmitting net affiliated      
receivables and other changes caused by Codification.                           

  The New York Insurance Department has adopted Codification as a component of
prescribed or permitted practices. The State had adopted certain prescribed     
accounting practices that are at variance from those found in Codification.     
Specifically, in 2001 deferred tax assets and deferred tax liabilities were not 
recognized. In 2002, the State adopted the prescribed accounting practices of   
the NAIC for deferred tax assets and deferred tax liabilities. The New York     
Superintendent of Insurance has the right to permit other specific practices    
that deviate from prescribed practices.                                         

Reserves and reinsurance                                                        

The following table provides a breakdown of our reserves for future policy
benefits by product type (in millions):                                         

                                                                [Download Table]

                                            December 31, December 31,
                                                2002         2001    
                                            ------------ ------------
                                                                     
General account annuities..................    $3,063       $2,767   
Interest-sensitive life insurance and other       615          627   
Ceded future policy benefits...............       434          240   
                                               ------       ------   
       Total...............................    $4,112       $3,634   
                                               ======       ======   

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Ceded future policy benefits shown above reflect coinsurance (indemnity   
reinsurance) transactions where we insured liabilities of approximately $516    
million in 1992 and $416 million in 1991 with FLA and ceded benefits related to 
our BOLI reinsurance discussed below. At December 31, 2002 and 2001, our        
reinsurance reserve credit from FLA relating to these coinsurance transactions  
totaled approximately $215.3 million and $230.1 million, respectively.          
Utilizing FKLA's employees, we are the servicing company for this coinsured     
business and we are reimbursed by FLA for the related servicing expenses. The   
increase in ceded future policy benefits in 2002, compared with 2001, is        
primarily due to BOLI ceded benefits in 2002 that were classified as a funds    
withheld account ("FWA") liability in 2001, as discussed below.                 

In 1996, we assumed, on a yearly renewable term basis, approximately $14.4
billion (face amount) of term life insurance from FKLA. Effective September 30, 
2000, this reinsurance agreement with FKLA was terminated. Upon termination, we 
returned $7.7 million of premiums to FKLA, representing consideration for the   
recaptured reserves. Due to the difference in the generally accepted accounting 
principles basis and the statutory accounting basis of the reserves related to  
this recaptured business, we recorded a deemed dividend distribution to Kemper  
of $16.3 million in 2000. (See the note captioned "Reinsurance" in the Notes to 
Consolidated Financial Statements.)                                             

In the fourth quarter of 2000, we assumed from FKLA $100.0 million in     
premium deposits 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       
trusts established by a securities firm. The securities firm sold interests in  
these trusts to institutional investors. This Funding Agreement has a variable  
rate of interest, is an obligation of our general account and is recorded as    
future policy benefits. (See the note captioned "Reinsurance" in the Notes to   
Consolidated Financial Statements.)                                             

Effective December 31, 2001, the Company entered into a quota-share       
reinsurance agreement with a ZFS affiliated company, Zurich Insurance Company,  
Bermuda Branch ("ZICBB"). Under the terms of this agreement, the Company cedes  
100 percent of the net amount at risk of the guaranteed minimum death benefit   
and guaranteed retirement income benefit portions of a small number of specific 
variable annuity contracts. As consideration for this reinsurance coverage, the 
Company cedes 100 percent of all charges to policyholders and all revenue       
sharing income received from fund managers related to such reinsured policies.  
In 2001, the Company received $7.9 million of ceding commissions and expense    
allowances, and paid $1.2 million of ceded premiums, related to this            
reinsurance agreement. The account values related to these policies are held in 
the Company's separate account during the accumulation period of the contracts. 
The reserve credits under this treaty are secured by a trust agreement that     
requires the fair market value of assets therein to be at least equal to 102    
percent of such reserve credits.                                                

  In January 2003, the specific annuities that comprised the block of business
ceded to ZICBB were surrendered. Approximately $5.0 million in surrender        
charges collected on these specific annuities was paid to ZICBB at the end of   
February, 2003, as the final settlement payment related to this reinsurance     
agreement.                                                                      

The net amount at risk of the guaranteed minimum death benefit and        
guaranteed retirement income benefit on certain new variable annuity contracts  
issued between March 1, 1997 and April 30, 2000 were ceded to outside           
reinsurers. As of December 31, 2002 and 2001, the reinsurance recoverable       
related to reinsuring the net amount at risk on these contracts amounted to     
$24.7 million and $8.3 million, respectively.                                   

 We are party to a reinsurance agreement with ZICBB. Under the terms of this
agreement, we cede, on a yearly renewable term basis, 100 percent of the net    
amount at risk (death benefit payable to the insured less the insured's         
separate account cash surrender value) related to BOLI. As consideration for    
this reinsurance coverage, we cede separate account fees (cost of insurance     
charges) to ZICBB. Until January 25, 2002, we retained a portion of such funds  
under the terms of a reinsurance agreement in a FWA, which was included as a    
component of benefits and funds payable in the accompanying 2001 consolidated   
balance sheet.                                                                  

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 During the first quarter of 2002, we amended our BOLI reinsurance agreement
with ZICBB. Under the amended agreement, the balance in the FWA was transferred 
to a trust account that acts as security for the reinsurance agreement. On      
January 25, 2002, approximately $222.5 million in cash was transferred to the   
trust account. The trust account is not reflected in our consolidated financial 
statements but is included in ZICBB's financial statements. At December 31,     
2002, reserve credits totaling $237.6 million were secured by the trust         
agreement which was supported by cash and invested assets with a fair value of  
approximately $252.6 million.                                                   

The following table contains amounts related to the BOLI reinsurance      
agreement with ZICBB (in millions):                                             

Business Owned Life Insurance (BOLI)                                            
(in millions)                                                                   

                                                                [Download Table]

                                   Year Ended December 31,   
                                ---------------------------- 
                                  2002      2001      2000   
                                --------  --------  -------- 
                                                             
Face amount in force........... $ 85,592  $ 85,564  $ 85,358 
                                ========  ========  ======== 
Net amount at risk ceded....... $(76,288) $(76,283) $(78,169)
                                ========  ========  ======== 
Cost of insurance charges ceded $  156.5  $  168.1  $  173.8 
                                ========  ========  ======== 
Funds withheld account......... $     --  $  236.1  $  228.8 
                                ========  ========  ======== 

  As previously mentioned, the trust account at ZICBB acts as security for the
reinsurance agreement. In 2001, and until January 25, 2002, the FWA supported   
reserve credits on reinsurance ceded on the BOLI product.                       

Competition                                                                     

We are in a highly competitive business. We compete with a large number of
other stock and mutual life insurance companies, many of which are larger       
financially, although none is truly dominant in the industry. KILICO, with its  
emphasis on annuity products, also competes for savings dollars with securities 
brokerage and investment advisory firms as well as other institutions that      
manage assets, produce financial products or market other types of investment   
products.                                                                       

Our principal methods of competition continue to be innovative products,  
often designed for selected distribution channels and economic conditions, as   
well as appropriate product pricing, careful underwriting, expense control and  
the quality of services provided to policyholders and agents.                   

To address our competition, we have adopted certain business strategies.  
These include:                                                                  

.  customer segmentation and focus,                                         

.  continued focus on existing and new variable and fixed annuities and BOLI
products,                                                             

.  distribution through diversified channels,                               

.  systematic review of investment risk and our capital position,           

.  ongoing efforts to continue as a low-cost provider of insurance products 
  and high-quality services to agents and policyholders through the use of
technology,                                                           

.  high quality, efficient operations, and                                  

.  rigorous expense management.                                             

Rankings and ratings                                                            

According to Best's Insurance Reports, 2002, as of December 31, 2001, we  
ranked 47th by admitted assets, 50th by net premiums written and 173rd by       
capital and surplus out of the top 250 life insurers.                           

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Our December 31, 2002 ratings were as follows:                            

                                                                [Download Table]

                              Rating    
                          --------------
                                        
A.M. Best Company........ A  (Excellent)
Moody's Investors Service A2 (Good)     
Standard & Poor's........ A+ (Strong)   

Our Standard & Poor's ("S&P") rating was coupled with ZFS through December
31, 2001, due to the perceived financial strength of ZFS and Zurich Life and    
the designation of Zurich Life as one of ZFS' core businesses. In September     
2001, S&P announced that it was downgrading several insurance groups based on   
the potential catastrophic losses from the September 11, 2001 terrorist attacks 
on the United States of America, and the subsequent fall in equity markets. At  
that time, ZFS was placed on CreditWatch with negative implications and its     
rating, and therefore ours, was downgraded from "AA+" to "AA". In February      
2002, ZFS received another downgrade to "AA-" and remained on CreditWatch with  
negative implications. During 2001, ZFS considered the divestiture of Zurich    
Life. Although ZFS made the decision to retain Zurich Life in December 2001,    
S&P decided to uncouple Zurich Life's ratings from ZFS in March 2002, primarily 
due to ZFS's consideration of the Zurich Life divestiture. At that time, we     
received a rating of "A+", S&P's fifth highest rating, reflecting the           
non-supported strength of Zurich Life and were taken off CreditWatch. In August 
2002, the outlook for ZFS, our parent, was revised from stable to negative and  
concurrently our A+ rating was placed on negative outlook.                      

We share our A.M. Best rating with ZFS. In the fall of 2001, A.M. Best    
placed ZFS under review with developing implications but did not change its     
ratings. In March 2002, ZFS's A.M. Best A+ (Superior) financial strength rating 
was affirmed, removed from under review and assigned a negative outlook. In     
September 2002, A.M. Best announced that it was downgrading ZFS to "A"          
(Excellent) from "A+" (Superior). In December 2002, A.M. Best affirmed the "A"  
rating of ZFS and its core operating subsidiaries and placed ZFS on a           
positive outlook.                                                               

Our Moody's Investors Service ("Moody's") Aa3 rating was reviewed in March
2002 and placed under review for possible downgrade. In June 2002, Moody's      
lowered our rating to A2, its sixth highest rating out of nineteen.             

Employees                                                                       

  At December 31, 2002, we used the services of approximately 959 employees of
FKLA, which are also shared with FLA and ZLICA.                                 

Regulation                                                                      

We are generally subject to regulation and supervision by the insurance   
departments of Illinois and other jurisdictions where we are licensed to do     
business. These departments enforce laws and regulations designed to assure     
that insurance companies maintain adequate capital and surplus, manage          
investments according to prescribed character, standards and limitations and    
comply with a variety of operational standards. The departments also make       
periodic examinations of individual companies and review annual and other       
reports on the financial condition of each company operating within their       
respective jurisdictions. Regulations, which often vary from state to state,    
cover most aspects of the life insurance business, including market practices,  
policy forms and accounting and financial reporting procedures.                 

Insurance holding company laws enacted in many states grant additional    
powers to state insurance commissioners to regulate acquisitions of and by      
domestic insurance companies, to require periodic disclosure of relevant        
information and to regulate certain transactions with related companies. These  
laws also impose prior approval requirements for certain transactions with      
affiliates and generally regulate dividend distributions by an insurance        
subsidiary to its holding company parent.                                       

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In addition, certain of our variable life insurance and variable annuity  
products, and the related separate accounts, are subject to regulation by the   
Securities and Exchange Commission (the "SEC").                                 

We believe we are in compliance, in all known material respects, with all 
applicable regulations. For information on regulatory and other dividend        
restrictions, see ITEM 5(c).                                                    

Investments                                                                     

A changing marketplace has affected the life insurance industry. To       
accommodate customers' increased preference for safety over higher yields, we   
have systematically reduced our investment risk and strengthened our capital    
position. During 2002, because of continued poor economic conditions, which     
resulted in both write-downs and credit-related losses in our fixed income      
portfolio, we repositioned this portfolio. The losses noted above were largely  
offset by realized gains on sales in the portfolio and the proceeds were        
primarily reinvested in higher quality, less risky investments at the expense   
of reducing our portfolio yield. This should result in less volatility in our   
fixed income portfolio in the future.                                           

  Our cash flow is carefully monitored and our investment program is regularly
and systematically planned to provide funds to meet all obligations and to      
optimize investment return. For investment securities, portfolio management is  
handled by Deutsche Investment Management Americas, Inc. ("DIM"), formerly      
Zurich Scudder Investments, Inc. ("ZSI"), a subsidiary of Zurich at December    
31, 2001. DIM provides investment services including purchases and sales of     
securities, under the supervision of the Investment Operating Committee of the  
Company. On September 24, 2001, ZFS announced that it would sell 100% of its    
ownership in ZSI to Deutsche Bank in a transaction valued at $2.5 billion. The  
sale was completed on April 5, 2002. This transaction did not included          
Scudder's United Kingdom operations, Threadneedle Investments.                  

Our real estate-related investments are handled by a minority-owned Kemper
real estate subsidiary. Investment policy is directed by our board of           
directors. Our investment strategies take into account the nature of each       
annuity and life insurance product, the respective crediting rates and the      
estimated future policy benefit maturities.                                     

Forward-looking statements                                                      

All statements, trend analyses and other information contained in this    
report and elsewhere (such as in other filings by KILICO with the SEC, press    
releases, presentations by KILICO 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 words such as "anticipate," "believe,"       
"plan," "estimate," "expect," "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. These factors include, among other things:                          

   (i) general economic conditions and other factors, including prevailing
interest rate levels and stock market performance, which may affect the   
 ability of KILICO to sell its products, the market value of our investments
and the lapse rate and profitability of our contracts,                    

(ii) our ability to achieve anticipated levels of operational       
efficiencies through certain cost-saving initiatives,                     

(iii) customer response to new products, distribution channels and  
marketing initiatives,                                                    

(iv) mortality, morbidity, and other factors which may affect the   
profitability of our insurance products,                                  

(v) changes in the federal income tax laws and regulations which may
affect the relative tax advantages of some of our products,               

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    (vi) increasing competition which could affect the sale of our products,

(vii) regulatory changes or actions, including those relating to    
regulation of financial services affecting (among other things) bank sales
  and underwriting of insurance products, and regulations relating to the sale
and underwriting and pricing of insurance products, and                   

    (viii) the risk factors or uncertainties listed from time to time in our
other filings with the SEC.                                               

Item 2. Properties                                                              

  We share 307,804 square feet of office space leased by Zurich North America,
an affiliate, from Wells Real Estate Funds, located in Schaumburg, Illinois.    
FKLA makes payments for its share of lease expense per terms of the agreement.  

Item 3. Legal Proceedings                                                       

We have been named as defendant in certain lawsuits incidental to our     
insurance business. Based upon the advice of legal counsel, our management      
believes that the resolution of these various lawsuits will not result in any   
material adverse effect on our consolidated financial position.                 

Item 4. Submission of Matters to a Vote of Security Holders                     

None.                                                                     

PART II 

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters   

(a) There is no established public trading market for KILICO's common stock.    

(b) Kemper owns all of the common stock of KILICO as of the date of this filing.

(c) A cash dividend of $20.0 million was declared and paid to Kemper on June    
 29, 2000. During 2000, we also reported a deemed dividend distribution of
 $16.3 million to Kemper. Cash dividends of $10.0 million and $3.0 million
 were declared and paid to Kemper on June 28, 2001 and September 27, 2001,
respectively. No dividends were paid by the Company in 2002 and no      
  additional dividends have been declared or paid through the date of filing
this Form 10-K.                                                         

 On September 20, 2002, Kemper contributed $30 million of capital to KILICO.
In addition, on December 31, 2002, Kemper forgave a $7.3 million tax      
receivable from KILICO, which was recorded as a capital contribution on   
KILICO's books.                                                           

Restrictions on dividends                                                       

Dividend distributions from us to our stockholder are restricted by state 
insurance laws. In Illinois, where we are domiciled, if a proposed dividend,    
together with other distributions during the 12 preceding months, would exceed  
the greater of (a) ten percent of our statutory surplus as regards              
policyholders as of the preceding December 31, or (b) our statutorily adjusted  
net income for the preceding calendar year, then the proposed dividend must be  
reported to the director of insurance at least 30 days prior to the proposed    
payment date. The dividend then may be paid only if not disapproved. The        
Illinois insurance laws also permit payment of dividends only out of earned     
surplus, exclusive of most unrealized capital gains. During 2001, the Company   
paid dividends to Kemper in the amount of $13.0 million, which were approved by 
the Illinois Department of Insurance. In 2002, the Company did not pay any      
dividends. The Company cannot pay any dividends in 2003 without Illinois        
Department of Insurance approval.                                               

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Item 6. Selected Financial Data                                                 

  The following table sets forth selected financial information for KILICO for
the five years ended December 31, 2002. Such information should be read in      
conjunction with our consolidated financial statements and notes thereto,       
included in ITEM 8 of this Annual Report on Form 10-K. All amounts are shown in 
millions.                                                                       

                                                        [Enlarge/Download Table]

                                      December 31, December 31, December 31, December 31, December 31,
                                          2002         2001         2000         1999         1998    
                                      ------------ ------------ ------------ ------------ ------------
                                                                                                      
Total revenue........................  $   380.8    $   398.3    $   360.9    $   363.4    $   419.7  
                                       =========    =========    =========    =========    =========  
Net income (loss) excluding realized                                                                  
  investment results.................  $  (168.5)   $    38.2    $    53.7    $    51.1    $    31.4  
                                       =========    =========    =========    =========    =========  
Net income before goodwill impairment                                                                 
  and cumulative effect of accounting                                                                 
  change.............................  $     9.4    $    51.6    $    48.3    $    44.9    $    65.1  
                                       =========    =========    =========    =========    =========  
Net income (loss)....................  $  (169.0)   $    51.6    $    48.3    $    44.9    $    65.1  
                                       =========    =========    =========    =========    =========  
Financial summary                                                                                     
Total separate account assets........  $13,547.4    $13,108.8    $11,179.6    $ 9,778.1    $ 7,099.2  
                                       =========    =========    =========    =========    =========  
Total assets.........................  $18,666.3    $18,089.8    $16,006.6    $14,655.7    $12,239.7  
                                       =========    =========    =========    =========    =========  
Future policy benefits, net of                                                                        
  reinsurance........................  $ 3,677.9    $ 3,393.6    $ 3,278.0    $ 3,409.1    $ 3,561.6  
                                       =========    =========    =========    =========    =========  
Stockholder's equity.................  $   723.8    $   818.0    $   730.1    $   630.0    $   853.9  
                                       =========    =========    =========    =========    =========  

As further discussed in ITEM 7, Management's Discussion and Analysis of   
Financial Condition and Results of Operations, we wrote down our goodwill asset 
as of January 1, 2002, in accordance with Statement of Financial Accounting     
Standard No. 142, Goodwill and Other Intangible Assets, issued in July 2001.    
The write-down totaled $178.4 million.                                          

Item 7. Management's Discussion and Analysis of Financial Condition and Results 
of Operations                                                                   

RESULTS OF OPERATIONS 

We recorded a net loss of $169.0 million in 2002, compared with net income
of $51.6 million and $48.3 million in 2001 and 2000, respectively. The net loss 
was attributable to the write-off of the goodwill asset and lower operating     
earnings for 2002, compared with 2001. The increase in net income in 2001,      
compared with 2000, was due to an increase in net realized investment gains     
somewhat offset by a decrease in operating earnings before amortization of      
goodwill and other intangibles.                                                 

The following table reflects the components of net income (loss):         

Net income (loss)                                                               
(in millions)                                                                   

                                                        [Enlarge/Download Table]

                                                                         Year Ended December 31, 
                                                                         ----------------------- 
                                                                           2002    2001    2000  
                                                                         -------  ------  ------ 
                                                                                                 
Operating earnings before amortization of goodwill and other intangibles $  10.7  $ 51.9  $ 66.8 
Goodwill impairment.....................................................  (156.5)     --      -- 
Amortization of goodwill and other intangibles..........................     (.8)  (13.7)  (13.1)
Net realized investment gains (losses)..................................     (.5)   13.4    (5.4)
Cumulative effect of accounting change, net of tax......................   (21.9)     --      -- 
                                                                         -------  ------  ------ 
       Net income (loss)................................................ $(169.0) $ 51.6  $ 48.3 
                                                                         =======  ======  ====== 

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Net realized investment results, after tax                                      
(in millions)                                                                   

                                                                [Download Table]

                           Year Ended December 31,
                           ---------------------  
                            2002     2001    2000 
                           ------   ------  ----- 
                                                  
Fixed maturity securities. $ 22.0   $ 12.9  $ (.5)
Fixed maturity write-downs  (12.0)   (10.1)  (7.4)
Real estate-related gains.     .6     10.4    1.1 
Other gains (losses), net.  (11.1)      .2    1.4 
                           ------   ------  ----- 
       Total.............. $  (.5)  $ 13.4  $(5.4)
                           ======   ======  ===== 

 Net realized investment gains on fixed maturity securities in both 2002 and
2001 were primarily due to the sale of securities in a decreasing interest rate 
environment that resulted in higher market values in fixed maturity             
investments. Significantly offsetting these realized gains were                 
other-than-temporary declines in value of certain securities due to             
credit-related concerns about a number of issuers and collateralized bond       
obligation impairment losses related to Emerging Issues Task Force 99-20,       
Recognition of Interest Income and Impairment on Purchased and Retained         
Beneficial Interests in Securitized Financial Assets. (See INVESTMENTS          
section.) These pre-tax write-downs totaled $18.5 million and $15.5 million in  
2002 and 2001, respectively. In 2000, pre-tax fixed maturity write-downs        
totaled $11.4 million and were primarily related to other-than-temporary        
declines in value of certain securities due to credit-related concerns about a  
small number of issuers.                                                        

The other losses, net, for 2002 consist primarily of a write-down on a    
leveraged lease that covers two aircraft. The aircraft are leased by United     
Airlines ("UAL") and were written down to zero subsequent to UAL filing Chapter 
11 bankruptcy in the fourth quarter of 2002. The pre-tax write-down totaled     
$17.5 million.                                                                  

The real estate-related gains in 2001 were primarily due to the release of
reserve allowances originally recorded against certain mortgage loans. (See     
INVESTMENTS section.).                                                          

The decrease in amortization of goodwill and other intangibles was due to 
the implementation of Statement of Financial Accounting Standards No. 142       
("SFAS 142"), Goodwill and Other Intangible Assets, issued in July 2001. SFAS   
142 primarily addresses the accounting that must be applied to goodwill and     
intangible assets subsequent to their acquisition. Effective January 1, 2002,   
SFAS 142 requires that goodwill and indefinite-lived intangible assets no       
longer be amortized, but be tested annually for impairment at the reporting     
unit level.                                                                     

  We tested our goodwill for impairment, based on the guidance under SFAS 142,
at the life insurance and annuities operating segment level as a result of a    
shift in our financial focus to a line of business performance view. As a       
result of the testing performed, an impairment of $21.9 million was recorded in 
the annuities segment as of June 30, 2002 as a cumulative effect of accounting  
change, net of tax. The fair value of that segment was estimated using expected 
present value of future cash flows for both current business in-force and       
future production estimates.                                                    

  In September 2002, the board of directors of our indirect, 100% shareholder,
Zurich Financial Services Group ("the Group"), approved a plan designed to      
improve the profitability of the Group and its subsidiaries. Under this plan,   
the Group considered a number of strategic options, the completion of which     
could have a significant impact on the recoverability of the carrying value of  
certain assets. Among the assets affected by the approval of the plan is the    
goodwill associated with the acquisition of the Zurich Life companies. The      
Company filed its Form 10-Q for the period ended June 30, 2002 prior to the     
board's action. As a result, the Company recorded the complete write-down of    
the remaining goodwill of $156.5 million in the third quarter of 2002, the      
period during which we became aware of this action by the Group's board of      
directors.                                                                      

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  Operating earnings before the amortization of goodwill and other intangibles
decreased to $10.7 million in 2002, compared with $51.9 million in 2001,        
primarily due to:                                                               

 .  a decrease in spread revenue (net investment income less interest credited
to policyholders),                                                    

.  an increase in claims incurred and other policyholder benefits,          

.  an increase in taxes, licenses and fees,                                 

.  an increase in commissions and operating expenses, net of the deferral of
insurance acquisition costs, and                                      

.  an increase in the amortization of insurance acquisition costs and value 
of business acquired,                                                 

offset by                                                             

.  an increase in separate account fees,                                

.  an increase in other income, and                                     

.  a decrease in income tax expense.                                    

  Operating earnings before the amortization of goodwill and other intangibles
decreased to $51.9 million in 2001, compared with $66.8 million in 2000,        
primarily due to:                                                               

.  a decrease in premium income,                                            

.  an increase in claims incurred and other policyholder benefits,          

.  an increase in commissions and operating expenses, net of the deferral of
insurance acquisition costs, and                                      

.  an increase in income tax expense,                                       

offset by                                                             

.  an increase in separate account fees,                                

.  an increase in other income,                                         

.  an increase in spread revenue (net investment income less interest   
credited to policyholders),                                       

.  a decrease in taxes, licenses and fees, and                          

  .  a decrease in the amortization of insurance acquisition costs and value
of business acquired.                                             

The following table reflects our sales and reinsurance assumed:           

Sales and reinsurance assumed                                                   
(in millions)                                                                   

                                                                [Download Table]

                                                         Year Ended December 31,  
                                                       -------------------------- 
                                                         2002     2001     2000   
                                                       -------- -------- -------- 
                                                                                  
Annuities:                                                                        
   Variable........................................... $  979.3 $2,547.4 $1,160.5 
   Fixed..............................................    370.3    142.0    168.6 
   Funding Agreements assumed.........................       --       --    100.0 
                                                       -------- -------- -------- 
       Total annuities................................  1,349.6  2,689.4  1,429.1 
                                                       -------- -------- -------- 
Life Insurance:                                                                   
   Separate account business-owned variable universal                             
     life ("BOLI")....................................    863.7    515.3    819.6 
   Separate account variable universal life...........     17.7     29.6     36.5 
   Term life..........................................      3.7      1.6     (8.2)
   Interest-sensitive life............................      1.1      1.3      1.4 
                                                       -------- -------- -------- 
       Total life.....................................    886.2    547.8    849.3 
                                                       -------- -------- -------- 
          Total sales................................. $2,235.8 $3,237.2 $2,278.4 
                                                       ======== ======== ======== 

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 Sales of annuity products consist of total deposits received, which are not
recorded as revenue within the consolidated statements of operations. Variable  
annuity deposits, including deposits under the fixed account option, decreased  
$1.6 billion in 2002, compared with 2001. The decrease in the variable annuity  
deposits is primarily due to lower sales of our DESTINATIONS/SM/ product. In    
the fourth quarter of 2001, we discontinued offering the guaranteed retirement  
income benefit ("GRIB") option with the DESTINATIONS/SM/ product due to the     
continued decline in the stock market over the past two years and in the first  
quarter of 2003, we discontinued all sales of DESTINATIONS/SM/. While we        
continued to receive renewal premiums and Section 1035 premium (tax-free        
exchange of certain insurance policies) during 2002, sales of the               
DESTINATIONS/SM /product will continue to be substantially lower in future      
years because of these decisions.                                               

The GRIB is an optional benefit to the DESTINATIONS/SM/ variable 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 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 percent   
interest per year to the annuitization date.                          

Fixed annuity deposits increased $228.3 million in 2002 when compared with
2001, primarily due to the successful promotion of our Zurich Classic II fixed  
annuity product in the second half of 2002.                                     

The $100.0 million Funding Agreement assumed in 2000 resulted from a new  
reinsurance agreement with FKLA. (See the note captioned "Reinsurance" in the   
Notes to Consolidated Financial Statements.)                                    

Sales of variable annuities increase separate account fees earned. In     
addition, they pose less investment risk to us, to the extent that              
policyholders allocate net premium to one or more subaccounts that invest in    
underlying investment funds that invest in stocks or bonds. The customer bears  
the investment risk on these stocks or bonds, however, the risk is subject to   
the underlying guarantees provided in the contract. Additional fees are charged 
to cover specific benefit options elected by the policyholders, such as the     
GRIB option.                                                                    

Sales of BOLI increased $348.4 million to $863.7 million in 2002, compared
with $515.3 million in 2001, the majority of which was attributable to renewal  
premiums. Due to the nature of the product--high dollar volume per sale, low    
frequency of sales, the level of BOLI sales can fluctuate, sometimes            
significantly, between periods. Continued maturation of the BOLI market and our 
ratings as a company can also affect the level of BOLI sales. Sales of          
individual variable universal life insurance decreased $11.9 million to $17.7   
million in 2002, compared with $29.6 million in 2001 as we exited this product  
line in 2002 due to lack of scale and profitability. Sales of these separate    
account variable products pose minimal investment risk as policyholders also    
direct their premium to one or more subaccounts that invest in underlying       
investment funds which invest in stocks and bonds. 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.                                                    

Face amount of new variable universal life insurance business issued      
amounted to $0.1 billion in 2002, compared with $2.2 billion in 2001 and $3.8   
billion in 2000. The decrease in face amount issued in 2002, compared with      
2001, is primarily due to the decrease in first year sales of BOLI.             

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The following table reflects our assets under management:                 

Assets under management                                                         
(in millions)                                                                   

                                                                [Download Table]

                             2002      2001      2000   
                           --------- --------- ---------
                                                        
General account........... $ 3,930.9 $ 3,815.8 $ 3,689.5
Separate account--BOLI....   8,769.6   7,598.9   6,905.9
Separate account--non-BOLI   4,777.8   5,509.8   4,273.7
                           --------- --------- ---------
       Total.............. $17,478.3 $16,924.5 $14,869.1
                           ========= ========= =========

Total assets under management have increased over the last few years      
primarily reflecting the volume of sales. The level of policyholder surrenders, 
withdrawals and death benefits also directly impacts the level of assets under  
management from year to year. Total assets under management were also affected  
by equity market and interest rate fluctuations.                                
Spread revenue decreased in 2002, compared with 2001, due to a larger     
decrease in investment income than the decrease in interest credited. The       
decrease in investment income was primarily due to the reinvestment of 2001 and 
2002 sales proceeds, maturities and prepayments in lower yielding securities    
due to the lower interest rate environment, the non-recurrence of the positive  
impact during 2001 of placing certain mortgage loans on accrual status in the   
fourth quarter of 2001 (see INVESTMENTS--Real estate-related investments for    
further discussion) and the loss of investment income earned on the BOLI FWA    
during 2002. During the first quarter of 2002, we amended our BOLI reinsurance  
agreement with a ZFS affiliated company, Zurich Insurance Company, Bermuda      
Branch ("ZICBB"). Under the amended agreement, the balance in the FWA was       
transferred to a trust account that acts as security for the reinsurance        
agreement. On January, 25, 2002, approximately $222.5 million in cash was       
transferred to the trust account. The trust account is not reflected in our     
consolidated financial statements but is included in ZICBB's financial          
statements.                                                                     

The decrease in interest credited in 2002, compared to 2001, was due to   
lower average interest crediting rates reflecting the declining interest rate   
environment, somewhat offset by higher average policyholder account balances.   

Spread revenue increased in 2001, compared with 2000, due to a larger     
increase in investment income than in interest credited to policyholders. The   
increase in investment income in 2001, compared with 2000, was primarily due to 
placing certain mortgage loans on accrual status in the fourth quarter of 2001. 
(See INVESTMENTS--Real estate-related investments for further discussion.) This 
increase was somewhat offset by the reinvestment of 2000 and 2001 sales         
proceeds, maturities and prepayments in lower yielding securities due to the    
lower interest rate environment.                                                

The increase in interest credited in 2001, compared with 2000, was due to 
higher average policyholder account balances and a slight increase in average   
interest crediting rates, primarily due to new business issued.                 

Investment income was also reduced over the last three years reflecting   
purchase accounting adjustments related to the amortization of premiums on      
fixed maturity investments. Under purchase accounting, the fair value of the    
fixed maturity investments as of January 4, 1996, the date Kemper was acquired  
by ZFS, became the new cost basis in the investments. The difference between    
the new cost basis and original par is then amortized against investment income 
over the remaining effective lives of the fixed maturity investments. As a      
result of the interest rate environment as of January 4, 1996, the market value 
of the fixed maturity investments was approximately $133.9 million greater than 
original par. Premium amortization decreased investment income by approximately 
$1.9 million in 2002, compared with $2.8 million in 2001 and $3.5 million in    
2000.                                                                           

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Separate account fees and charges                                               
(in millions)                                                                   

                                                                [Download Table]

                                                      2002     2001     2000  
                                                    -------  -------  ------- 
                                                                              
Separate account fees on non-BOLI variable life and                           
  annuities........................................ $  85.9  $  67.6  $  62.1 
BOLI cost of insurance charges and fees--direct....   164.8    163.5    164.4 
BOLI cost of insurance charges and fees--ceded.....  (156.9)  (168.4)  (173.8)
BOLI premium tax expense loads.....................    16.2      8.3     15.6 
                                                    -------  -------  ------- 
       Total....................................... $ 110.0  $  71.0  $  68.3 
                                                    =======  =======  ======= 

Included in separate account fees and charges are administrative and other
fees received from the separate account products of $79.0 million in 2002,      
compared with $66.7 million and $61.4 million in 2001 and 2000, respectively.   
Administrative and other fee revenue increased in each of the last three years  
due to growth in average separate account assets, somewhat offset by the        
decline in the stock market, as the fees are primarily asset-based. Also        
included in separate account fees and charges are cost of insurance ("COI")     
charges related to variable universal life insurance, primarily BOLI, of $163.1 
million, $162.1 million and $164.4 million in 2002, 2001 and 2000,              
respectively. Of these COI charges, $156.5 million, $168.1 million and $173.8   
million, respectively, were ceded to ZICBB.                                     
  Net BOLI cost of insurance charges and fees increased $12.8 million in 2002,
compared with 2001, primarily related to the transfer of the assets supporting  
the FWA to a trust, as previously discussed. Prior to the transfer, we ceded    
additional cost of insurance charges due to appreciation of the FWA, resulting  
in ceded COI charges in excess of 100 percent of direct COI charges received.   

Other income increased $5.5 million in 2002, compared with 2001. The      
increase was primarily due to an increase in surrender charge revenue as well   
as an increase in commission revenue from broker-dealer operations. Surrender   
charge revenue totaled $10.1 million in 2002, compared with $6.5 million and    
$6.0 million in 2001 and 2000, respectively. The increase in surrender charge   
revenue over the past three years reflects the increased policyholder surrender 
and withdrawal activity, excluding BOLI, during the same period. Broker-dealer  
commission revenue increased $2.5 million in 2002, compared with 2001. This     
increase was substantially offset by an increase in broker-dealer commission    
expense in 2002.                                                                

Other income increased $1.7 million in 2001, compared with 2000. The      
increase was primarily due to an increase in commission revenue from            
broker-dealer operations. The increase was substantially offset by an increase  
in broker-dealer commission expense in 2001.                                    

Policyholder surrenders, withdrawals and death benefits                         
(in millions)                                                                   

                                                                [Download Table]

                   2002   2001   2000 
                  ------ ------ ------
                                      
General account.. $358.6 $450.9 $579.1
Separate account.  552.1  523.8  393.3
                  ------ ------ ------
       Total..... $910.7 $974.7 $972.4
                  ====== ====== ======

Reflecting the current interest rate environment and other competitive    
market factors, we adjust crediting rates on interest-sensitive products over   
time in order to manage spread revenue and policyholder surrender and           
withdrawal activity. Spread revenue can also be improved over time by           
increasing investment income.                                                   

General account surrenders, withdrawals and death benefits decreased $92.3
million in 2002, compared with 2001, due to a decrease in overall surrenders    
and withdrawals as equity markets remained volatile.                            

Surrenders, withdrawals and death benefits on separate account products   
increased $28.3 million in 2002, compared with 2001. Excluding surrenders of    
$92.4 million on BOLI contracts in 2001, the majority of which                  

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was a contact with an affiliate, surrenders, withdrawals and death benefits on  
separate account products increased $120.7 million in 2002, compared with 2001. 
The increase is primarily due to investors' seeking more stable returns during  
a period of equity market uncertainty.                                          

Claims incurred and other policyholder benefits increased $40.7 million in
2002, compared with 2001, primarily due to an increase in policyholder reserves 
for guaranteed minimum death benefits ("GMDB") and GRIB on certain of our       
variable annuity contracts due to increasing variable annuity business in-force 
and a lower stock market. We reserve for death benefit guarantees in our        
variable annuities. For policies that were deemed to have elected               
annuitization, GRIB reserves have been established to cover the present value   
of future benefits. A further decline in the stock market would have the impact 
of increasing these GMDB and GRIB reserves.                                     

  Pursuant to accounting principles generally accepted in the United States of
America, no additional liabilities for future policy benefits related to        
guaranteed living benefits have been established. However, a number of          
accounting exposure drafts on this subject have been circulated for comment.    
While these exposure drafts vary significantly in terms of recognizing future   
policy liabilities for guaranteed living benefits, it appears some form of      
recognition will be forthcoming. As a result, recognition of future policy      
benefits for GRIB in future periods could vary significantly from amounts       
recorded as of December 31, 2002.                                               

 The increase in claims incurred and other policyholder benefits is also due
to higher mortality experience in 2002, compared with 2001, and higher          
guaranteed minimum death benefit payments on certain of our variable annuity    
contracts due to increasing variable annuity business in-force and a lower      
stock market.                                                                   

The termination of the assumed term life reinsurance agreement with FKLA  
decreased claims incurred and other policyholder benefits in 2001, compared to  
2000.                                                                           

 Taxes, licenses and fees primarily reflect premium taxes on BOLI. Excluding
the taxes due on BOLI, for which we received a corresponding expense load in    
separate account fees and other charges; taxes, licenses and fees amounted to   
$3.1 million in 2002, compared with $2.4 million in 2001 and $2.3 million in    
2000.                                                                           

Commission and operating expenses, net of the deferral of insurance       
acquisition costs increased in 2002, compared with 2001 and 2000. The increase  
is primarily due to an increase in broker-dealer commission expense, as         
previously mentioned.                                                           

  Amortization of insurance acquisition costs increased $16.9 million in 2002,
compared with 2001. This net increase was attributable to lower future          
estimated gross profits (EGPs) due to the continued decline in the stock        
market, realized capital gains on investments purchased subsequent to the ZFS   
acquisition and a lower yielding investment portfolio. The percentage changes   
in the S&P 500 for the years ended December 31, 2002, 2001 and 2000 were -23.4  
percent, -13.0 percent, and -10.1 percent, respectively. Depreciation in the    
stock market resulted in depreciation in the separate account assets, which     
reduces asset-based separate account fees and future EGPs. This accelerated     
amortization in the current period. Realized capital gains on post-purchase     
(i.e., after January 4, 1996) investments increased current gross profits,      
decreasing future EGPs, and accelerated amortization in the current period. The 
lower yielding investment portfolio compresses future interest margins (spread  
income) which reduces future EGPs and also accelerates current year             
amortization.                                                                   
 Amortization of insurance acquisition costs decreased $5.2 million in 2001,
compared with 2000. This net decrease was attributable to several factors.      
During 2000, the amortization of insurance acquisition costs was increased by   
$10.5 million due to loss recognition resulting from our periodic review of the 
estimated future gross profits on annuity contracts. Estimated future gross     
profits on annuity contracts were lowered at that time based on the reduction   
in the asset-based separate account fees. During 2001, realized capital losses  
on investments purchased subsequent to the ZFS acquisition decreased the        
amortization of insurance acquisition costs by $6.4 million. These amounts were 
partially offset by an increase in amortization, due to the higher volume of    
annuity business in force.                                                      

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Deferred insurance acquisition costs, and their related amortization, for 
policies sold prior to January 4, 1996 have been replaced under purchase        
accounting by the value of business acquired ("VBA"). The VBA reflects the      
present value of the right to receive future cash flows from insurance          
contracts existing at the date of acquisition. The amortization of the VBA is   
calculated assuming an interest rate equal to the liability or contract rate on 
the business acquired. Deferred insurance acquisition costs are established on  
all new policies sold after January 4, 1996.                                    

 Depreciation in the stock market has continued to decrease the pre-purchase
(i.e., prior to January 4, 1996) separate account assets and the related        
asset-based separate account fees over the past few years. The continued        
reduction in the asset-based separate account fees has decreased the current    
and future EGPs in 2002, 2001 and 2000. The amortization of the VBA over the    
past several years reflects the net impact that the continued decline in the    
stock market has had on the current and future EGPs of the pre-purchase annuity 
contracts. A lower yielding pre-purchase investment portfolio during 2002 has   
also impacted VBA amortization in 2002. The lower yielding investment portfolio 
compresses future interest margins (spread income) which reduces future EGPs    
and accelerates current year amortization.                                      

 As previously discussed, we wrote off the remaining goodwill asset that was
on the books at January 1, 2002. In accordance with SFAS 142, no amortization   
was recorded in 2002 related to the goodwill asset. Other intangible assets     
related to the purchase of PMG continue to be amortized on a straight-line      
basis over a ten-year period.                                                   

Tax expense for 2002 decreased by $30.5 million, compared with 2001,      
primarily due to lower operating earnings in 2002, compared to 2001 and         
realized capital losses in 2002, compared to realized capital gains in 2001.    
Prior year's provision to return adjustments created a tax benefit of $2.2      
million during 2002. There were no such adjustments during 2001. Tax expense    
also decreased by $3.6 million in 2002 related to a tax settlement with the     
Internal Revenue Service.                                                       

Tax expense increased in 2001, compared with 2000, primarily due to the   
release of a $15.2 million valuation allowance in 2000. The valuation allowance 
was related to the ultimate realization of losses on real estate assets         
disposed of before December 31, 1995. In 2000, an additional $4.6 million       
benefit was realized on the termination of the reinsurance agreement with FKLA. 

Operations by Business Segment                                                  

We, along with FKLA, ZLICA and FLA, operate under the trade name Zurich   
Life, formerly Zurich Kemper Life. Prior to 2002, Zurich Life was organized by  
Strategic Business Unit ("SBU"). Each SBU concentrated on specific distribution 
channels. However, the SBUs were not managed at the legal entity level, but     
rather at the Zurich Life level. Zurich Life's SBUs crossed legal entity lines, 
as certain similar products were sold by more than one legal entity and/or      
through more than one distribution channel.                                     

In 2002, our management team shifted its financial focus from SBU         
performance to a line of business performance, within each legal entity. The    
SBUs are now primarily responsible for market management, including             
distribution management, product design, sales and marketing.                   

We have two primary operating segments, life insurance and annuities, that
offer different types of products and services. These two operating segments    
reflect the way we manage our operations and make business decisions.           

 Premiums received from the sale of annuity products and the majority of our
life insurance products are treated as deposit-type funds and are not recorded  
as revenue within the consolidated statements of operations. However, revenues  
for both the life insurance and annuity segments are generated from investing   
these deposit-type funds. For universal life insurance products and fixed       
annuity products, deposits are primarily invested in                            

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fixed maturity securities from which we earn investment income. Variable life   
insurance deposits and variable annuity deposits are transferred to the         
separate account and invested in underlying investment funds that invest in     
stocks and bonds. We receive cost of insurance charges and other separate       
account fees as revenues from this business. In addition, we receive premium    
tax and DAC tax expense loads from certain policyholders.                       

In the following table, we use the caption "net operating income" as an   
operating measure of segment performance. Net operating income is calculated by 
deducting net realized investment gains or losses, net of related income taxes, 
and the cumulative effect of a change in accounting principle, net of tax, from 
net income. Net realized investment gains or losses are excluded from net       
operating income because they can, in part, be discretionary and are not        
indicative of operational trends.                                               

Prior period information has been restated to conform to the new composition of 
our segments. 

                                                        [Enlarge/Download Table]

                                                               Twelve Months Ended                 Twelve Months Ended       
                                                                December 31, 2002                   December 31, 2001        
                                                       -----------------------------------  ---------------------------------
                    (in thousands)                        Life       Annuity      Total        Life     Annuity      Total   
                    --------------                     ----------  ----------  -----------  ---------- ---------- -----------
                                                                                                                             
Total operating revenue............................... $   80,573  $  300,968  $   381,541  $   78,196 $  299,441 $   377,637
                                                       ==========  ==========  ===========  ========== ========== ===========
Operating income (loss) before tax expense, goodwill                                                                         
 impairment and cumulative effect of accounting                                                                              
 change............................................... $   13,663  $   (5,800) $     7,863  $   15,721 $   43,370 $    59,091
Income tax expense (benefit) on operations............      5,238      (7,342)      (2,104)      7,128     13,795      20,923
Goodwill impairment...................................    (32,832)   (123,679)    (156,511)         --         --          --
                                                       ----------  ----------  -----------  ---------- ---------- -----------
Net operating income (loss) before cumulative effect                                                                         
 of accounting change.................................    (24,407)   (122,137)    (146,544)      8,593     29,575      38,168
Cumulative effect of accounting change, net of tax....         --     (21,907)     (21,907)         --         --          --
                                                       ----------  ----------  -----------  ---------- ---------- -----------
Net operating income (loss)........................... $  (24,407) $ (144,044) $  (168,451) $    8,593 $   29,575 $    38,168
                                                       ==========  ==========  ===========  ========== ========== ===========
Goodwill.............................................. $       --  $       --  $        --  $    6,601 $  171,817 $   178,418
                                                       ==========  ==========  ===========  ========== ========== ===========
Total assets.......................................... $9,840,840  $8,825,442  $18,666,282  $8,841,469 $9,248,359 $18,089,828
                                                       ==========  ==========  ===========  ========== ========== ===========
Total reserve for policyholder benefits in the general                                                                       
 account.............................................. $  808,389  $3,303,100  $ 4,111,489  $  628,899 $3,005,262 $ 3,634,161
Total Separate Account liabilities....................  8,848,140   4,699,236   13,547,376   7,696,013  5,412,740  13,108,753
                                                       ----------  ----------  -----------  ---------- ---------- -----------
Total reserve for policyholder benefits............... $9,656,529  $8,002,336  $17,658,865  $8,324,912 $8,418,002 $16,742,914
                                                       ==========  ==========  ===========  ========== ========== ===========

                                                        [Enlarge/Download Table]

                                                              Twelve Months Ended        
                                                               December 31, 2000         
                                                       ----------------------------------
                    (in thousands)                        Life      Annuity      Total   
                    --------------                     ---------- ----------  -----------
                                                                                         
Total operating revenue............................... $   90,913 $  278,274  $   369,187
                                                       ========== ==========  ===========
Operating income (loss) before tax expense, goodwill                                     
 impairment and cumulative effect of accounting                                          
 change............................................... $   23,820 $   34,005  $    57,825
Income tax expense (benefit) on operations............      4,171        (27)       4,144
                                                       ---------- ----------  -----------
Net operating income (loss) before cumulative effect                                     
 of accounting change.................................     19,649     34,032       53,681
Cumulative effect of accounting change, net of tax....         --         --           --
                                                       ---------- ----------  -----------
Net operating income (loss)........................... $   19,649 $   34,032  $    53,681
                                                       ========== ==========  ===========
Goodwill.............................................. $    5,764 $  185,399  $   191,163
                                                       ========== ==========  ===========
Total assets.......................................... $8,077,697 $7,928,946  $16,006,643
                                                       ========== ==========  ===========
Total reserve for policyholder benefits in the general                                   
 account.............................................. $  691,290 $2,896,850  $ 3,588,140
Total Separate Account liabilities....................  7,009,309  4,170,330   11,179,639
                                                       ---------- ----------  -----------
Total reserve for policyholder benefits............... $7,700,599 $7,067,180  $14,767,779
                                                       ========== ==========  ===========

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Total operating revenues for the life insurance segment increased slightly
in 2002, compared with 2001. The increase is primarily due to higher separate   
account fees offset by lower net investment income. The higher separate account 
fees were mainly due to the increase in BOLI premium in 2002, compared with     
2001. The decrease in net investment income was mainly due to a lower invested  
asset base in recent years, as previously discussed.                            

 Total operating revenues for the annuity segment also increased slightly in
2002, compared with 2001. The increase is primarily due to higher separate      
account fees due to a larger separate account asset base and an increase in     
surrender charges. These increases were offset by lower net investment income   
in 2002, compared with 2001.                                                    

Net operating income, before taxes, goodwill impairment and the cumulative
effect of an accounting change, for the life insurance segment decreased in     
2002, compared with 2001. The decrease is primarily due to an increase in       
claims incurred.                                                                

Net operating income, before taxes, goodwill impairment and the cumulative
effect of an accounting change, for the annuity segment decreased in 2002,      
compared with 2001, primarily due to an increase in policyholder reserves and   
an increase in the amortization of deferred acquisition costs. Policyholder     
reserves increased due to GMDB and GRIB reserve increases, as previously        
discussed. Amortization of deferred acquisition costs increased due to lower    
future EGPs, as previously discussed.                                           

INVESTMENTS 

Our principal investment strategy is to maintain a balanced,              
well-diversified portfolio supporting the insurance contracts written. We make  
shifts in our investment portfolio depending on, among other factors:           

.  our evaluation of risk and return in various markets,                    

.  consistency with our business strategy and investment guidelines approved
by the board of directors,                                            

.  the interest rate environment,                                           

.  liability durations, and                                                 

.  changes in market and business conditions.                               

Invested assets and cash                                                        
(in millions)                                                                   

                                                                [Download Table]

                                                       December 31,  December 31, 
                                                           2002          2001     
                                                       ------------  ------------ 
                                                                                  
Cash and short-term investments....................... $   47   1.2% $  216   5.7%
Fixed maturity securities:                                                        
   Investment-grade:                                                              
       NAIC(1) Class 1................................  2,442  62.1   1,846  48.4 
       NAIC(1) Class 2................................    881  22.4   1,121  29.4 
   Below investment-grade (NAIC classes 3 through 6):                             
       Performing.....................................     95   2.4     123   3.2 
       Non-performing.................................      3   0.0       5   0.1 
Equity securities.....................................     59   1.5      68   1.8 
Joint venture mortgage loans..........................    114   2.9     104   2.7 
Third-party mortgage loans............................     58   1.5      64   1.7 
Other real estate-related investments.................      6   0.2       8   0.2 
Policy loans..........................................    224   5.7     240   6.3 
Other.................................................      2   0.1      21   0.5 
                                                       ------ -----  ------ ----- 
          Total(2).................................... $3,931 100.0% $3,816 100.0%
                                                       ====== =====  ====== ===== 

--------                                                                        
(1) National Association of Insurance Commissioners ("NAIC").                   
--Class 1 = A- and above                                                  
--Class 2 = BBB- through BBB+                                             
(2) See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" in   
the Notes to Consolidated Financial Statements.                         

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Fixed maturity securities                                                       

We carry our fixed maturity investment portfolio, which is considered     
available-for-sale, at estimated fair value. The aggregate unrealized           
appreciation or depreciation is recorded as a component of accumulated other    
comprehensive income, net of any applicable income tax expense on unrealized    
appreciation. The after-tax aggregate unrealized appreciation on fixed maturity 
securities at December 31, 2002 was $69.5 million. The after-tax aggregate      
unrealized appreciation on fixed maturity securities at December 31, 2001 was   
$24.3 million. We record tax benefits related to aggregate unrealized           
depreciation on investments. However, where appropriate, the tax benefit is     
offset by a valuation allowance. 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.                       

At December 31, 2002, investment-grade fixed maturity securities, cash and
short-term investments accounted for 85.7 percent of invested assets and cash,  
compared with 83.5 percent at December 31, 2001. Approximately 48.0 percent of  
our NAIC Class 1 bonds were rated AAA or equivalent at year-end 2002, compared  
with 53.3 percent at December 31, 2001.                                         

  Approximately 16.2 percent of the investment-grade fixed maturity securities
at December 31, 2002 were residential mortgage-backed securities, down from     
22.0 percent at December 31, 2001. Approximately 6.3 percent of the             
investment-grade fixed maturity securities at December 31, 2002 were commercial 
mortgage-backed securities, compared with 5.7 percent at December 31, 2001. The 
residential mortgage-backed securities consist primarily of marketable mortgage 
pass-through securities issued by the Government National Mortgage Association, 
the Federal National Mortgage Association or the Federal Home Loan Mortgage     
Corporation and other investment-grade securities collateralized by mortgage    
pass-through securities issued by these entities. We have not made any          
investments in interest-only or other similarly volatile tranches of            
mortgage-backed securities. Our mortgage-backed investments are generally of    
AAA credit quality, and the markets for these investments have been and are     
expected to remain liquid.                                                      

Approximately 7.3 percent and 9.6 percent of the investment-grade fixed   
maturity securities at December 31, 2002 and 2001, respectively, consisted of   
asset-backed securities. The majority of investments in asset-backed securities 
were backed by home equity loans (34.7%), manufactured housing loans (17.7%),   
collateralized loan and bond obligations (15.4%) and automobile loans (13.1%).  

Future investment income from mortgage-backed securities and other        
asset-backed securities may be affected by the timing of principal payments and 
the yields on reinvestment alternatives available at the time of such payments. 
Prepayment activity resulting from a decline in interest rates on such          
securities purchased at a premium would accelerate the amortization of the      
premiums. Accelerated amortization would result in reductions of investment     
income related to such securities.                                              

  At December 31, 2002 and 2001, unamortized premiums and discounts related to
mortgage-backed and asset-backed securities were as follows (in millions):      

                                                                [Download Table]

                      December 31,
                      ----------- 
                      2002   2001 
                      -----  -----
                                  
Unamortized premiums. $19.0  $12.2
                      =====  =====
Unamortized discounts $ 3.5  $ 9.0
                      =====  =====

Amortization of the discount or premium from mortgage-backed and          
asset-backed securities is recognized using a level, effective yield method.    
This method considers the estimated timing and amount of prepayments of the     
underlying loans and is adjusted to reflect differences between the prepayments 
originally anticipated and the                                                  

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actual prepayments received and currently anticipated. To the extent that the   
estimated lives of these securities change as a result of changes in prepayment 
rates, the adjustment is also included in net investment income.                

The table below provides information about the mortgage-backed and        
asset-backed securities that are sensitive to changes in interest rates. The    
expected maturity dates have been calculated on a security by security basis    
for asset-backed securities and collateralized mortgage obligations. Mortgage   
pass-though expected maturities are calculated from grouped securities by       
collateral type, weighted average coupon and maturity date. Prepayment          
assumptions were obtained from a survey conducted by a securities information   
service and are consistent with the current interest rate and economic          
environment.                                                                    

                                                        [Enlarge/Download Table]

                                  Carrying                                                                      
                                  Value at                  Expected Maturity Date                 Fair Value at
                                December 31, ----------------------------------------------------  December 31, 
      (in millions)                 2002       2003     2004     2005    2006    2007   Thereafter     2002     
      -------------             ------------ -------  -------  -------  ------  ------  ---------- -------------
                                                                                                                
Mortgage-backed                                                                                                 
   Residential                                                                                                  
      --Principal payments.....   $ 536.8    $ 216.3  $ 111.1  $ 120.0  $ 53.1  $ 14.7   $  21.6      $ 536.8   
      --Average yield..........      4.80%      5.26%    5.78%    6.08%   6.06%   5.88%     5.71%        4.80%  
   Commercial                                                                                                   
      --Principal payments.....   $ 210.9    $  19.3  $    --  $   8.1  $   --  $ 46.7   $ 136.9      $ 210.9   
      --Average yield..........      6.18%      6.18%    6.18%    6.18%   6.11%   6.09%     6.58%        6.18%  
Asset-backed                                                                                                    
      --Principal payments.....   $ 245.3    $  39.2  $  54.3  $  45.2  $ 38.2  $ 31.2   $  37.2      $ 245.3   
      --Average yield..........      6.55%      6.55%    6.38%    6.27%   6.84%   7.39%     7.44%        6.55%  
                                  -------                                                             -------   
                                  $ 993.0                                                             $ 993.0   
                                  =======                                                             =======   
                                                        [Enlarge/Download Table]


                                  Carrying                                                                   
                                  Value at                 Expected Maturity Date               Fair Value at
                                December 31, -------------------------------------------------  December 31, 
      (in millions)                 2001      2002    2003    2004    2005    2006   Thereafter     2001     
      -------------             ------------ ------  ------  ------  ------  ------  ---------- -------------
                                                                                                             
Mortgage-backed                                                                                              
   Residential                                                                                               
      --Principal payments.....   $  726.5   $ 62.9  $ 87.8  $ 72.8  $ 85.6  $ 86.4   $ 331.0     $  726.5   
      --Average yield..........       6.39%    6.39%   6.36%   6.36%   6.47%   6.29%     6.27%        6.39%  
   Commercial                                                                                                
      --Principal payments.....   $   92.4   $  8.8  $  7.4  $  3.9  $ 17.4  $ 11.9   $  43.0     $   92.4   
      --Average yield..........       6.52%    6.52%   6.52%   6.52%   6.45%   6.45%     6.67%        6.52%  
Asset-backed                                                                                                 
      --Principal payments.....   $  291.3   $ 31.4  $ 44.7  $ 45.8  $ 37.5  $ 18.5   $ 113.4     $  291.3   
      --Average yield..........       7.12%    7.12%   7.10%   7.34%   7.47%   7.57%     7.54%        7.12%  
                                  --------                                                        --------   
                                  $1,110.2                                                        $1,110.2   
                                  ========                                                        ========   

The current weighted average maturity of the mortgage-backed and          
asset-backed securities at December 31, 2002, is 2.96 years. A 50 basis point   
increase in interest rates would extend the weighted average maturity to        

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approximately 3.14 years, while a 50 basis point decrease in interest rates     
would decrease the weighted average maturity to approximately 2.87 years.       

The weighted average maturity of the mortgage-backed and asset-backed     
securities at December 31, 2001, was 4.55 years. A 200 basis point increase in  
interest rates would have extended the weighted average maturity by             
approximately .55 of a year, while a 200 basis point decrease in interest rates 
would have decreased the weighted average maturity by approximately 2.27 of a   
year.                                                                           

Below investment-grade securities holdings (NAIC classes 3 through 6),    
representing securities of 40 issuers at December 31, 2002, totaled 2.4 percent 
of cash and invested assets at December 31, 2002 and 3.3 percent at December    
31, 2001. Below investment-grade securities are generally unsecured and often   
subordinated to other creditors of the issuers. These issuers may have          
relatively higher levels of indebtedness and be more sensitive to adverse       
economic conditions than investment-grade issuers. Our strategy of limiting     
exposure to below investment-grade securities takes into account the more       
conservative nature of today's consumer and the resulting demand for            
higher-quality investments in the life insurance and annuity marketplace.       

Real estate-related investments                                                 

The $177.7 million real estate-related portfolio consists of joint venture
and third party mortgage loans and other real estate-related investments. The   
real estate-related portfolio constituted 4.6 percent of cash and invested      
assets at December 31, 2002, compared with $176.4 million, or 4.6 percent, at   
December 31, 2001.                                                              

During 2001, a change in circumstances surrounding a water development    
project located in California's Sacramento River Valley led to a decision to    
reclassify the related mortgage loans to accrual status and release the general 
reserve allowance originally set up for these loans. These changes included the 
State of California's State Water Resources Control Board ("SWRCB") approval of 
the project's water right permit as well as the completion of a third-party     
appraisal of the project, subsequent to the SWRCB's approval of the permit and  
the project's inclusion by the CALFED Bay-Delta Program ("CALFED") as a         
potential first phase implementation project. CALFED is a collaborative effort  
of state and federal agencies working to find solutions for California's water  
management issues.                                                              

Taken together, these facts supported, in our best judgment, not only the 
level of existing debt on the project but also the accrual of interest as       
specified in the terms of the loans. As a result, interest income was recorded  
in the fourth quarter of 2001 in the amount of $24.9 million, representing      
interest earned in 2001 as well as recaptured interest from 2000 and 1999, the  
years in which these loans were on non-accrual status. The release of the       
general reserve allowance generated a realized gain of $16.4 million in 2001.   

The Company continues to monitor the progress of this project and CALFED  
continues to study the project's feasibility. A county in which the project     
would be located passed a new local permit ordinance in 2002. The Company is    
challenging this ordinance at the appeal court level after being unsuccessful   
in its initial legal challenge.                                                 

As reflected in the "Real estate portfolio" table below, we have continued
to fund both existing projects and legal commitments. The future legal          
commitments were $29.9 million at both December 31, 2002 and 2001. As of        
December 31, 2002, we expect to fund approximately $0.2 million of these legal  
commitments, along with providing capital to existing projects. The disparity   
between total legal commitments and the amount expected to be funded relates    
principally to standby financing arrangements that provide credit enhancements  
to certain tax-exempt bonds. We do not currently expect to fund these           
commitments. The total legal commitments, along with estimated working capital  
requirements, are considered in management's evaluation of reserves and         
write-downs.                                                                    

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  Excluding the $0.7 million of net equity investments in joint ventures, real
estate loans totaled $177.0 million at December 31, 2002, after reserves and    
write-downs. Of this amount, $174.0 million are on accrual status with a        
weighted average interest rate of approximately 8.9 percent. Of these accrual   
loans:                                                                          

.  6.8 percent have terms requiring current periodic payments of their full 
contractual interest,                                                 

.  34.5 percent require only partial payments or payments to the extent of  
borrowers' cash flow, and                                             

.  58.7 percent require that payments are deferred until maturity.          

The equity investments in real estate at December 31, 2002 consisted of   
other equity investments in joint ventures. These equity investments include    
our share of periodic operating results. As an equity owner or affiliate of an  
equity owner, we have the ability to fund, and historically have elected to     
fund, operating requirements of certain joint ventures.                         

Real estate portfolio                                                           
(in millions)                                                                   

                                                                [Download Table]

                                                       Other Real Estate-           
                                       Mortgage Loans Related Investments           
                                       -------------  -------------------           
                                        Joint  Third-  Other     Equity             
                                       Venture Party  Loans(2) Investments   Total  
                                       ------- ------ -------- ----------- ------   
                                                                                    
Balance at December 31, 2001.......... $104.3  $63.9   $ 7.3      $ 0.9    $176.4(1)
Additions (deductions):                                                             
Fundings..............................    0.2     --      --         --       0.2   
Interest added to principal...........    9.6    2.0      --         --      11.6   
Sales/paydowns/distributions..........     --   (7.5)   (3.8)      (0.2)    (11.5)  
Net realized investment gains (losses)     --   (0.4)    1.4         --       1.0   
                                       ------  -----   -----      -----    ------   
Balance at December 31, 2002.......... $114.1  $58.0   $ 4.9      $ 0.7    $177.7(3)
                                       ======  =====   =====      =====    ======   

--------                                                                        
(1) Net of $6.6 million reserve and write-downs. Excludes $5.4 million of real  
estate-related accrued interest.                                        
(2) The other real estate loans are notes receivable evidencing financing,      
 primarily to joint ventures. These loans were issued generally to provide
financing for Kemper's or our joint ventures for various purposes.      
(3) Net of $8.6 million reserve and write-downs. Excludes $5.8 million of real  
estate-related accrued interest.                                        

Real estate concentrations and outlook                                          

  The real estate portfolio is distributed by geographic location and property
type. However, concentration exposures in certain states and in certain types   
of properties do exist. In addition to these exposures, exposures also exist as 
to certain real estate developers and partnerships.                             

As a result of our ongoing strategy to reduce exposure to real            
estate-related investments, we had investments in four projects that accounted  
for substantially all of the $177.7 million real estate-related portfolio as of 
December 31, 2002.                                                              
 The largest of these investments were loans to a master limited partnership
(the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens       
Mutual Casualty Company, which amounted to $102.3 million at December 31, 2002. 
The MLP's underlying investment primarily consists of the water development     
project, as discussed earlier. The SWRCB has approved the water right permit    
and the Army Corps of Engineers issued required permits in June of 2002.        
Various local permits are/may be required in addition to the state and federal  
permits. The final resolution of this permit process will impact the long-term  
economic viability of the project. This venture contains uncertainty due to the 
difficulty of completing water projects in California and current fiscal        
difficulties being experienced by the state. Loans to the MLP were placed on    
non-accrual status at                                                           

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the beginning of 1999 to ensure that book value of the MLP did not increase     
over net realizable value. In 2001, these loans were placed on accrual status,  
as previously discussed.                                                        

The second largest of these investments at December 31, 2002, amounted to 
$60.0 million and consisted of second mortgages on nine hotel properties and    
one retail property. Patrick M. Nesbitt or his affiliates, a third-party real   
estate developer, have ownership interests in these properties. These           
properties are geographically dispersed and the current market values of the    
underlying properties substantially exceed the balances due on all but one of   
the mortgages. These loans are on accrual status. As of December 31, 2002, we   
carry a valuation reserve of $0.6 million for one of these properties as its    
estimated fair value decreased below the debt supported by the property.        

At December 31, 2002, a loan to a joint venture amounted to $11.8 million.
This affiliated mortgage loan is on an office property located in Illinois and  
owned by an affiliate, Zurich North America.                                    

The remaining real estate-related investment amounted to $4.9 million at  
December 31, 2002 and consisted of mortgage loans on various unzoned lots       
located in Hawaii. These properties are not currently producing income and the  
loans are on non-accrual. All zoned properties were sold by March of 2001. We   
are currently pursuing an out of court settlement with the City of Honolulu for 
the down zoning of certain unzoned properties. If a settlement is not reached,  
the trial will begin in 2003. We are holding the other unzoned properties for   
future zoning and sales. It is anticipated that it could be a number of years   
until we obtain zoning to allow development or completely dispose of all        
investments in Hawaii.                                                          

  We evaluate our real estate-related investments (including accrued interest)
using an estimate of the investments' observable market price, net of estimated 
selling costs. Where no observable market price exists (i.e. the water          
development project), periodic appraisals are obtained. Because the real estate 
review process includes estimates involving changing economic conditions and    
other factors, there can be no assurance that current estimates will prove      
accurate over time. Real estate-related investments are expected to continue to 
decline further through future sales and paydowns. Net income could be reduced  
in future periods if:                                                           

.  the water development project does not prove viable,                     

.  real estate market conditions worsen in areas where our portfolio is     
located,                                                              

.  Kemper's and our plans with respect to certain projects change, or       

.  necessary construction or zoning permits are not obtained.               

Troubled real estate-related investments consisted of loans on nonaccrual 
status, before reserves and write-downs, totaling $10.6 million and $13.0       
million at December 31, 2002 and 2001, respectively. Interest does not accrue   
on real estate-related investments when it is judged that the likelihood of     
interest collection is doubtful. Loans on nonaccrual status after reserves and  
write-downs amounted to $5.0 million and $7.4 million at December 31, 2002 and  
2001, respectively.                                                             

Net investment income                                                           

 Pre-tax net investment income totaled $228.3 million in 2002, compared with
$269.4 million in 2001 and $257.5 million in 2000. This includes our share of   
the operating results from equity investments in real estate consisting of      
other income less other expenses. Investment income was adversely impacted in   
2002 and 2001 by the declining interest rate environment. Investment income was 
positively impacted in 2001 by the inclusion of three years of interest on      
loans previously carried on non-accrual status and negatively impacted in 2002, 
2001 and 2000 by purchase accounting adjustments, as previously discussed.      

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Total foregone investment income before tax on both nonperforming fixed   
maturity investments and nonaccrual real estate-related investments was as      
follows:                                                                        

Foregone investment income                                                      
(in millions)                                                                   

                                                                [Download Table]

                                  Year Ended  
                                 December 31, 
                                --------------
                                2002 2001 2000
                                ---- ---- ----
                                              
Real estate-related investments $1.0 $1.1 $9.1
Fixed maturity securities......  1.7  1.3   --
                                ---- ---- ----
       Total................... $2.7 $2.4 $9.1
                                ==== ==== ====

Foregone investment income is the result of bonds that are in default and 
certain real estate-related investments that have been placed on nonaccrual     
status. Any increase in nonperforming securities, and either worsening or       
stagnant real estate conditions, would increase the expected adverse effect on  
future investment income and realized investment results. During 2001, $15.7    
million of foregone investment income was recaptured from prior years due to    
the previously mentioned reclassification of certain mortgage loans to accrual  
status.                                                                         

Realized investment results                                                     

 Net income reflects after-tax realized investment losses of $0.5 million in
2002 and after-tax realized gains of $13.4 million in 2001 and after-tax        
realized investment losses of $5.4 million in 2000.                             

Unrealized gains and losses on fixed maturity investments that are        
available-for-sale are not reflected in net income. These 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, however, the       
security is written down to net realizable value, and the write-down adversely  
impacts net income. Pre-tax write-downs amounted to $18.5 million, $15.5        
million and $11.4 million for the years ended December 31, 2002, 2001 and 2000, 
respectively.                                                                   

We regularly monitor our investment portfolio and as part of this process 
review the assets for possible impairments of carrying value. Because the       
review process includes estimates involving changing economic conditions and    
other factors, there can be no assurance that current estimates will prove      
accurate over time.                                                             

See Note 1, "Summary of Significant Accounting Policies", in the Notes to 
Consolidated Financial Statements for information regarding derivative          
investments.                                                                    

Interest rates                                                                  

The Federal Open Market Committee ("FOMC") met eight times in 2002. At the
November meeting, interest rates were lowered by one-half of one percent in     
order to help the economy work through the current soft spot. While inflation   
and inflation risks remained well contained in 2002, greater uncertainty, in    
part attributable to geopolitical risks, has inhibited spending, production and 
employment during 2002.                                                         

 During 2000, the FOMC raised interest rates three times in total, resulting
in a flatter yield curve due to higher short-term interest rates. With signs of 
economic weakness becoming more prevalent, the FOMC began lowering interest     
rates in January 2001 after raising them 100 basis points in 2000. The FOMC     
lowered rates 11 times in 2001, totaling 475 basis points, in an attempt to     
stimulate the economy. The yield curve steepening that had begun at the end of  
2000 accelerated during 2001, leaving the treasury yield curve at its steepest  
levels since                                                                    

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1993. The events of September 11, 2001 led to further interest rate declines by 
the FOMC to help mitigate economic weakness and liquidity concerns. The         
steepening curve and lower rates resulted in a decrease in unrealized fixed     
maturity investment losses during 2000 and unrealized fixed maturity investment 
gains during 2001 and 2002.                                                     

 When the proceeds from maturing or sold investments are reinvested at lower
yields in a low interest rate environment, we can adjust crediting rates on     
fixed annuities and other interest-bearing liabilities. However, competitive    
conditions and contractual commitments do not always permit the reduction in    
crediting rates to fully or immediately reflect reductions in investment yield. 
This can result in narrower spreads.                                            

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. Approximately 24  
percent of the fixed and variable annuity liabilities as of December 31, 2002,  
however, were no longer subject to significant (less than 5%) surrender fees.   

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       
policyholder's 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 or        
investments sold from a large, publicly traded investment portfolio.            

We also continuously monitor capital resources. Our adjusted capital and  
surplus (statutory accounting basis) is compared with required capital under    
the NAIC's risk-based capital ("RBC") approach. During 2002, our RBC ratio      
declined due to losses on a statutory accounting basis, but does not require    
any regulatory action. One source of the decline in the capital ratio has been  
the requirement to establish additional reserves for guarantees on the          
DESTINATIONS/SM/ product. These reserves are driven by the decline in the stock 
market and additional deposits into existing contracts. Further market declines 
will require establishment of additional reserves. We monitor capital resources 
very closely and mitigation strategies have been and will be put in place       
should further market declines continue.                                        

Ratings                                                                         

 Ratings are an important factor in establishing the competitive position of
life insurance companies. Rating organizations continue to review the financial 
performance and condition of life insurers and their investment portfolios. Any 
reductions in our claims-paying ability or financial strength ratings could     
result in our products being less attractive to consumers. Any reductions in    
our parent's ratings could also adversely impact our financial flexibility.     

Each rating is subject to revision or withdrawal at any time by the       
assigning organization and should be evaluated independently of any other       
rating.                                                                         

Our Standard & Poor's ("S&P") rating was coupled with ZFS through December
31, 2001 due to the perceived financial strength of ZFS and Zurich Life and the 
designation of Zurich Life as one of ZFS's core businesses. In September 2001,  
S&P announced that it was downgrading several insurance groups based on the     
potential catastrophic losses from the September 11, 2001 terrorist attacks on  
the United States of America, and                                               

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the subsequent fall in the equity markets. At that time, ZFS was placed on      
CreditWatch with negative implications and its rating, and therefore ours, was  
downgraded from "AA+" to "AA". In February 2002, ZFS received another downgrade 
to "AA-" and remained on CreditWatch with negative implications. During 2001,   
ZFS considered the divestiture of Zurich Life. Although ZFS made the decision   
to retain Zurich Life in December 2001, S&P decided to uncouple Zurich Life's   
ratings from ZFS in March 2002, primarily due to ZFS's consideration of the     
Zurich Life divestiture. At that time we received a rating of "A+", S&P's fifth 
highest rating, reflecting the non-supported strength of Zurich Life and we     
were taken off CreditWatch. In August 2002, the outlook for ZFS, our parent,    
was revised from stable to negative and concurrently our A+ rating was placed   
on a negative outlook.                                                          

We share our A.M. Best rating with ZFS. In the fall of 2001, A.M. Best    
placed ZFS under review with developing implications but did not change its     
ratings. In March 2002, ZFS's A.M. Best A+ (Superior) financial strength rating 
was affirmed, removed from under review and assigned a negative outlook. In     
September 2002, A.M. Best announced that it was downgrading ZFS to "A"          
(Excellent) from "A+" (Superior). In December 2002, A.M. Best affirmed the "A"  
rating of ZFS and its core operating subsidiaries and placed ZFS on a           
positive outlook.                                                               

Our Moody's Investors Service ("Moody's") Aa3 rating was reviewed in March
2002 and placed under review for possible downgrade. In June, 2002, Moody's     
lowered our rating to A2, its sixth highest rating out of nineteen.             

Stockholder's equity                                                            

Stockholder's equity totaled $723.8 million at December 31, 2002, compared
with $818.0 million at December 31, 2001 and $730.1 million at December 31,     
2000. The decrease in stockholder's equity in 2002 was primarily due to a net   
loss of $169.0 million, offset by an increase in other comprehensive income of  
$37.5 million and an increase in additional paid-in capital of $37.3 million.   
The increase in accumulated other comprehensive income was primarily related to 
unrealized appreciation of the fixed maturity investment portfolio due to       
declining interest rates during 2002. The increase in additional paid-in        
capital was due to a $30 million capital contribution from Kemper Corporation   
("Kemper"), our parent company, and a $7.3 million forgiveness of a tax         
receivable due to Kemper from us.                                               

The increase in stockholder's equity in 2001 was primarily due to an      
increase in accumulated other comprehensive income of $49.3 million and net     
income of $51.6 million, offset by dividends of $13.0 million paid to Kemper.   
The increase in accumulated other comprehensive income was primarily related to 
unrealized appreciation of the fixed maturity investment portfolio due to       
declining interest rates during 2001.                                           

Item 8. Financial Statements and Supplementary Data                             

                                                        [Enlarge/Download Table]

                                                                                            Page(s)
                                                                                            -------
                                                                                                   
Report of Independent Accountants..........................................................     29 
Consolidated Balance Sheets, December 31, 2002 and 2001....................................     30 
Consolidated Statements of Operations, three years ended December 31, 2002.................     31 
Consolidated Statements of Comprehensive Income (Loss), three years ended December 31, 2002     32 
Consolidated Statements of Stockholder's Equity, three years ended December 31, 2002.......     33 
Consolidated Statements of Cash Flows, three years ended December 31, 2002.................     34 
Notes to Consolidated Financial Statements.................................................  35-56 
Financial Statement Schedules:                                                                     
   Supplementary Insurance Information.....................................................     66 
   Reinsurance.............................................................................     67 
   Valuation and Qualifying Accounts.......................................................     68 

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REPORT OF INDEPENDENT ACCOUNTANTS 

To the Board of Directors and Stockholder of                                    
Kemper Investors Life Insurance Company:                                        

  In our opinion, the accompanying consolidated financial statements listed in
the accompanying index present fairly, in all material respects, the financial  
position of Kemper Investors Life Insurance Company and its subsidiaries (the   
"Company") at December 31, 2002 and 2001, and the results of their operations   
and their cash flows for each of the three years in the period ended December   
31, 2002, in conformity with accounting principles generally accepted in the    
United States of America. In addition, the financial statement schedules listed 
in the accompanying index present fairly, in all material respects, the         
information set forth therein when read in conjunction with the related         
consolidated financial statements. These financial statements and financial     
statement schedules are the responsibility of the Company's management; our     
responsibility is to express an opinion on these financial statements and       
financial statement schedules based on our audits. We conducted our audits of   
these statements and schedules in accordance with auditing standards generally  
accepted in the United States of America, which require that we plan and        
perform the audits to obtain reasonable assurance about whether the financial   
statements are free of material misstatement. An audit includes examining, on a 
test basis, evidence supporting the amounts and disclosures in the financial    
statements, assessing the accounting principles used and significant estimates  
made by management, and evaluating the overall financial statement              
presentation. We believe that our audits provide a reasonable basis for our     
opinion.                                                                        

  As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 142,  
Goodwill and Other Intangible Assets, as of December 31, 2002.                  

PRICEWATERHOUSECOOPERS LLP                                                      

Chicago, Illinois                                                               
March 21, 2003                                                                  

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

CONSOLIDATED BALANCE SHEETS 

(in thousands, except share data) 

                                                        [Enlarge/Download Table]

                                                                                  December 31, December 31,
                                                                                      2002         2001    
                                                                                  ------------ ------------
                                                                                                           
Assets                                                                                                     
   Fixed maturity securities, available-for-sale, at fair value (amortized cost:                           
     December 31, 2002, $3,313,920; December 31, 2001, $3,057,139)............... $ 3,420,773  $ 3,094,560 
   Equity securities (cost: December 31, 2002, $52,627; December 31, 2001,                                 
     $65,473)....................................................................      58,615       67,731 
   Short-term investments........................................................          --      159,105 
   Joint venture mortgage loans..................................................     114,061      104,303 
   Third-party mortgage loans....................................................      57,985       63,897 
   Other real estate-related investments.........................................       5,645        8,240 
   Policy loans..................................................................     223,888      239,787 
   Other invested assets.........................................................       2,491       20,799 
                                                                                  -----------  ----------- 
       Total investments.........................................................   3,883,458    3,758,422 
   Cash..........................................................................      47,436       57,374 
   Accrued investment income.....................................................     148,549      140,762 
   Reinsurance recoverable.......................................................     433,566      240,536 
   Deferred insurance acquisition costs..........................................     431,915      381,506 
   Value of business acquired....................................................      53,600       75,806 
   Goodwill......................................................................          --      178,418 
   Other intangible assets.......................................................       5,502        6,261 
   Deferred income taxes.........................................................      73,228       95,688 
   Federal income tax receivable.................................................      11,232       13,866 
   Receivable on sales of securities.............................................          --        2,100 
   Fixed assets..................................................................       3,179        5,619 
   Other assets and receivables..................................................      27,241       24,717 
   Assets held in separate accounts..............................................  13,547,376   13,108,753 
                                                                                  -----------  ----------- 
       Total assets.............................................................. $18,666,282  $18,089,828 
                                                                                  ===========  =========== 
Liabilities                                                                                                
   Future policy benefits........................................................ $ 4,111,063  $ 3,634,161 
   Other policyholder benefits and funds payable.................................     203,159      436,449 
   Other accounts payable and liabilities........................................      80,905       92,472 
   Liabilities related to separate accounts......................................  13,547,376   13,108,753 
                                                                                  -----------  ----------- 
       Total liabilities.........................................................  17,942,503   17,271,835 
                                                                                  -----------  ----------- 
Commitments and contingent liabilities...........................................          --           -- 
Stockholder's equity                                                                                       
   Capital stock--$10 par value, authorized 300,000 shares; outstanding                                    
     250,000 shares..............................................................       2,500        2,500 
   Additional paid-in capital....................................................     841,633      804,347 
   Accumulated other comprehensive income........................................      54,009       16,551 
   Retained deficit..............................................................    (174,363)      (5,405)
                                                                                  -----------  ----------- 
       Total stockholder's equity................................................     723,779      817,993 
                                                                                  -----------  ----------- 
       Total liabilities and stockholder's equity................................ $18,666,282  $18,089,828 
                                                                                  ===========  =========== 

See accompanying notes to consolidated financial statements.  

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

CONSOLIDATED STATEMENTS OF OPERATIONS 

(in thousands)  

                                                        [Enlarge/Download Table]

                                                                             Year Ended December 31,     
                                                                         ------------------------------- 
                                                                            2002       2001       2000   
                                                                         ---------  ---------  --------- 
                                                                                                         
Revenue                                                                                                  
   Net investment income................................................ $ 228,330  $ 269,419  $ 257,470 
   Realized investment gains (losses)...................................      (779)    20,660     (8,277)
   Premium income.......................................................     1,002        486      8,394 
   Separate account fees and charges....................................   110,013     70,993     68,293 
   Other income.........................................................    42,196     36,739     35,030 
                                                                         ---------  ---------  --------- 
       Total revenue....................................................   380,762    398,297    360,910 
                                                                         ---------  ---------  --------- 
Benefits and Expenses                                                                                    
   Interest credited to policyholders...................................   152,945    159,127    152,289 
   Claims incurred and other policyholder benefits......................    62,613     21,933     13,718 
   Taxes, licenses and fees.............................................    19,244     10,714     17,861 
   Commissions..........................................................   111,461    179,585    114,162 
   Operating expenses...................................................    67,474     66,026     61,671 
   Deferral of insurance acquisition costs..............................   (96,509)  (166,202)  (104,608)
   Amortization of insurance acquisition costs..........................    34,941     18,052     23,231 
   Amortization of value of business acquired...........................    20,751     15,606     19,926 
   Goodwill impairment..................................................   156,511         --         -- 
   Amortization of goodwill.............................................        --     12,744     12,744 
   Amortization of other intangible assets..............................       759        961        368 
                                                                         ---------  ---------  --------- 
       Total benefits and expenses......................................   530,190    318,546    311,362 
                                                                         ---------  ---------  --------- 
   Income (loss) before income tax expense (benefit) and cumulative                                      
     effect of accounting change, net of tax............................  (149,428)    79,751     49,548 
   Income tax expense (benefit).........................................    (2,377)    28,154      1,247 
                                                                         ---------  ---------  --------- 
   Net income (loss) before cumulative effect of accounting change, net                                  
     of tax.............................................................  (147,051)    51,597     48,301 
   Cumulative effect of accounting change, net of tax...................   (21,907)        --         -- 
                                                                         ---------  ---------  --------- 
       Net income (loss)................................................ $(168,958) $  51,597  $  48,301 
                                                                         =========  =========  ========= 

See accompanying notes to consolidated financial statements.  

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)  

(in thousands)  

                                                        [Enlarge/Download Table]

                                                                                  Year Ended December 31,    
                                                                               ----------------------------- 
                                                                                  2002      2001      2000   
                                                                               ---------  --------  -------- 
                                                                                                             
Net income (loss)............................................................. $(168,958) $ 51,597  $ 48,301 
                                                                               ---------  --------  -------- 
Other comprehensive income (loss), before tax:                                                               
   Unrealized holding gains (losses) on investments arising during period:                                   
   Unrealized holding gains on investments....................................    80,067    54,155    61,487 
   Adjustment to value of business acquired...................................    (1,786)   (5,914)   (3,400)
   Adjustment to deferred insurance acquisition costs.........................   (15,344)   (1,050)     (230)
                                                                               ---------  --------  -------- 
       Total unrealized holding gains on investments arising during                                          
         period...............................................................    62,937    47,191    57,857 
                                                                               ---------  --------  -------- 
Less reclassification adjustments for items included in net income (loss):                                   
   Adjustment for (gains) losses included in realized investment gains                                       
     (losses).................................................................    19,394    (9,203)  (24,583)
   Adjustment for amortization of premium on fixed maturities included in                                    
     net investment income....................................................    (9,400)   (5,732)   (4,538)
   Adjustment for (gains) losses included in amortization of value of                                        
     business acquired........................................................      (331)   (1,705)      214 
   Adjustment for (gains) losses included in amortization of insurance                                       
     acquisition costs........................................................    (4,185)    6,395        13 
                                                                               ---------  --------  -------- 
          Total reclassification adjustments for items included in net                                       
            income (loss).....................................................     5,478   (10,245)  (28,894)
                                                                               ---------  --------  -------- 
Other comprehensive income, before related income tax expense                                                
  (benefit)...................................................................    57,459    57,436    86,751 
Related income tax expense (benefit)..........................................    20,001     8,167    (1,350)
                                                                               ---------  --------  -------- 
          Other comprehensive income, net of tax..............................    37,458    49,269    88,101 
                                                                               ---------  --------  -------- 
          Comprehensive income (loss)......................................... $(131,500) $100,866  $136,402 
                                                                               =========  ========  ======== 

See accompanying notes to consolidated financial statements.  

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY 

(in thousands)  

                                                        [Enlarge/Download Table]

                                                                       Year Ended December 31,    
                                                                   ------------------------------ 
                                                                      2002      2001       2000   
                                                                   ---------  --------  --------- 
                                                                                                  
Capital stock, beginning and end of period........................ $   2,500  $  2,500  $   2,500 
                                                                   ---------  --------  --------- 
Additional paid-in capital, beginning of period...................   804,347   804,347    804,347 
Capital contributions from parent.................................    37,286        --         -- 
                                                                   ---------  --------  --------- 
Additional paid-in-capital, end of period.........................   841,633   804,347    804,347 
                                                                   ---------  --------  --------- 
Accumulated other comprehensive income (loss), beginning of period    16,551   (32,718)  (120,819)
Other comprehensive income, net of tax............................    37,458    49,269     88,101 
                                                                   ---------  --------  --------- 
   End of period..................................................    54,009    16,551    (32,718)
                                                                   ---------  --------  --------- 
Retained deficit, beginning of period.............................    (5,405)  (44,002)   (56,023)
Net income (loss).................................................  (168,958)   51,597     48,301 
Dividends to parent...............................................        --   (13,000)   (36,280)
                                                                   ---------  --------  --------- 
   End of period..................................................  (174,363)   (5,405)   (44,002)
                                                                   ---------  --------  --------- 
       Total stockholder's equity................................. $ 723,779  $817,993  $ 730,127 
                                                                   =========  ========  ========= 

See accompanying notes to consolidated financial statements.  

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

CONSOLIDATED STATEMENTS OF CASH FLOWS 

(in thousands)  

                                                        [Enlarge/Download Table]

                                                                             Year Ended December 31,       
                                                                       ----------------------------------- 
                                                                           2002         2001        2000   
                                                                       -----------  -----------  --------- 
                                                                                                           
Cash flows from operating activities                                                                       
   Net income (loss).................................................. $  (168,958) $    51,597  $  48,301 
   Reconciliation of net income (loss) to net cash from operating                                          
     activities:                                                                                           
       Realized investment (gains) losses.............................         779      (20,660)     8,277 
       Interest credited and other charges............................     188,926      169,084    142,344 
       Deferred insurance acquisition costs, net......................     (61,569)    (148,150)   (81,377)
       Amortization of value of business acquired.....................      20,751       15,606     19,926 
       Amortization of goodwill.......................................          --       12,744     12,744 
       Goodwill impairment............................................     156,511           --         -- 
       Amortization of discount and premium on investments............       9,400        5,731      4,538 
       Amortization of other intangible assets........................         759          961        368 
       Deferred income taxes..........................................       2,458       16,927    (25,930)
       Net change in current federal income taxes.....................       2,634       (5,063)   (18,593)
       Benefits and premium taxes due related to separate account                                          
         business-owned life insurance................................      11,521       (6,392)   (61,476)
       Funds withheld account transfer................................    (222,500)          --         -- 
       Cumulative effect of accounting change, net of tax.............      21,907           --         -- 
       Change in premium suspense.....................................     (43,625)      41,938        657 
       Other, net.....................................................     (13,116)     (36,818)    41,720 
                                                                       -----------  -----------  --------- 
          Net cash flow from operating activities.....................     (94,122)      97,505     91,499 
                                                                       -----------  -----------  --------- 
Cash flows from investing activities                                                                       
   Cash from investments sold or matured:                                                                  
       Fixed maturity securities held to maturity.....................     198,824      281,664    170,465 
       Fixed maturity securities sold prior to maturity...............   2,307,588    1,331,168    589,933 
       Equity securities..............................................      17,435           --      1,271 
       Mortgage loans, policy loans and other invested assets.........      76,382       60,495     73,177 
   Cost of investments purchased or loans originated:                                                      
       Fixed maturity securities......................................  (2,757,149)  (1,481,699)  (569,652)
       Equity securities..............................................      (4,244)          --     (1,264)
       Mortgage loans, policy loans and other invested assets.........     (48,722)     (41,395)   (47,109)
       Investment in subsidiaries.....................................          --       (2,690)    (4,899)
   Short-term investments, net........................................     159,105     (143,205)    26,491 
   Net change in receivable and payable for securities transactions...      12,928        6,186     (4,786)
   Net change in other assets.........................................       2,440        2,248     (5,141)
                                                                       -----------  -----------  --------- 
          Net cash from investing activities..........................     (35,413)      12,772    228,486 
                                                                       -----------  -----------  --------- 
Cash flows from financing activities                                                                       
   Policyholder account balances:                                                                          
       Deposits.......................................................     601,045      680,106    608,363 
       Withdrawals....................................................    (505,674)    (733,521)  (881,888)
   Capital contributions..............................................      37,286           --         -- 
   Dividends to parent................................................          --      (13,000)   (36,280)
   Cash overdrafts....................................................     (13,060)     (20,589)    11,906 
                                                                       -----------  -----------  --------- 
          Net cash from financing activities..........................     119,597      (87,004)  (297,899)
                                                                       -----------  -----------  --------- 
          Net increase (decrease) in cash.............................      (9,938)      23,273     22,086 
Cash, beginning of period.............................................      57,374       34,101     12,015 
                                                                       -----------  -----------  --------- 
Cash, end of period................................................... $    47,436  $    57,374  $  34,101 
                                                                       ===========  ===========  ========= 

See accompanying notes to consolidated financial statements.  

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  

(1) Summary of Significant Accounting Policies                                  

Basis of presentation                                                       

  Kemper Investors Life Insurance Company and its subsidiaries ("the Company")
issue fixed and variable annuity products, variable life, term life and         
interest-sensitive life insurance products marketed primarily through a network 
of financial institutions, securities brokerage firms, insurance agents and     
financial planners. The Company is licensed in the District of Columbia and all 
states except New York. Zurich Life Insurance Company of New York ("ZLICONY"),  
formerly Zurich Kemper Life Insurance Company of New York, a wholly-owned       
subsidiary, received its license from the State of New York early in 2001 and   
began writing business in May of 2001. The Company also owns the PMG group of   
companies ("PMG"), acquired in 2000, and Investors Brokerage Services, Inc. The 
Company is a wholly-owned subsidiary of Kemper Corporation ("Kemper"), a        
non-operating holding company. Kemper is a wholly-owned subsidiary of Zurich    
Holding Company of America ("ZHCA"), a holding company. ZHCA is a 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.                                                                

The financial statements include the accounts of the Company on a         
consolidated basis. All significant intercompany balances and transactions have 
been eliminated. Certain reclassifications have been made to the 2001 and 2000  
consolidated financial statements in order for them to conform to the 2002      
presentation. The accompanying consolidated financial statements of the Company 
as of and for the years ended December 31, 2002, 2001 and for the three years   
in the period ended December 31, 2002, have been prepared in conformity with    
Accounting Principles Generally Accepted in the United States of America        
("GAAP").                                                                       

Estimates                                                                   

The preparation of financial statements in conformity with GAAP requires  
management to make estimates and assumptions that could affect the reported     
amounts of assets and liabilities as well as the disclosure of contingent       
assets or liabilities at the date of the financial statements. As a result,     
actual results reported as revenue and expenses could differ from the estimates 
reported in the accompanying financial statements. As further discussed in the  
accompanying notes to the consolidated financial statements, significant        
estimates and assumptions affect goodwill, deferred insurance acquisition       
costs, the value of business acquired, provisions for real estate-related       
losses and reserves, other-than-temporary declines in values for fixed maturity 
and equity securities, the valuation allowance for deferred income taxes, the   
calculation of fair value disclosures for certain financial instruments and     
future policy benefit reserves.                                                 

Goodwill and other intangibles                                              

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 ("SFAS 142"), Goodwill and Other         
Intangible Assets. SFAS 142 primarily addresses the accounting that must be     
applied to goodwill and intangible assets subsequent to their acquisition.      
Effective January 1, 2002, SFAS 142 requires that goodwill and indefinite-lived 
intangible assets no longer be amortized, but be tested, at least annually, for 
impairment at the reporting unit level.                                         

In conjunction with management's focus on line of business operations, the
Company's goodwill was tested for impairment at the life insurance and          
annuities operating segment level based on the guidance under SFAS 142. As a    
result of the testing performed, an impairment of $21.9 million was recorded in 
the annuities segment as of June 30, 2002 due to more conservative growth       
assumptions based on the market's volatility over the last few years. The fair  
value of that segment was estimated using expected present value of future cash 
flows for both current business in-force and future production estimates.       

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

In September 2002, the board of directors of the Company's indirect, 100% 
shareholder, Zurich Financial Services Group ("the Group"), approved a plan     
designed to improve the profitability of the Group and its subsidiaries. Under  
this plan, the Group considered a number of strategic options, the completion   
of which could have a significant impact on the recoverability of the carrying  
value of certain assets. Among the assets affected by the approval of the plan  
is the goodwill associated with the 1996 acquisition of the Zurich Life         
companies by ZFS. The Company filed its Form 10-Q for the period ended June 30, 
2002 prior to the Group board's action. As a result, the Company recorded the   
complete write-down of the remaining goodwill of $156.5 million in the third    
quarter of 2002, the period during which the Company became aware of this       
action by the Group's board of directors.                                       

Other definite-lived, intangible assets of $7.6 million, recorded in 2001 
and 2000 in connection with the purchase of PMG, continue to be amortized on a  
straight-line basis over a ten-year period.                                     

Value of business acquired                                                  

The value of business acquired reflects the estimated fair value of the   
Company's life insurance business in force and represents the portion of the    
cost to acquire the Company that is allocated to the value of the right to      
receive future cash flows from insurance contracts existing at the date of      
acquisition, January 4, 1996. Such value is the present value of the            
actuarially determined projected cash flows for the acquired policies.          

 The value of the business acquired is amortized over the estimated contract
life of the business acquired in relation to the present value of estimated     
gross profits using current assumptions based on an interest rate equal to the  
liability or contract rate on the business acquired. The estimated amortization 
and accretion of interest for the value of business acquired for each of the    
years through December 31, 2007 are as follows:                                 

                                                                [Download Table]

                                                Projected          
                        Beginning              Accretion Of Ending 
Year Ended December 31,  Balance  Amortization   Interest   Balance
----------------------- --------- ------------ ------------ -------
(in thousands)                                                     
                                                                   
     2000 (actual)..... $113,111    $(26,805)     $6,879    $93,185
     2001 (actual).....   93,185     (21,394)      5,788     77,579
     2002 (actual).....   77,579     (24,464)      3,713     56,828
     2003..............   56,828     (12,977)      3,073     46,924
     2004..............   46,924     (11,795)      2,479     37,608
     2005..............   37,608      (9,585)      2,000     30,023
     2006..............   30,023      (8,321)      1,584     23,286
     2007..............   23,286      (7,624)      1,201     16,863

The projected ending balance of the value of business acquired will be    
further adjusted to reflect the impact of unrealized gains or losses on fixed   
maturity securities held as available-for-sale in the investment portfolio.     
Such adjustments are not recorded in the Company's net income but rather are    
recorded as a credit or charge to accumulated other comprehensive income, net   
of income tax. This adjustment decreased the value of business acquired by $3.2 
million as of December 31, 2002 and by $1.8 million as of December 31, 2001.    
This adjustment increased the value of business acquired by $2.4 million as of  
December 31, 2000. Accumulated other comprehensive income decreased by          
approximately $2.1 million as of December 31, 2002 and $1.2 million as of       
December 31, 2001, due to this adjustment and increased accumulated other       
comprehensive income by approximately $1.6 million as of December 31, 2000.     

Life insurance revenue and expenses                                         

Revenue for annuities, variable life insurance and interest-sensitive life
insurance products consists of investment income and realized capital gains,    
policy charges such as mortality, expense and surrender charges,                

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

and expense loads for premium taxes on certain contracts. Expenses consist of   
benefits in excess of account balances and interest credited to contracts,      
policy maintenance costs and amortization of deferred insurance acquisition     
costs and value of business acquired.                                           

  Premiums for term life policies are reported as earned when due. Profits for
such policies are recognized over the duration of the insurance policies by     
matching benefits and expenses to premium income.                               

Reinsurance                                                                 

In the ordinary course of business, the Company enters into reinsurance   
agreements to diversify risk and limit its overall financial exposure to        
certain blocks of annuities and to individual death claims. Although these      
reinsurance agreements contractually obligate the reinsurers to reimburse the   
Company, they do not discharge the Company from its primary liabilities and     
obligations to policyholders. As such, these amounts paid or deemed to have     
been paid are recorded on the Company's consolidated balance sheet as           
reinsurance recoverables and ceded future policy benefits.                      

Deferred insurance acquisition costs                                        

The costs of acquiring new business, principally commission expense and   
certain policy issuance and underwriting expenses, have been deferred to the    
extent they are recoverable from estimated future gross profits on the related  
contracts and policies. The deferred insurance acquisition costs for annuities, 
separate account business and interest-sensitive life insurance products are    
being amortized over the estimated contract life in relation to the present     
value of estimated gross profits. Deferred insurance acquisition costs related  
to such interest-sensitive products also reflect the estimated impact of        
unrealized gains or losses on fixed maturity securities held as                 
available-for-sale in the investment portfolio, through a charge or credit to   
accumulated other comprehensive income, net of income tax. The deferred         
insurance acquisition costs for term life insurance products are being          
amortized over the premium paying period of the policies.                       

Future policy benefits                                                      

Liabilities for future policy benefits related to annuities and           
interest-sensitive life contracts reflect net premiums received plus interest   
credited during the contract accumulation period and the present value of       
future payments for contracts that have annuitized. A liability has been        
established for guaranteed death benefits in excess of account values. The      
guaranteed retirement income benefit ("GRIB") is an optional benefit to the     
DESTINATIONS/SM/ variable 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 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 percent   
interest per year to the annuitization date.                          

GRIB reserves have been established to cover the present value of future  
benefits for policies that were deemed to have elected annuitization. In        
accordance with current GAAP guidance, no additional liabilities for future     
policy benefits related to guaranteed living benefits have been established.    

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

Current interest rates credited during the contract accumulation period   
range from 0.5 percent to 12.0 percent. Future minimum guaranteed interest      
rates vary from 3.0 percent to 4.5 percent. For contracts that have annuitized, 
interest rates used in determining the present value of future payments range   
principally from 2.5 percent to 4.5 percent.                                    

Liabilities for future term life policy benefits have been computed       
principally by a net level premium method. Anticipated rates of mortality are   
based on the 1975-1980 Select and Ultimate Table modified by Company            
experience, including withdrawals. Assumed investment yields are by policy      
duration and range from 6.0 percent to 7.3 percent over 20 years.               

Guaranty fund assessments                                                   

The Company is liable for guaranty fund assessments related to certain    
unaffiliated insurance companies that have become insolvent during the years    
2002 and prior. The Company's financial statements include provisions for all   
known assessments that are expected to be levied against the Company as well as 
an estimate of amounts (net of estimated future premium tax recoveries) that    
the Company believes it will be assessed in the future for which the life       
insurance industry has estimated the cost to cover losses to policyholders.     

Invested assets and related income                                          

Investments in fixed maturity securities and equity securities are carried
at fair value. Short-term investments are carried at cost, which approximates   
fair value.                                                                     

  The amortized cost of fixed maturity securities is adjusted for amortization
of premiums and accretion of discounts to maturity, or in the case of           
mortgage-backed and asset-backed securities, over the estimated life of the     
security. Such amortization is included in net investment income. Amortization  
of the discount or premium from mortgage-backed and asset-backed securities is  
recognized using a level effective yield method which considers the estimated   
timing and amount of prepayments of the underlying loans and is adjusted to     
reflect differences which arise between the prepayments originally anticipated  
and the actual prepayments received and currently anticipated. To the extent    
that the estimated lives of such securities change as a result of changes in    
prepayment rates, the adjustment is also included in net investment income. The 
Company does not accrue interest income on fixed maturity securities deemed to  
be impaired on an other-than-temporary basis, or on mortgage loans and other    
real estate loans where the likelihood of collection of interest is doubtful.   

Mortgage loans are carried at their unpaid balance, net of unamortized    
discount and any applicable reserves or write-downs. Other real estate-related  
investments, net of any applicable reserves and write-downs, include notes      
receivable from real estate ventures and investments in real estate ventures,   
adjusted for the equity in the operating income or loss of such ventures. Real  
estate reserves are established when declines in collateral values, estimated   
in light of current economic conditions, indicate a likelihood of loss.         

 Investments in policy loans and other invested assets, consisting primarily
of venture capital investments and a leveraged lease are carried primarily at   
cost, net of any applicable reserves or write-downs.                            

  Realized gains or losses on sales of investments, determined on the basis of
identifiable cost on the disposition of the respective investment, recognition  
of other-than-temporary declines in value and changes in real estate-related    
reserves and write-downs are included in revenue. Net unrealized gains or       
losses on revaluation of investments are credited or charged to accumulated     
other comprehensive income (loss). Such unrealized gains are recorded net of    
deferred income tax expense and unrealized losses are tax benefited. However,   
the tax benefits from unrealized losses are offset by a valuation allowance,    
where appropriate.                                                              

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

Derivative instruments                                                      

 The Company is party to an interest rate swap agreement with Zurich Capital
Markets, Inc. ("ZCM"), an affiliated counterparty. The Company invests          
primarily in fixed rate investments. A floating rate funding agreement was      
reinsured in 2000 and the Company subsequently entered into an interest rate    
swap agreement. Under interest rate swaps, the Company agrees with other        
parties to exchange, at specified intervals, the difference between fixed-rate  
and floating-rate interest amounts calculated by reference to an agreed         
notional principal amount. No cash is exchanged at the outset of the contract   
and no principal payments are made by either party. A single net payment is     
made by one counterparty at each due date. In 2002, the Company paid            
$3.8 million as settlement for the difference between the fixed-rate and        
floating-rate interest.                                                         

The Company is exposed to credit-related losses in the event of           
nonperformance by counterparties to financial instruments, but it does not      
expect its counterparty to fail to meet its obligations given its high credit   
ratings. The credit exposure of interest rate swaps is represented by the fair  
value (market value) of contracts. At December 31, 2002, and 2001 an open swap  
agreement with a notional value of $100.0 million and an expiration date of     
November 2004, had a negative market value of $8.1 million and $5.0 million,    
respectively. The negative market value was included as a component of other    
accounts payable and liabilities in the accompanying consolidated balance       
sheets.                                                                         

Separate account business                                                   

The assets and liabilities of the separate accounts represent segregated  
funds administered and invested by the Company for purposes of funding variable 
annuity and variable life insurance contracts for the exclusive benefit of      
variable annuity and variable life insurance contractholders. The Company       
receives administrative fees from the separate account and retains varying      
amounts of withdrawal charges to cover expenses in the event of early           
withdrawals by contractholders. The assets and liabilities of the separate      
accounts are carried at fair value.                                             

Income tax                                                                  

The Company will file a consolidated federal income tax return with Zurich
Holding Company of America, beginning with the 2002 tax year. Deferred taxes    
are provided on the temporary differences between the tax and financial         
statement basis of assets and liabilities.                                      

(2) Cash Flow Information                                                       

The Company defines cash as cash in banks and money market accounts. The  
Company received a federal income tax refund of $2.7 million in 2002 and paid   
taxes of $19.8 million and $43.9 million directly to the United States Treasury 
Department during 2001 and 2000, respectively.                                  

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

(3) Invested Assets and Related Income                                          

  The Company is carrying its fixed maturity investment portfolio at estimated
fair value as fixed maturity securities are considered available-for-sale. The  
carrying value of fixed maturity securities compared with amortized cost,       
adjusted for other-than-temporary declines in value, and estimated unrealized   
gains and losses, were as follows:                                              

                                                        [Enlarge/Download Table]


                                                                                    Estimated Unrealized
                                                               Carrying  Amortized  --------------------
                                                                Value      Cost      Gains     Losses   
                                                                -----      ----      -----     ------   
(in thousands)                                                                                          
                                                                                                        
December 31, 2002                                                                                       
   U.S. treasury securities and obligations of U.S.                                                     
     government agencies and authorities..................... $  265,400 $  260,287 $  5,140  $    (26) 
   Obligations of states and political subdivisions,                                                    
     special revenue and nonguaranteed.......................     19,873     19,073      800        --  
   Debt securities issued by foreign Governments.............      4,793      4,506      287        --  
   Corporate securities......................................  2,137,716  2,062,712   90,030   (15,026) 
   Mortgage and asset-backed securities......................    992,990    967,342   35,972   (10,324) 
                                                              ---------- ---------- --------  --------  
       Total fixed maturity securities....................... $3,420,773 $3,313,920 $132,229  $(25,376) 
                                                              ========== ========== ========  ========  
   Equity securities......................................... $   58,615 $   52,627 $  5,988  $     --  
                                                              ========== ========== ========  ========  
December 31, 2001                                                                                       
   U.S. treasury securities and obligations of U.S.                                                     
     government agencies and authorities..................... $   21,354 $   21,286 $    254  $   (186) 
   Obligations of states and political subdivisions, special                                            
     revenue and nonguaranteed...............................     13,488     13,292      196        --  
   Debt securities issued by foreign governments.............      4,537      4,508       29        --  
   Corporate securities......................................  1,945,006  1,926,160   45,602   (26,756) 
   Mortgage and asset-backed securities......................  1,110,175  1,091,893   24,795    (6,513) 
                                                              ---------- ---------- --------  --------  
       Total fixed maturity securities....................... $3,094,560 $3,057,139 $ 70,876  $(33,455) 
                                                              ========== ========== ========  ========  
   Equity securities......................................... $   67,731 $   65,473 $  2,261  $     --  
                                                              ========== ========== ========  ========  

The carrying value and amortized cost of fixed maturity investments, by   
contractual maturity at December 31, 2002, are shown below. Actual maturities   
will differ from contractual maturities because borrowers may have the right to 
call or prepay obligations with or without call or prepayment penalties and     
because mortgage-backed and asset-backed securities provide for periodic        
payments throughout their life.                                                 

                                                        [Enlarge/Download Table]

                                                                       Carrying  Amortized 
                                                                        Value      Cost    
                                                                      ---------- ----------
(in thousands)                                                                             
                                                                                           
One year or less..................................................... $   63,112 $   62,223
Over one year through five years.....................................    806,702    774,553
Over five years through ten years....................................  1,312,277  1,265,409
Over ten years.......................................................    245,692    244,393
Securities not due at a single maturity date, primarily mortgage- and                      
  asset-backed securities(1).........................................    992,990    967,342
                                                                      ---------- ----------
       Total fixed maturity securities............................... $3,420,773 $3,313,920
                                                                      ========== ==========

--------                                                                        
(1) Weighted average maturity of 3.4 years.                                     

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

Proceeds from sales of investments in fixed maturity securities prior to  
maturity were $2,307.6 million, $1,331.2 million and $589.9 million during      
2002, 2001 and 2000, respectively. Gross gains of $81.2 million, $32.9 million  
and $8.6 million and gross losses, including write-downs of fixed maturity      
securities, of $65.8 million, $28.6 million and $20.8 million were realized on  
sales and maturities in 2002, 2001 and 2000, respectively. Pre-tax write-downs  
amounted to $18.5 million, $15.5 million and $11.4 million for the years ended  
December 31, 2002, 2001 and 2000, respectively.                                 

At December 31, 2002, the Company held $102.3 million in mortgage loan    
investments in Delta Wetlands, which exceeded 10 percent of the Company's       
stockholder's equity at December 31, 2002. Excluding agencies of the U.S.       
government, no other individual investment exceeded 10 percent of the Company's 
stockholder's equity at December 31, 2002.                                      

 At December 31, 2002, securities carried at approximately $5.3 million were
on deposit with governmental agencies as required by law.                       

For its securitized financial assets, the Company recognizes an impairment
loss if the fair value of the security is below book value and the net present  
value of expected future cash flows is less than the net present value of       
expected future cash flows at the most recent (prior) estimation date. The      
Company recorded write-downs totaling $9.5 million and $8.6 million in 2002 and 
2001, respectively, related to their securitized financial assets. The Company  
did not have any write-downs in 2000 related to their securitized financial     
assets.                                                                         

Upon default or indication of potential default by an issuer of fixed     
maturity securities other than securitized financial assets, the issue(s) of    
such issuer would be placed on nonaccrual status and, since declines in fair    
value would no longer be considered by the Company to be temporary, would be    
analyzed for possible write-down. Any such issue would be written down to its   
net realizable value during the fiscal quarter in which the impairment was      
determined to have become other-than-temporary. Thereafter, each issue on       
nonaccrual status is regularly reviewed, and additional write-downs may be      
taken in light of later developments. The Company recorded fixed maturity       
write-downs on other than securitized financial assets of $9.0 million, $6.9    
million and $11.4 million in 2002, 2001 and 2000, respectively.                 

The Company's computation of net realizable value involves judgments and  
estimates, so such value should be used with care. Such value determination     
considers such factors as the existence and value of any collateral; the        
capital structure of the issuer; the level of actual and expected market        
interest rates; where the issue ranks in comparison with other debt of the      
issuer; the economic and competitive environment of the issuer and its          
business; the Company's view on the likelihood of success of any proposed       
issuer restructuring plan; and the timing, type and amount of any restructured  
securities that the Company anticipates it will receive.                        

The Company's $177.7 million real estate portfolio at December 31, 2002   
consists of joint venture and third-party mortgage loans and other real         
estate-related investments. At December 31, 2002 and 2001, total impaired real  
estate-related loans were as follows:                                           

                                                                [Download Table]

                                       December 31, December 31,
                                           2002         2001    
                                       ------------ ------------
(in millions)                                                   
                                                                
Impaired loans without reserves--gross    $ 4.8        $ 7.3    
Impaired loans with reserves--gross...     10.8         11.3    
                                          -----        -----    
       Total gross impaired loans.....     15.6         18.6    
Reserves related to impaired loans....     (2.7)        (2.7)   
Write-downs related to impaired loans.     (3.5)        (3.5)   
                                          -----        -----    
       Net impaired loans.............    $ 9.4        $12.4    
                                          =====        =====    

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

The Company had an average balance of $13.6 million and $65.3 million in  
impaired loans for 2002 and 2001, respectively. Cash payments received on       
impaired loans are generally applied to reduce the outstanding loan balance.    

At December 31, 2002 and 2001, loans on nonaccrual status, before reserves
and write-downs, amounted to $10.6 million and $13.0 million, respectively. The 
Company's nonaccrual loans are generally included in impaired loans.            

Net Investment Income                                                           

The sources of net investment income were as follows:                     

                                                                [Download Table]

                                                    2002     2001     2000  
                                                  -------- -------- --------
(in thousands)                                                              
                                                                            
Interest on fixed maturity securities............ $186,034 $214,505 $223,964
Dividends on equity securities...................    4,508    4,598    4,573
Income from short-term investments...............    1,479    2,332    3,433
Income from mortgage loans.......................   15,598   30,771    6,091
Income from policy loans.........................   23,189   19,394   20,088
Income from other real estate-related investments       13       27       99
Income from other loans and investments..........      951      646    2,455
                                                  -------- -------- --------
       Total investment income...................  231,772  272,273  260,703
Investment expense...............................    3,442    2,854    3,233
                                                  -------- -------- --------
       Net investment income..................... $228,330 $269,419 $257,470
                                                  ======== ======== ========

During 2001, a change in circumstances surrounding a water development    
project located in California's Sacramento River Valley led to a decision to    
reclassify the related mortgage loans to accrual status and release the general 
reserve allowance originally set up for these loans. These changes included the 
State of California's State Water Resources Control Board ("SWRCB") approval of 
the project's water right permit as well as the completion of a third-party     
appraisal of the project, subsequent to the SWRCB's approval of the permit and  
the project's inclusion by the CALFED Bay-Delta Program ("CALFED") as a         
potential early implementation project. CALFED is a collaborative effort of     
state and federal agencies working to find solutions for California's water     
management issues.                                                              

Taken together, these facts supported, in management's best judgment, not 
only the level of existing debt on the project but also the accrual of interest 
as specified in the terms of the loans. As a result, interest income was        
recorded in the fourth quarter of 2001 in the amount of $24.9 million,          
representing interest earned in 2001 as well as recaptured interest from 2000   
and 1999, the years in which the loans were on non-accrual status. The release  
of the general reserve allowance generated a realized gain of $16.4 million in  
2001.                                                                           

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

Net Realized Investment Gains (Losses)                                          

Net realized investment gains (losses) for the years ended December 31,   
2002, 2001 and 2000, were as follows:                                           

                                                                [Download Table]

                                                           2002     2001     2000   
                                                         --------  ------- -------- 
(in thousands)                                                                      
                                                                                    
Real estate-related..................................... $    961  $16,081 $  1,711 
Fixed maturity securities...............................   15,444    4,284  (12,185)
Equity securities.......................................      346      262      245 
Other...................................................  (17,530)      33    1,952 
                                                         --------  ------- -------- 
   Realized investment gains (losses) before income tax                             
     expense (benefit)..................................     (779)  20,660   (8,277)
Income tax expense (benefit)............................     (273)   7,231   (2,897)
                                                         --------  ------- -------- 
       Net realized investment gains (losses)........... $   (506) $13,429 $ (5,380)
                                                         ========  ======= ======== 

The other losses, net, for 2002 consist primarily of a write-down on a    
leveraged lease that covers two aircraft. The aircraft are leased by United     
Airlines ("UAL") and were written down to zero subsequent to UAL filing Chapter 
11 bankruptcy in the fourth quarter of 2002. The pre-tax write-down totaled     
$17.5 million.                                                                  

Unrealized gains (losses) are computed below as follows: fixed maturity   
securities--the difference between fair value and amortized cost, adjusted for  
other-than-temporary declines in value; equity and other securities--the        
difference between fair value and cost. The change in net unrealized investment 
gains (losses) by class of investment for the years ended December 31, 2002,    
2001 and 2000 were as follows:                                                  

                                                                [Download Table]

                                             December 31, December 31, December 31,
                                                 2002         2001         2000    
                                             ------------ ------------ ------------
(in thousands)                                                                     
                                                                                   
Fixed maturity securities...................   $ 69,432     $69,970      $89,421   
Equity and other securities.................        641        (879)       1,187   
Adjustment to deferred insurance acquisition                                       
  costs.....................................    (11,159)     (7,446)        (243)  
Adjustment to value of business acquired....     (1,455)     (4,209)      (3,614)  
                                               --------     -------      -------   
   Unrealized gain (loss) before income tax                                        
     expense (benefit)......................     57,459      57,436       86,751   
Income tax expense (benefit)................     20,001       8,167       (1,350)  
                                               --------     -------      -------   
       Net unrealized gain (loss) on                                               
         investments........................   $ 37,458     $49,269      $88,101   
                                               ========     =======      =======   

Income tax expense related to the change in unrealized gains for the years
ended December 31, 2002, 2001 and 2000 was $24.4 million, $12.2 million and $0, 
respectively. The income tax benefit related to the adjustment to deferred      
insurance acquisition costs for the years ended December 31, 2002, 2001 and     
2000 was $3.9 million, $2.6 million and $0.1 million, respectively. The income  
tax benefit related to the adjustment to value of business acquired for the     
years ended December 31, 2002, 2001 and 2000 was $0.5 million, $1.5 million and 
$1.3 million, respectively.                                                     

(4) Concentration of Credit Risk                                                

The Company generally strives to maintain a diversified invested asset    
portfolio; however, certain concentrations of credit risk exist in mortgage-    
and asset-backed securities and real estate.                                    

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

  Approximately 16.2 percent of the investment-grade fixed maturity securities
at December 31, 2002 were residential mortgage-backed securities, down from     
22.0 percent at December 31, 2001. Approximately 6.3 percent of the             
investment-grade fixed maturity securities at December 31, 2002 were commercial 
mortgage-backed securities, compared with 5.7 percent at December 31, 2001. The 
residential mortgage-backed securities consist primarily of marketable mortgage 
pass-through securities issued by the Government National Mortgage Association, 
the Federal National Mortgage Association or the Federal Home Loan Mortgage     
Corporation and other investment-grade securities collateralized by mortgage    
pass-through securities issued by these entities. The Company has not made any  
investments in interest-only or other similarly volatile tranches of            
mortgage-backed securities. The Company's mortgage-backed investments are       
generally of AAA credit quality, and the markets for these investments have     
been and are expected to remain liquid.                                         

Approximately 7.3 percent and 9.6 percent of the investment-grade fixed   
maturity securities at December 31, 2002 and 2001, respectively, consisted of   
asset-backed securities. The majority of investments in asset-backed securities 
were backed by home equity loans (34.7%), manufactured housing loans (17.7%),   
collateralized loan and bond obligations (15.4%) and automobile loans (13.1%).  

The Company's real estate portfolio is distributed by geographic location 
and property type. The geographic distribution of a majority of the real estate 
portfolio as of December 31, 2002 was as follows: California (58.0%),           
Washington (9.4%), Colorado (7.6%) and Illinois (6.6%). The property type       
distribution of a majority of the real estate portfolio as of December 31, 2002 
was as follows: land (57.0%), hotels (31.4%) and office (6.6%).                 

To maximize the value of certain land and other projects, additional      
development has been proceeding or has been planned. Such development of        
existing projects would continue to require funding, either from the Company or 
third parties. In the present real estate markets, third-party financing can    
require credit enhancing arrangements (e.g., standby financing arrangements and 
loan commitments) from the Company. The values of development projects are      
dependent on a number of factors, including Kemper's and the Company's plans    
with respect thereto, obtaining necessary construction and zoning permits and   
market demand for the permitted use of the property. There can be no assurance  
that such permits will be obtained as planned or at all, nor that such          
expenditures will occur as scheduled, nor that Kemper's or the Company's plans  
with respect to such projects may not change substantially.                     

  More than half of the Company's real estate mortgage loans are on properties
or projects where the Company, Kemper, or their affiliates have taken ownership 
positions in joint ventures with a small number of partners.                    

At December 31, 2002, loans to a master limited partnership (the "MLP")   
between subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty   
Company, a former affiliate, constituted approximately $102.3 million of the    
Company's real estate portfolio. Kemper's interest in the MLP is 75.0 percent   
at December 31, 2002. Loans to the MLP were placed on non-accrual status at the 
beginning of 1999 due to management's desire not to increase book value of the  
MLP over net realizable value, as interest on these loans has historically been 
added to principal. During 2001, a change in circumstances surrounding the      
water development project related to these loans led to the reclassification of 
these loans to accrual status. As a result, interest income was recorded in the 
fourth quarter of 2001 and subsequent periods and the general reserve allowance 
related to these loans was released. At December 31, 2002, MLP-related          
commitments accounted for approximately $0.2 million of the Company's           
off-balance-sheet legal commitments.                                            

At December 31, 2002, loans to and investments in joint ventures in which 
Patrick M. Nesbitt or his affiliates ("Nesbitt"), a third-party real estate     
developer, have ownership interests constituted approximately                   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

$60.0 million of the Company's real estate portfolio. The Nesbitt ventures      
consist of nine hotel properties and one retail property. At December 31, 2002, 
the Company did not have any Nesbitt-related off-balance-sheet legal funding    
commitments outstanding. At December 31, 2002, the Company carried a valuation  
reserve of $0.6 million for one of these properties as its estimated fair value 
decreased below the debt supported by the property.                             

At December 31, 2002, a loan to a joint venture amounted to $11.8 million.
This affiliated mortgage loan was on an office property located in Illinois and 
owned by an affiliate, Zurich North America. At December 31, 2002, the Company  
did not have any off-balance-sheet legal funding commitments outstanding        
related to this investment.                                                     

The remaining real estate-related investment amounted to $4.9 million at  
December 31, 2002 and consisted of mortgage loans on unzoned lots located in    
Hawaii. These properties are not currently producing income and the loans are   
on non-accrual. All zoned properties were sold by March of 2001. The Company is 
currently pursuing an out of court settlement with the City of Honolulu for the 
down zoning of certain unzoned properties. If a settlement is not reached, the  
trial will begin in 2003. The Company is holding the other unzoned properties   
for future zoning and sales. The Company anticipates that it could be a number  
of years until the Company obtains zoning to allow development or completely    
disposes of all its investment in Hawaii. At December 31, 2002,                 
off-balance-sheet legal commitments related to Hawaiian properties totaled $4.0 
million.                                                                        

At December 31, 2002, the Company no longer had any outstanding loans or  
investments in projects with the Prime Group, Inc. or its affiliates, as all    
such investments have been sold. However, the Company continues to have Prime   
Group-related commitments, which accounted for $25.7 million of the Company's   
off-balance-sheet legal commitments at December 31, 2002.                       

(5) Income Taxes                                                                

  Income tax expense (benefit) was as follows for the years ended December 31,
2002, 2001 and 2000:                                                            

                                                                [Download Table]

                    2002    2001     2000   
                  -------  ------- -------- 
(in thousands)                              
                                            
 Current......... $(4,835) $11,228 $ 28,274 
 Deferred........   2,458   16,926  (27,027)
                  -------  ------- -------- 
       Total..... $(2,377) $28,154 $  1,247 
                  =======  ======= ======== 

Additionally, the deferred income tax expense (benefit) related to items  
included in other comprehensive income was as follows for the years ended       
December 31, 2002, 2001 and 2000:                                               

                                                                [Download Table]

                                             2002     2001     2000  
                                           -------  -------  ------- 
(in thousands)                                                       
                                                                     
Unrealized gains and losses on investments $24,416  $12,246  $    -- 
Value of business acquired................    (509)  (1,473)  (1,265)
Deferred insurance acquisition costs......  (3,906)  (2,606)     (85)
                                           -------  -------  ------- 
       Total.............................. $20,001  $ 8,167  $(1,350)
                                           =======  =======  ======= 

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

The actual income tax expense for 2002, 2001 and 2000 differed from the   
"expected" tax expense for those years as displayed below. "Expected" tax       
expense was computed by applying the U.S. federal corporate tax rate of 35      
percent in 2002, 2001, and 2000 to income before income tax expense.            

                                                                [Download Table]

                                                        2002      2001     2000   
                                                      --------  -------  -------- 
(in thousands)                                                                    
                                                                                  
Computed expected tax expense........................ $(52,300) $27,913  $ 17,342 
Difference between "expected" and actual tax expense:                             
   State taxes.......................................      342   (2,302)      737 
   Goodwill impairment and amortization of other                                  
     intangibles.....................................   55,045    4,797     4,589 
   Dividend received deduction.......................   (2,220)      --    (1,191)
   Foreign tax credit................................       --      (15)     (214)
   Change in valuation allowance.....................       --       --   (15,201)
   Recapture of affiliated reinsurance...............       --       --    (4,599)
   Prior year tax settlements........................   (3,594)  (2,577)       -- 
   Other, net........................................      350      338      (216)
                                                      --------  -------  -------- 
       Total actual tax expense...................... $ (2,377) $28,154  $  1,247 
                                                      ========  =======  ======== 

Deferred tax assets and liabilities are generally determined based on the 
difference between the financial statement and tax basis of assets and          
liabilities using enacted tax rates in effect for the year in which the         
differences are expected to reverse.                                            

The $4.6 million tax benefit related to the recapture of affiliated       
reinsurance in 2000 is due to the deferred tax effect related to the deemed     
dividend distribution. (See the note captioned "Summary of Significant          
Accounting Policies--Reinsurance.") This deferred tax benefit was recognized in 
the tax provision under current accounting guidance relating to the recognition 
of deferred taxes.                                                              

The Company only records deferred tax assets if future realization of the 
tax benefit is more likely than not. The Company had established a valuation    
allowance to reduce the deferred federal tax asset related to real estate and   
unrealized losses on investments to a realizable amount. This amount was based  
on the evidence available and management's judgment. The valuation allowance is 
subject to future adjustments based upon, among other items, the Company's      
estimates of future operating earnings and capital gains. The decrease in the   
valuation allowance in 2001 is related to the change in the amount of           
unrealized losses on investments.                                               

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

The tax effects of temporary differences that give rise to significant    
portions of the Company's net deferred federal tax assets or liabilities were   
as follows:                                                                     

                                                        [Enlarge/Download Table]

                                                              December 31, December 31,
                                                                  2002         2001    
                                                              ------------ ------------
(in thousands)                                                                         
                                                                                       
Deferred federal tax assets:                                                           
   Deferred insurance acquisition costs ("DAC Tax")..........   $141,338     $135,307  
   Unrealized losses on investments..........................         --           --  
   Life policy reserves......................................     82,584       90,870  
   Unearned revenue..........................................     56,986       55,574  
   Real estate-related.......................................         --           --  
   Other investment-related..................................     13,365       12,646  
   Other.....................................................      6,131        3,349  
                                                                --------     --------  
       Total deferred federal tax assets.....................    300,404      297,746  
   Valuation allowance.......................................         --           --  
                                                                --------     --------  
       Total deferred federal tax assets after valuation                               
         allowance...........................................    300,404      297,746  
                                                                --------     --------  
Deferred federal tax liabilities:                                                      
   Value of business acquired................................     13,439       24,608  
   Deferred insurance acquisition costs......................    156,042      135,317  
   Depreciation and amortization.............................     13,142       21,165  
   Other investment-related..................................      4,848        7,239  
   Unrealized gains on investments...........................     35,966       12,246  
   Other.....................................................      3,739        1,483  
                                                                --------     --------  
       Total deferred federal tax liabilities................    227,176      202,058  
                                                                --------     --------  
Net deferred federal tax assets..............................   $ 73,228     $ 95,688  
                                                                ========     ========  

  The net deferred tax assets relate primarily to unearned revenue and the DAC
Tax associated with a non-registered individual and group variable              
business-owned life insurance contract ("BOLI"). Management believes that it is 
more likely than not that the results of future operations will generate        
sufficient taxable income over the ten year amortization period of the unearned 
revenue and DAC Tax to realize such deferred tax assets.                        

The tax returns through the year 1996 have been examined by the Internal  
Revenue Service ("IRS"). Changes proposed are not material to the Company's     
financial position. The tax returns for the years 1997 through 1999 are         
currently under examination by the IRS.                                         

(6) Related-Party Transactions                                                  

The Company received capital contributions from Kemper totaling $37.3     
million in 2002 and paid cash dividends of $13.0 million and $20.0 million to   
Kemper during 2001 and 2000, respectively. The Company reported a deemed        
dividend distribution of $16.3 million during 2000 related to the recapture of  
a reinsurance agreement with Federal Kemper Life Assurance Company ("FKLA"), an 
affiliated company.                                                             

The Company has loans to joint ventures, consisting primarily of mortgage 
loans on real estate, in which the Company and/or one of its affiliates has an  
ownership interest. At December 31, 2002 and 2001, joint venture mortgage loans 
totaled $114.1 million and $104.3 million, respectively, and during 2002, 2001  
and 2000, the Company earned interest income on these joint venture loans of    
$10.4 million, $25.4 million and $0.8 million, respectively.                    

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

 In February 2001, the Company sold a $60 million group variable life policy
to FKLA, covering all current FKLA employees as of February 14, 2001. The       
transaction, as business-owned life insurance ("BOLI"), permits FKLA to         
indirectly fund certain of its employee benefit obligations.                    

  All of the Company's personnel are employees of FKLA. Expenses are allocated
to the Company for the utilization of FKLA employees and facilities. Expenses   
allocated to the Company from FKLA during 2002, 2001 and 2000 amounted to $29.9 
million, $27.4 million and $23.3 million, respectively. The Company also paid   
to Kemper real estate subsidiaries fees of $0.4 million, $0.5 million and $0.6  
million in 2002, 2001 and 2000, respectively, related to the management of the  
Company's real estate portfolio.                                                

The Company has a service agreement with Deutsche Investment Management   
Americas, Inc. ("DIM"), formerly Zurich Scudder Investments, Inc. ("ZSI"), a    
subsidiary of Zurich at December 31, 2001. DIM provides investment services,    
including purchases or sales of securities, under the supervision of the        
Investment Committee of the Company. On September 24, 2001, ZFS announced that  
it would sell 100% of its ownership in ZSI to Deutsche Bank in a transaction    
valued at $2.5 billion. The sale was completed on April 5, 2002. This           
transaction did not include Scudder's United Kingdom operations, Threadneedle   
Investments.                                                                    

At December 31, 2002 and 2001, the Company reported the following amounts due   
from or (to) related parties:                                                   

                                                                [Download Table]

                                         December 31,  December 31,
                                             2002          2001    
                                         ------------  ------------
                                                                   
ZLICA................................... $     17,979  $   640,705 
Zurich Insurance Company--Bermuda Branch           --    1,131,138 
Other...................................        1,017       96,037 
                                         ------------  ----------- 
   Receivable from related parties...... $     18,996  $ 1,867,880 
                                         ============  =========== 
FKLA.................................... $ (3,536,310) $(2,064,245)
Zurich Direct...........................      (52,607)     (83,572)
Zurich Insurance Company--Bermuda Branch  (16,354,306)          -- 
Other...................................     (108,000)  (1,859,277)
                                         ------------  ----------- 
   Payable to related parties........... $(20,051,223) $(4,007,094)
                                         ============  =========== 
   Net payable to related parties....... $(20,032,227) $(2,139,214)
                                         ============  =========== 

Related party receivables and payables are settled each month.            

In 2000, the Company purchased PMG Securities Corporation, PMG Asset      
Management, Inc., PMG Marketing, Inc., and PMG Life Agency, Inc. (collectively  
"PMG"). The total cost was $8.2 million, resulting in the recording of          
intangible assets in the amount of $7.6 million. The Company owns 100 percent   
of the stock of PMG. Also in 2000, the Company transferred $63.3 million in     
fixed maturity securities and cash to fund the operations of its newly formed   
subsidiary, Zurich Life Insurance Company of New York ("ZLICONY"). ZLICONY      
received its insurance license from the State of New York in January 2001 and   
began writing business in May of 2001.                                          

At December 31, 2000, the Company held a $100.0 million investment in ZSLM
Trust, issued by an affiliate. On October 30, 2001, the Company sold these      
bonds for cash to Farmers Group, Inc., which is an affiliated company.          

The Company held an $11.8 million real estate-related investment in an    
affiliated mortgage loan at December 31, 2002 and 2001.                         

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

As previously discussed, the Company is party to an interest rate swap    
agreement with ZCM, an affiliated counterparty. (See the note captioned         
"Summary of Significant Accounting Policies--Derivative instruments" above.)    

(7) Reinsurance                                                                 

As of December 31, 2002 and 2001, the reinsurance recoverable related to  
fixed-rate annuity liabilities ceded to FLA amounted to $215.3 million and      
$230.1 million, respectively.                                                   

The Company cedes 90 percent of all new direct individual life insurance  
premiums to outside reinsurers. Life reserves ceded to outside reinsurers on    
the Company's direct business amounted to approximately $2.4 million and $2.1   
million as of December 31, 2002 and 2001, respectively.                         

The Company is party to a reinsurance agreement with a ZFS affiliated     
company, Zurich Insurance Company, Bermuda Branch ("ZICBB"). Under the terms of 
this agreement, the Company cedes, on a yearly renewable term basis, 100        
percent of the net amount at risk (death benefit payable to the insured less    
the insured's separate account cash surrender value) related to BOLI. As        
consideration for this reinsurance coverage, the Company cedes separate account 
fees (cost of insurance charges) to ZICBB and, under the original agreement,    
retained a portion of such funds in a funds withheld account ("FWA") which is   
included as a component of benefits and funds payable in the accompanying       
consolidated balance sheet as of December 31, 2001.                             

During the first quarter of 2002, the Company amended the BOLI reinsurance
agreement with ZICBB. Under the amended agreement, the balance in the FWA was   
transferred to a trust account that acts as security for the reinsurance        
agreement. On January 25, 2002, approximately $222.5 million in cash was        
transferred to the trust account. The trust account is not reflected in the     
Company's consolidated financial statements but is included in ZICBB's          
financial statements as of December 31, 2002. At December 31, 2002, reserve     
credits totaling $237.6 million were secured by the trust agreement, which was  
supported by cash and invested assets with a fair value of approximately $252.6 
million.                                                                        

The net amount at risk of the guaranteed minimum death benefit and        
guaranteed retirement income benefit on certain new variable annuity contracts  
issued between March 1, 1997 and April 30, 2000 were ceded to outside           
reinsurers. As of December 31, 2002 and 2001, the reinsurance recoverable       
related to reinsuring the net amount at risk on these contracts amounted to     
$24.7 million and $8.3 million, respectively.                                   

Effective December 31, 2001, the Company entered into a quota-share       
reinsurance agreement with ZICBB. Under the terms of this agreement, the        
Company cedes 100 percent of the net amount at risk of the guaranteed minimum   
death benefit and guaranteed retirement income benefit portions of a small      
number of specific variable annuity contracts. As consideration for this        
reinsurance coverage, the Company cedes 100 percent of all charges to           
policyholders and all revenue sharing income received from fund managers        
related to such reinsured policies. In 2001, the Company received $7.9 million  
of ceding commissions and expense allowances, and paid $1.2 million of ceded    
premiums, related to this reinsurance agreement. The account values related to  
these policies are held in the Company's separate account during the            
accumulation period of the contracts. The reserve credits under this treaty are 
secured by a trust agreement that requires the fair market value of assets      
therein to at least equal 102 percent of such reserve credits.                  

  In January 2003, the specific annuities that comprised the block of business
ceded to ZICBB were surrendered. Approximately $5.0 million in surrender        
charges collected on these specific annuities was paid to ZICBB at the end of   
February 2003, as the final settlement payment related to this reinsurance      
agreement.                                                                      

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

In the fourth quarter of 2000, the yearly renewable term reinsurance      
agreement between the Company and FKLA was terminated. Premiums and reserves    
were both reduced by $7.7 million. A difference in the basis of the reserves    
between GAAP and statutory accounting resulted in a deemed dividend             
distribution to Kemper of $16.3 million.                                        

Also in the fourth quarter of 2000, the Company assumed from FKLA $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 and is recorded as a future policy benefit.                             

As previously discussed, the Company entered into an interest rate swap in
2000 to exchange the floating-rate interest payments for fixed interest         
payments.                                                                       

The following table contains amounts related to the BOLI funds withheld   
reinsurance agreement with ZICBB (in millions):                                 

Business Owned Life Insurance (BOLI)                                            
(in millions)                                                                   

                                                                [Download Table]

                                   Year Ended December 31,   
                                ---------------------------- 
                                  2002      2001      2000   
                                --------  --------  -------- 
                                                             
Face amount in force........... $ 85,592  $ 85,564  $ 85,358 
                                ========  ========  ======== 
Net amount at risk ceded....... $(75,288) $(76,283) $(78,169)
                                ========  ========  ======== 
Cost of insurance charges ceded $  156.5  $  168.1  $  173.8 
                                ========  ========  ======== 
Funds withheld account......... $     --  $  236.1  $  228.8 
                                ========  ========  ======== 

  The Company's FWA supported reserve credits on reinsurance ceded on the BOLI
product at December 31, 2001 and 2000. At December 31, 2002, the trust supports 
reserve credits on the reinsurance ceded.                                       

(8) Postretirement Benefits Other Than Pensions                                 

FKLA sponsors a health and welfare benefit plan that provides insurance   
benefits covering substantially all eligible, active and retired employees of   
FKLA and their covered dependents and beneficiaries. The Company is allocated a 
portion of the costs of providing such benefits. The Company is self-insured    
with respect to medical benefits, and the plan is not funded except with        
respect to certain disability-related medical claims. The medical plan provides 
for medical insurance benefits at retirement, with eligibility based upon age   
and the participant's number of years of participation attained at retirement.  
The plan is contributory for pre-Medicare retirees, and will be contributory    
for all retiree coverage for most current employees, with contributions         
generally adjusted annually. Postretirement life insurance benefits are         
noncontributory and are limited to $5,000 per participant retiring in 2001 and  
subsequent years, and $10,000 per participant retiring in years prior to 2001.  

The allocated accumulated postretirement benefit obligation accrued by the
Company as of December 31, 2002 and 2001 amounted to $1.4 million and $1.3      
million, respectively.                                                          

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

The discount rate used in determining the allocated postretirement benefit
obligation was 6.5 percent and 7.0 percent for 2002 and 2001, respectively. The 
assumed health care trend rate used was based on projected experience for 2002, 
7.3 percent for 2003, gradually declining to 6.1 percent by the year 2007 and   
gradually declining thereafter.                                                 

A one percentage point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit obligation  
as of December 31, 2002 and 2001 by $159 thousand and $142 thousand,            
respectively.                                                                   

(9) Commitments and Contingent Liabilities                                      

The Company is involved in various legal actions for which it establishes 
liabilities where appropriate. In the opinion of the Company's management,      
based upon the advice of legal counsel, the resolution of such litigation is    
not expected to have a material adverse effect on the consolidated financial    
statements.                                                                     

Although neither the Company nor its joint venture projects have been     
identified as a "potentially responsible party" under federal environmental     
guidelines, inherent in the ownership of, or lending to, real estate projects   
is the possibility that environmental pollution conditions may exist on or near 
or relate to properties owned or previously owned or on properties securing     
loans. Where the Company has presently identified remediation costs, they have  
been taken into account in determining the cash flows and resulting valuations  
of the related real estate assets. Based on the Company's receipt and review of 
environmental reports on most of the projects in which it is involved, the      
Company believes its environmental exposure would be immaterial to its          
consolidated results of operations.                                             

  However, the Company may be required in the future to take actions to remedy
environmental exposures, and there can be no assurance that material            
environmental exposures will not develop or be identified in the future. The    
amount of future environmental costs is impossible to estimate due to, among    
other factors, the unknown magnitude of possible exposures, the unknown timing  
and extent of corrective actions that may be required, the determination of the 
Company's liability in proportion to others and the extent such costs may be    
covered by insurance or various environmental indemnification agreements.       

(10) Financial Instruments--Off-Balance-Sheet Risk                              

At December 31, 2002, the Company had future legal loan commitments and   
stand-by financing agreements totaling $29.9 million to support the financing   
needs of various real estate investments. To the extent these arrangements are  
called upon, amounts loaned would be collateralized by assets of the joint      
ventures, including first mortgage liens on the real estate. The Company's      
criteria in making these arrangements are the same as for its mortgage loans    
and other real estate investments. These commitments are included in the        
Company's analysis of real estate-related reserves and write-downs. The fair    
values of loan commitments and standby financing agreements are estimated in    
conjunction with and using the same methodology as the fair value estimates of  
mortgage loans and other real estate-related investments.                       

(11) Fair Value of Financial Instruments                                        

 Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These        
estimates do not reflect any premium or discount that could result from         
offering for sale at one time the Company's entire holdings of a particular     
financial instrument. A significant portion of the Company's financial          
instruments are carried at fair value. Fair value estimates for                 

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

financial instruments not carried at fair value are generally determined using  
discounted cash flow models and assumptions that are based on judgments         
regarding current and future economic conditions and the risk characteristics   
of the investments. Although fair value estimates are calculated using          
assumptions that management believes are appropriate, changes in assumptions    
could significantly affect the estimates and such estimates should be used with 
care.                                                                           

Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated   
future business and the value of assets and certain liabilities that are not    
considered financial instruments. Accordingly, the aggregate fair value         
estimates presented do not represent the underlying value of the Company. For   
example, the Company's subsidiaries are not considered financial instruments,   
and their value has not been incorporated into the fair value estimates. In     
addition, tax ramifications related to the realization of unrealized gains and  
losses can have a significant effect on fair value estimates and have not been  
considered in any of the estimates.                                             

The Company used the following methods and assumptions in estimating the  
fair value of its financial instruments:                                        

Fixed maturity securities and equity securities: Fair values were   
 determined by using market quotations, or independent pricing services that
use prices provided by market makers or estimates of fair values obtained 
from yield data relating to instruments or securities with similar        
 characteristics, or fair value as determined in good faith by the Company's
portfolio manager, DIM.                                                   

 Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheets for these instruments approximate fair values.

  Policy loans: The carrying value of policy loans approximates the fair
value as the Company adjusts the rates to remain competitive.             

 Mortgage loans and other real estate-related investments: Fair values
were estimated based upon the investments observable market price, net of 
estimated costs to sell and where no observable price is available, by    
 appraised value. The estimates of fair value should be used with care given
the inherent difficulty in estimating the fair value of real estate due to
the lack of a liquid quotable market. Mortgage loans and other real       
estate-related investments are stated at their aggregate unpaid balances, 
less a valuation allowance of $4.8 million and $2.8 million in 2002 and   
2001, respectively. The real estate portfolio is monitored closely and    
reserves are adjusted to reflect market conditions. This results in a     
carrying value that approximates fair value at December 31, 2002 and 2001.

Other investments: The carrying amounts reported in the consolidated
balance sheets for these instruments approximate fair values.             

  Life policy benefits: For deposit liabilities with defined maturities,
the fair value was based on the discounted value of future cash flows. The
discount rate was based on the rate that would be offered for similar     
  deposits at the reporting date. For all other deposit liabilities, primarily
  deferred annuities and universal life contracts, the fair value was based on
the amount payable on demand at the reporting date.                       

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

The carrying values and estimated fair values of the Company's financial  
instruments at December 31, 2002 and 2001 were as follows:                      

                                                        [Enlarge/Download Table]

                                                          December 31, 2002     December 31, 2001  
                                                        --------------------- ---------------------
                                                         Carrying              Carrying            
                                                          Value    Fair Value   Value    Fair Value
                                                        ---------- ---------- ---------- ----------
(in thousands)                                                                                     
                                                                                                   
Financial instruments recorded as assets:                                                          
   Fixed maturity securities........................... $3,420,773 $3,420,773 $3,094,560 $3,094,560
   Cash and short-term investments.....................     47,436     47,436    216,479    216,479
   Mortgage loans and other real estate-related assets.    177,691    177,691    176,440    176,440
   Policy loans........................................    223,888    223,888    239,787    239,787
   Equity securities...................................     58,615     58,615     67,731     67,731
   Other invested assets...............................      2,491      2,491     20,799     20,799
Financial instruments recorded as liabilities:                                                     
   Life policy benefits, excluding term life reserves..  3,625,384  3,565,147  3,376,604  3,324,417
   Funds withheld account..............................         --         --    236,134    236,134

(12) Stockholder's Equity--Retained Earnings                                    

The maximum amount of dividends which can be paid by insurance companies  
domiciled in the State of Illinois to stockholders without prior approval of    
regulatory authorities is restricted. In 2003, the Company cannot pay any       
dividends without Illinois Department of Insurance approval. In 2002, the       
Company did not pay dividends. The Company paid cash dividends of $13.0 million 
and $20.0 million to Kemper during 2001 and 2000, respectively. The Company     
reported a deemed dividend distribution of $16.3 million during 2000 related to 
the recapture of the reinsurance agreement with FKLA.                           

The Company's net income (loss) and capital and surplus as determined in  
accordance with statutory accounting principles were as follows:                

                                                                [Download Table]

                                2002      2001      2000  
                              --------  --------  --------
(in thousands)                                            
                                                          
Net income (loss)............ $(84,871) $(71,854) $ 19,975
                              ========  ========  ========
Statutory capital and surplus $312,653  $332,598  $397,423
                              ========  ========  ========

  The Company's statutory net loss reflects the market downturn and its impact
on reserves for guaranteed death and living benefits consistent with statutory  
reserving methodology.                                                          

As of January 1, 2001, the Company adopted the Codification of Statutory  
Accounting Principles ("Codification") guidance. The National Association of    
Insurance Commissioners ("NAIC") Accounting Practices and Procedures Manual is  
the NAIC's primary guidance on statutory accounting. Codification provides      
guidance for areas where statutory accounting had been silent and changed       
current statutory accounting in some areas. The Illinois Insurance Department   
adopted Codification, effective January 1, 2001. The Company's statutory        
surplus was positively impacted by $16.7 million upon adoption as a result of   
the net effect of recording a deferred tax asset, of non-admitting              
non-operating system software, of non-admitting net affiliated receivables and  
other changes caused by Codification.                                           

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

(13) Unaudited Interim Financial Information                                    

The following table sets forth the Company's unaudited quarterly financial
information:                                                                    

                                                        [Enlarge/Download Table]

                                                                  Quarter Ended                     
                                             ------------------------------------------------------ 
                                             March 31   June 30  September 30 December 31    Year   
                                             --------  --------  ------------ ----------- --------- 
(in thousands)                                                                                      
                                                                                                    
2002 Operating Summary                                                                              
   Revenue.................................. $ 92,322  $105,170   $  92,308    $ 90,962   $ 380,762 
                                             ========  ========   =========    ========   ========= 
   Net operating income, excluding realized                                                         
     gains, before cumulative effect of                                                             
     accounting change...................... $  8,109  $    394   $(169,309)   $ 14,261   $(146,545)
                                             ========  ========   =========    ========   ========= 
   Net operating income (loss), excluding                                                           
     realized gains......................... $(13,798) $    394   $(169,309)   $ 14,261   $(168,452)
   Net realized investment gains (losses)...     (841)    7,613       1,037      (8,315)       (506)
                                             --------  --------   ---------    --------   --------- 
       Net income (loss).................... $(14,639) $  8,007   $(168,272)   $  5,946   $(168,958)
                                             ========  ========   =========    ========   ========= 
2001 Operating Summary                                                                              
   Revenue.................................. $ 91,072  $ 98,360   $  85,013    $123,852   $ 398,297 
                                             ========  ========   =========    ========   ========= 
   Net operating income (loss), excluding                                                           
     realized gains (losses)................ $  8,183  $ (1,364)  $  (6,443)   $ 37,792   $  38,168 
   Net realized investment gains (losses)...    1,375     5,257       1,206       5,591      13,429 
                                             --------  --------   ---------    --------   --------- 
       Net income (loss).................... $  9,558  $  3,893   $  (5,237)   $ 43,383   $  51,597 
                                             ========  ========   =========    ========   ========= 
2000 Operating Summary                                                                              
   Revenue.................................. $ 87,648  $103,446   $  94,249    $ 75,567   $ 360,910 
                                             ========  ========   =========    ========   ========= 
   Net operating income, excluding realized                                                         
     gains (losses)......................... $ 12,031  $  9,953   $   8,710    $ 22,987   $  53,681 
   Net realized investment gains (losses)...   (1,378)     (105)        948      (4,845)     (5,380)
                                             --------  --------   ---------    --------   --------- 
       Net income........................... $ 10,653  $  9,848   $   9,658    $ 18,142   $  48,301 
                                             ========  ========   =========    ========   ========= 

(14) Operations by Business Segment                                             

The Company, along with FKLA, ZLICA and FLA, operate under the trade name 
Zurich Life, formerly Zurich Kemper Life. Prior to 2002, Zurich Life was        
organized by Strategic Business Unit ("SBU"). Each SBU concentrated on specific 
distribution channels. However, the SBUs were not managed at the legal entity   
level, but rather at the Zurich Life level. Zurich Life's SBUs cross legal      
entity lines, as certain similar products are sold by more than one legal       
entity and/or through more than one distribution channel.                       

 In 2002, the Company's management team shifted its financial focus from SBU
performance to a line of business performance within each legal entity. The     
SBUs are now primarily responsible for market management, including             
distribution management, product design, sales and marketing.                   

The Company has two primary operating segments, life insurance and        
annuities, that offer different types of products and services. These two       
operating segments reflect the way the Company manages its operations and makes 
business decisions.                                                             

 Premiums received from the sale of annuity products and the majority of our
life insurance products are treated as deposit-type funds and are not recorded  
as revenue within the consolidated statements of operations.                    

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

However, revenues for both the life insurance and annuity segments are          
generated from investing these deposit-type funds. For universal life insurance 
products and fixed annuity products, deposits are primarily invested in fixed   
maturity securities and the Company earns investment income. Variable life      
insurance deposits and variable annuity deposits are transferred to the         
separate account and invested in underlying investment funds that invest in     
stocks and bonds. The Company receives cost of insurance charges and other      
separate account fees as revenues from this business. In addition, the Company  
receives premium tax and DAC Tax expense loads from certain contractholders.    

 In the following table, the Company uses the caption "net operating income"
as an operating measure of segment performance. Net operating income is         
calculated by deducting net realized investment gains or losses, net of related 
income taxes, and the cumulative effect of a change in accounting principle,    
net of tax, from net income. Net realized investment gains or losses are        
excluded from net operating income because they can, in part, be discretionary  
and are not indicative of operational trends.                                   

  Prior period information has been restated to conform to the new composition
of our segments.                                                                

                                                        [Enlarge/Download Table]

                                                               Twelve Months Ended                 Twelve Months Ended       
                                                                December 31, 2002                   December 31, 2001        
                                                       -----------------------------------  ---------------------------------
                                                          Life       Annuity      Total        Life     Annuity      Total   
                                                       ----------  ----------  -----------  ---------- ---------- -----------
(in thousands)                                                                                                               
                                                                                                                             
Total operating revenue............................... $   80,573  $  300,968  $   381,541  $   78,196 $  299,441 $   377,637
                                                       ----------  ----------  -----------  ---------- ---------- -----------
Operating income (loss) before tax expense, goodwill                                                                         
 impairment and cumulative effect of accounting                                                                              
 change............................................... $   13,663  $   (5,800) $     7,863  $   15,721 $   43,370 $    59,091
Income tax expense (benefit) on operations............      5,238      (7,342)      (2,104)      7,128     13,795      20,923
Goodwill impairment...................................    (32,832)   (123,679)    (156,511)         --         --          --
                                                       ----------  ----------  -----------  ---------- ---------- -----------
Net operating income (loss) before cumulative effect                                                                         
 of accounting change.................................    (24,407)   (122,137)    (146,544)      8,593     29,575      38,168
Cumulative effect of accounting change, net of tax....         --     (21,907)     (21,907)         --         --          --
                                                       ----------  ----------  -----------  ---------- ---------- -----------
Net operating income (loss)........................... $  (24,407) $ (144,044) $  (168,451) $    8,593 $   29,575 $    38,168
                                                       ==========  ==========  ===========  ========== ========== ===========
Goodwill.............................................. $       --  $       --  $        --  $    6,601 $  171,817 $   178,418
                                                       ----------  ----------  -----------  ---------- ---------- -----------
Total assets.......................................... $9,840,840  $8,825,442  $18,666,282  $8,841,469 $9,248,359 $18,089,828
                                                       ==========  ==========  ===========  ========== ========== ===========
Total reserve for policyholder benefits in the general                                                                       
 account.............................................. $  808,389  $3,303,100  $ 4,111,489  $  628,899 $3,005,262 $ 3,634,161
Total Separate Account liabilities....................  8,848,140   4,699,236   13,547,376   7,696,013  5,412,740  13,108,753
                                                       ----------  ----------  -----------  ---------- ---------- -----------
Total reserve for policyholder benefits............... $9,656,529  $8,002,336  $17,658,865  $8,324,912 $8,418,002 $16,742,914
                                                       ==========  ==========  ===========  ========== ========== ===========

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KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 

                                                        [Enlarge/Download Table]

                                                              Twelve Months Ended        
                                                               December 31, 2000         
                                                       ----------------------------------
                                                          Life      Annuity      Total   
                                                       ---------- ----------  -----------
(in thousands)                                                                           
                                                                                         
Total operating revenue............................... $   90,913 $  278,274  $   369,187
                                                       ---------- ----------  -----------
Operating income (loss) before tax expense, goodwill                                     
 impairment and cumulative effect of accounting                                          
 change............................................... $   23,820 $   34,005  $    57,825
Income tax expense (benefit) on operations............      4,171        (27)       4,144
                                                       ---------- ----------  -----------
Net operating income (loss) before cumulative effect                                     
 of accounting change.................................     19,649     34,032       53,681
Cumulative effect of accounting change, net of tax....         --         --           --
                                                       ---------- ----------  -----------
Net operating income (loss)........................... $   19,649 $   34,032  $    53,681
                                                       ========== ==========  ===========
Goodwill.............................................. $    5,764 $  185,399  $   191,163
                                                       ---------- ----------  -----------
Total assets.......................................... $8,077,697 $7,928,946  $16,006,643
                                                       ========== ==========  ===========
Total reserve for policyholder benefits in the general                                   
 account.............................................. $  691,290 $2,896,850  $ 3,588,140
Total Separate Account liabilities....................  7,009,309  4,170,330   11,179,639
                                                       ---------- ----------  -----------
Total reserve for policyholder benefits............... $7,700,599 $7,067,180  $14,767,779
                                                       ========== ==========  ===========

(15) Subsequent Event                                                           

In the first quarter of 2003, the specific annuities that comprised the   
block of business ceded to ZICBB were surrendered. Approximately $5.0 million   
in surrender charges collected on these specific annuities was paid to ZICBB at 
the end of February, 2003, as the final settlement payment related to this      
reinsurance agreement.                                                          

(16) Effects of New Accounting Pronouncements                                   

In January, 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest       
Entities, an Interpretation of ARB No. 51. The primary objective of FIN 46 is   
to provide guidance on the identification of, and financial reporting for,      
entities over which control is achieved through means other than voting rights; 
such entities are known as variable-interest entities. While there are a number 
of criteria that determine the effective date of FIN 46, the Company has        
concluded that it does not have any variable-interest entities.                 

Item 9. Changes in and Disagreements with Accountants on Accounting and         
Financial Disclosure                                                            

None.                                                                     

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PART III  

Item 10. Directors and Executive Officers of the Registrant                     

                                                        [Enlarge/Download Table]

           Name and Age                                                                                   
Position with Kemper Investors Life                                                                       
   Insurance Company ("KILICO")                                                                           
         Year of Election             Other Business Experience During Past 5 Years or More               
-----------------------------------   -----------------------------------------------------               
                                                                                                          
Gale K. Caruso (45)                   President and Chief Executive Officer of Federal Kemper Life        
  President and Chief Executive       Assurance Company ("FKLA"), Fidelity Life Association ("FLA") and   
  Officer since June 1999. Director   Zurich Life Insurance Company of America ("ZLICA"). President and   
  since July 1999.                    Chief Executive Officer of Zurich Direct, Incorporated ("ZD") since 
                                      April 2000. Director of FKLA, FLA and ZLICA since July 1999 and of  
                                      ZD since March 2000. President and Chief Executive Officer of Zurich
                                      Kemper Life Insurance Company of New York ("ZLICONY") since         
                                      April 2000 and Director since October 1999. Chairman and Director of
                                      Investors Brokerage Services, Inc. ("IBS") since May 2000 and of    
                                      Investors Brokerage Services Insurance Agency, Inc. ("IBSIA") since 
                                      March 2000. Chairman and Director of PMG Asset Management, Inc.     
                                      ("PMGAM"), PMG Life Agency Inc. ("PMGLA"), PMG Marketing,           
                                      Inc. ("PMG Marketing") and PMG Securities Corporation ("PMG         
                                      Securities") since March 2000. Executive Vice President and Director
                                      of Kemper Corporation ("Kemper") since February 2000. Chairman,     
                                      President and Chief Executive Officer of Scudder Canada Investor    
                                      Services, Ltd. from 1995 to June 1999. Managing Director of Scudder 
                                      Kemper Investments, Inc. from July 1986 to June 1999.               

Frederick L. Blackmon (51)            Executive Vice President of FKLA, FLA, ZLICA and ZD since June      
  Executive Vice President since      2000. Executive Vice President of ZLICONY since May 2001. Chief     
  June 2000. Chief Financial Officer  Financial Officer of FKLA since December 1995. Chief Financial      
  since December 1995. Director       Officer of FLA since January 1996. Chief Financial Officer of ZLICA 
  since January 2001.                 and ZD since March 1996. Chief Financial Officer of ZLICONY since   
                                      April 2000. Director of FKLA, ZLICA and ZLICONY since January       
                                      2001. Senior Vice President of KILICO and FKLA from December        
                                      1995 to June 2000. Senior Vice President of FLA from January 1996 to
                                      June 2000. Senior Vice President of ZLICA and ZD from March 1996    
                                      to June 2000. Senior Vice President of ZLICONY from April 2000 to   
                                      May 2001. Director of FLA since May 1998. Director of ZD from       
                                      March 1996 to March 1997 and since January 2001. Chief Financial    
                                      Officer of Kemper since January 1996. Treasurer of Kemper from      
                                      January 1996 to February 2000.                                      

Russell M. Bostick (46)               Executive Vice President of FKLA, FLA, ZLICA and ZD since June      
  Executive Vice President since      2000. Executive Vice President of ZLICONY since May 2001. Chief     
  June 2000. Chief Information        Information Officer of FKLA, FLA, ZLICA and ZD since April 1998.    
  Officer since April 1998.           Chief Information Officer of ZLICONY since April 2000. Senior Vice  
                                      President of FKLA, FLA, ZLICA and ZD from March 1999 to June        
                                      2000. Senior Vice President of ZLICONY from April 2000 to May       
                                      2001. Vice President of FKLA, FLA, KILICO, ZLICA and ZD from        
                                      April 1998 to March 1999. Chief Technology Officer of Corporate     
                                      Software & Technology from June 1997 to April 1998. Vice President, 
                                      Information Technology Department of CNA Insurance Companies        
                                      from January 1995 to June 1997.                                     

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            Name and Age                                                                                   
 Position with Kemper Investors Life                                                                       
    Insurance Company ("KILICO")                                                                           
          Year of Election             Other Business Experience During Past 5 Years or More               
 -----------------------------------   -----------------------------------------------------               
                                                                                                           
Mark A. Davis (44)                     Executive Vice President and Chief Actuary of FKLA, FLA, ZD, and    
  Executive Vice President and Chief   ZLICA since August 2002. Executive Vice President and Chief Actuary 
  Actuary since August 2002.           of ZLICONY since July 2002. Principal at Tillinghast-Towers Perrin  
                                       from June 1987 to July 2002.                                        

Martin D. Feinstein (54)               Chairman of the Board of FKLA, FLA, ZLICA and ZLICONY since         
  Chairman of the Board since          January 2001. Chairman of the Board of Farmers Group, Inc. ("FGI")  
  January 2001.                        since November 1997 and President since January 1995. Chief         
                                       Executive Officer of FGI since January 1995 and Director since      
                                       February 1995. Member of Group Executive Committee of Zurich        
                                       Financial Services since March 1998. Director of Zurich Scudder     
                                       Investments, Inc. since January 2001. Director of Farmers New World 
                                       Life from April 1995 to April 2000 and since May 2002. Chief        
                                       Operating Officer of FGI from January 1995 to January 1997. Director
                                       of B.A.T. Industries from January 1997 to September 1998.           

Edward K. Loughridge (48)              Executive Vice President of FKLA, FLA, ZLICA and ZD since June      
  Executive Vice President since June  2000. Executive Vice President of ZLICONY since May 2001.           
  2000. Corporate Development          Corporate Development Officer of FKLA and FLA since January 1996.   
  Officer since January 1996.          Corporate Development Officer for ZLICA and ZD since March 1996.    
                                       Corporate Development Officer of ZLICONY since April 2000. Senior   
                                       Vice President of KILICO, FKLA and FLA from January 1996 to June    
                                       2000. Senior Vice President of ZLICA and ZD from March 1996 to      
                                       June 2000. Senior Vice President of ZLICONY from April 2000 to      
                                       May 2001.                                                           

Debra P. Rezabek (47)                  Executive Vice President of FKLA, FLA, ZLICA and ZD since June      
  Executive Vice President since June  2000. Executive Vice President of ZLICONY since May 2001. General   
  2000. General Counsel since May      Counsel of FKLA and FLA since 1992. General Counsel ZLICA and       
  1993. Corporate Secretary since      ZD since March 1996. Corporate Secretary of FKLA and FLA since      
  January 1996. Director since         January 1996. Corporate Secretary of ZLICA and ZD since March       
  January 2001.                        1996. General Counsel and Corporate Secretary of ZLICONY since      
                                       April 2000. Director of FKLA and ZLICA since January 2001. Senior   
                                       Vice President of KILICO, FKLA, FLA, ZLICA and ZD from March        
                                       1996 to June 2000. Senior Vice President of ZLICONY from April      
                                       2000 to May 2001. Director of FLA since May 1998. Director of       
                                       ZLICONY since January 2001. Director of ZD from March 1996 to       
                                       March 1997. Secretary of IBS and IBSIA since 1993. Secretary of     
                                       PMGAM, PMGLA, PMG Marketing and PMG Securities since March          
                                       2000. Director of Government Affairs of FKLA and FLA from 1992 to   
                                       April 1997 and of KILICO from 1993 to April 1997. Assistant         
                                       Secretary of Kemper since January 1996.                             

Richard M. Sousa (49)                  Executive Vice President of FKLA, FLA and ZLICA since June 2002.    
  Executive Vice President             Executive Vice President of ZD since March 2002. Executive Vice     
  since June 2002. Director since      President of ZLICONY since July 2002. Director of FKLA, FLA,        
  May 2002.                            ZLICONY and ZLICA since May 2002. Senior Vice President, Call       
                                       Center Operations at Kemper from August 1998 to June 2002.          

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            Name and Age                                                                                  
 Position with Kemper Investors Life                                                                      
    Insurance Company ("KILICO")                                                                          
          Year of Election             Other Business Experience During Past 5 Years or More              
 -----------------------------------   -----------------------------------------------------              
                                                                                                          

George Vlaisavljevich (60)             Executive Vice President of FKLA, FLA, ZLICA and ZD since June     
  Executive Vice President since June  2000. Executive Vice President of ZLICONY since May 2001. Director 
  2000. Director since May 2001.       of FKLA and ZLICA since May 2001. Director of FLA since January    
                                       2001. Senior Vice President of KILICO, FKLA, FLA and ZLICA since   
                                       October 1996. Senior Vice President of ZD from March 1997 to June  
                                       2000. Senior Vice President of ZLICONY from April 2000 to May      
                                       2001. Director of IBS and IBSIA since October 1996. Director of    
                                       PMGAM, PMGLA, PMG Marketing and PMG Securities since March         
                                       2000. Executive Vice President of The Copeland Companies from April
                                       1983 to September 1996.                                            

Linda K. Wagner (38)                   Executive Vice President of FKLA, FLA, ZLICA, ZLICONY and ZD       
  Executive Vice President since       since March 2003. Senior Vice President of KILICO, FKLA, FLA,      
  March 2003.                          ZLICA, ZLICONY and ZD from April 2001 to March 2003. Vice          
                                       President of GE Financial Assurance from April 1999 to March 2001. 
                                       Assistant Vice President of Conseco, Inc. from August 1997 to April
                                       1999.                                                              

Item 11. Executive Compensation                                                 

SUMMARY COMPENSATION TABLE  

                                                        [Enlarge/Download Table]

                                                                             Long Term                
                                                                            Compensation              
                                         Annual Compensation                   Awards                 
                                        ---------------------              --------------             
                                                              Other Annual   Long Term     All Other  
                                                              Compensation Incentive Plan Compensation
   Name and Principal Position     Year Salary($) Bonus($)(2)    ($)(3)    Payouts ($)(2)    ($)(4)   
   ---------------------------     ---- --------- ----------- ------------ -------------- ------------
                                                                                                      
Gale K. Caruso.................... 2002 $238,500   $     --     $13,143       $     --      $33,072   
 Chief Executive Officer(1)        2001  211,500    133,480      17,466             --       27,841   
                                   2000  179,500     91,920      10,866        126,720       14,094   

Frederick L. Blackmon............. 2002  119,560         --       7,183             --       12,373   
 Executive Vice President and      2001  109,760     51,385       6,306             --        9,567   
 Chief Financial Officer(1)        2000  109,760     50,715       7,060         51,695       11,637   

George Vlaisavljevich............. 2002  237,000         --      20,753             --       26,149   
 Executive Vice President(1)       2001  275,000    141,000      20,042             --       28,650   
                                   2000  260,000    116,500      17,493        126,000       30,750   

Debra Rezabek                      2002  152,750         --      15,044             --           --   
 Executive Vice President, General 2001  135,450     69,930       8,791             --       13,135   
 Counsel and Corporate             2000  100,000     49,250       6,809         48,500       10,700   
   Secretary(1)                                                                                       

Linda Wagner...................... 2002  138,600         --          --             --        8,526   
 Executive Vice President(1)       2001   62,425     42,380      17,100             --           --   
                                   2000       --         --          --             --           --   

--------                                                                        
(1) Also served in same positions for FKLA, ZLICA, ZKLICONY and FLA. An         
   allocation of the time devoted to duties as executive officer of KILICO has
been made. All compensation items reported in the Summary Compensation  
Table reflect this allocation.                                          

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(2) Annual bonuses are paid pursuant to annual incentive plans. The amounts of  
the bonuses and long-term compensation awards earned in 2002 for all    
officers were not available as of the date of this filing.              

(3) The amounts disclosed in this column include taxable benefit from personal  
   use of an employer-provided automobile and certain estate planning services
facilitated for executives.                                             

(4) The amounts in this column include:                                         

(a) The amounts of employer contributions allocated to the accounts of the
  named persons under profit sharing plans or under supplemental plans
       maintained to provide benefits in excess of applicable ERISA limitations.

(b) Distributions from the Kemper and FKLA supplemental retirement plans. 

Item 12. Security Ownership of Certain Beneficial Owners and Management         

(a) As of March 1, 2003, 100 percent of the outstanding shares of KILICO  
  were owned by Kemper Corporation, 1600 McConnor Parkway, Schaumburg,
Illinois 60196.                                                   

(b) .                                                                     

                                                                [Download Table]

                          Zurich      
                     Ordinary Shares  
                    Beneficially Owned
                    ------------------
                    Number (1) Percent
                    ---------- -------
                                      
Martin D. Feinstein   1,326(2)    *   
Gale K. Caruso.....      --           

-                                                                 
*  Less than 1% of the outstanding Zurich ordinary shares.      
   (1) Not included in the number above for Mr. Feinstein and Ms. Caruso
     are options over Zurich Financial Services Shares. The exercise
         price of the 2000 Allied Zurich and Zurich Allied share options are
       $706.46 CHF and $901.20 CHF, respectively. The market price as of
December 31, 2002 is $129.00 CHF.                         
(2) Included are 780 deferred shares that have no voting power.   

(c) Not applicable.                                                       

Item 13. Certain Relationships and Related Transactions                         

(a) Transactions with management and others--none.                        

(b) Certain business relationships--not applicable.                       

(c) Indebtedness of management--not applicable.                           

(d) Transactions with promoters--not applicable.                          

Item 14. Controls and Procedures                                                

 In order to ensure the information we must disclose in our filings with the
Securities and Exchange Commission is recorded, processed, summarized and       
reported on a timely basis, we have adopted disclosure controls and procedures. 
Our Chief Executive Officer, Gale K. Caruso, and our Chief Financial Officer,   
Frederick L. Blackmon, have reviewed and evaluated our disclosure controls and  
procedures as of March 12, 2003 and have concluded that our disclosure controls 
and procedures are appropriate and that no changes are required at this time.   

  There have been no significant changes in our internal controls, or in other
factors affecting our internal controls, since March 12, 2003.                  

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PART IV 

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K        

(a)(1) Financial Statements.                                              

     A listing of all financial statements filed as part of this Annual Report
on Form 10-K is included on page 28 in ITEM 8.                            

(a)(2) Schedules.                                                         

The following schedules are supplemental to the financial statements of   
KILICO and its subsidiaries for 2002 and are included in this Form 10-K on the  
pages indicated below. All other schedules are omitted because the information  
required to be stated therein is included in the financial statements or notes  
thereto or because they are not applicable.                                     

                                                        [Enlarge/Download Table]

Schedule Title                                                                    Page
-------- -----                                                                    ----
                                                                                      
  III... Supplementary insurance information at December 31, 2002 and 2001.......  66 
  IV.... Reinsurance, for the year ended December 31, 2002*......................  67 
  V..... Valuation and qualifying accounts, for the year ended December 31, 2002*  68 

--------                                                                        
* This schedule for the years ended December 31, 2001 and 2000 is incorporated  
by reference to KILICO's Form 10-K filed on March 29, 2002 and on March 28, 
2001, respectively.                                                         

(a)(3) Exhibits.                                                          

The exhibits required to be filed by Item 601 of Regulation S-K are 
listed under the caption "Exhibits" in Item 15(c).                        

(b) Reports on Form 8-K.                                                  

No reports on Form 8-K were filed during the fourth quarter of 2002.

(c) Exhibits.                                                             

                                                        [Enlarge/Download Table]

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

     2      Not applicable.                                                                              

     3(a)   Articles of Incorporation are incorporated herein by reference to Exhibits filed with        
            Registration Statement on Form S-1 (File No. 333-02491) filed on or about April 12,          
            1996.                                                                                        

     3(b)   Bylaws are incorporated herein by reference to Exhibits filed with Registration Statement    
            on Form S-1 (File No. 333-02491) filed on or about April 12, 1996.                           

     4(a)   Variable and Market Value Adjusted Deferred Annuity Contract is incorporated herein by       
            reference to Exhibits filed with Registration Statement on Form S-1 (File No. 33-43462) filed
            October 23, 1991.                                                                            

     4(b)   Certificate to Variable and Market Value Adjusted Deferred Annuity Contract and              
            Enrollment Application is incorporated herein by reference to Exhibits filed with            
            Registration Statement on Form S-1 (File No. 33-43462) filed October 23, 1991.               

     4(c)   Individual Variable and Market Value Adjusted Annuity Contract and Enrollment                
            Application is incorporated herein by reference to Exhibits filed with Post-Effective        
            Amendment No. 4 to the Registration Statement on Form N-4 for KILICO Variable                
            Annuity Separate Account (File No. 33-43501) filed November 19, 1993.                        

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

     4(d)   Endorsement to Variable and Market Value Adjusted Deferred Annuity Contract                    
            is incorporated herein by reference to Exhibits filed with Post-Effective Amendment No. 4      
            to the Registration Statement on Form N-4 for KILICO Variable Annuity Separate                 
            Account (File No. 33-43501) filed November 19, 1993.                                           

     4(e)   Endorsement to Certificate to Variable and Market Value Adjusted Deferred                      
            Annuity Contract is incorporated herein by reference to Exhibits filed with Post-Effective     
            Amendment No. 4 to the Registration Statement on Form N-4 for KILICO Variable                  
            Annuity Separate Account (File No. 33-43501) filed November 19, 1993.                          

     4(f)   Revised Variable and Market Value Adjusted Deferred Annuity Contract is                        
            incorporated herein by reference to Exhibits filed with Post-Effective Amendment No. 4 to      
            the Registration Statement on Form N-4 for KILICO Variable Annuity Separate Account            
            (File No. 33-43501) filed November 19, 1993.                                                   

     4(g)   Revised Certificate to Variable and Market Value Adjusted Deferred Annuity                     
            Contract is incorporated herein by reference to Exhibits filed with Post-Effective             
            Amendment No. 4 to the Registration Statement on Form N-4 for KILICO Variable                  
            Annuity Separate Account (File No. 33-43501) filed November 19, 1993.                          

     9      Not applicable.                                                                                

     10     Distribution Agreement between Kemper Investors Life Insurance Company and Investors           
            Brokerage Services, Inc. is incorporated herein by reference to Exhibits filed with            
            Amendment No. 4 to Registration Statement on Form S-1 (File No. 33-43462) filed on             
            April 14, 1995.                                                                                

     11     Not applicable.                                                                                

     12     Not applicable.                                                                                

     13     Not applicable.                                                                                

     16     Not applicable.                                                                                

     18     Not applicable.                                                                                

     21     Subsidiaries of the registrant are incorporated herein by reference to Post-Effective Amendment
            No. 29 to the Registration Statement on Form N-4 (File No. 2-72671) filed on or about April 26,
            2000.                                                                                          

     22     Not applicable.                                                                                

     23     Consent of PricewaterhouseCoopers LLP.                                                         

     99.1   Certification of CEO Pursuant to 18 U.S.C. Section 1350, As adopted Pursuant to Section 906 of 
            the Sarbanes-Oxley Act of 2002.                                                                

     99.2   Certification of CFO Pursuant to 18 U.S.C. Section 1350, As adopted Pursuant to Section 906 of 
            the Sarbanes-Oxley Act of 2002.                                                                

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SIGNATURES  

  Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, Kemper Investors Life Insurance Company has duly caused this Annual       
Report on Form 10-K for the fiscal year ended December 31, 2002 to be signed on 
its behalf by the undersigned, thereunto duly authorized, in the City of        
Schaumburg, State of Illinois, on the 27th day of March, 2003.                  

                                   KEMPER INVESTORS LIFE INSURANCE
               COMPANY

                                        /s/  GALE K. CARUSO*
                                          By: __________________________________
                                            Gale K. Caruso
                                         President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this 
Annual Report on Form 10-K for the fiscal year ended December 31, 2002 has been 
signed below by the following persons on behalf of Kemper Investors Life        
Insurance Company in the capacities indicated on the 27th day of March, 2003.   

Signature                        Title                      
---------                        -----                      

/S/  MARTIN D. FEINSTEIN     Chairman of the Board                          
-----------------------------                                                   
Martin D. Feinstein                                                   

/S/  GALE K. CARUSO       President, Chief Executive                  
-----------------------------    Officer and Director                           
Gale K. Caruso                                                    

/S/  FREDERICK L. BLACKMON    Executive Vice President and                    
-----------------------------    Chief Financial Officer                        
Frederick L. Blackmon                                                   

/S/  DEBRA P. REZABEK      Executive Vice President,                    
-----------------------------    General Counsel and Director                   
Debra P. Rezabek                                                    

/S/  GEORGE VLAISAVLJEVICH    Executive Vice President and                    
-----------------------------    Director                                       
George Vlaisavljevich                                                   

/S/  RICHARD M. SOUSA      Executive Vice President and                 
-----------------------------    Director                                       
Richard M. Sousa                                                    

/S/  DAVID S. JORGENSEN     Senior Vice President,                        
-----------------------------    Controller and Treasurer                       
David S. Jorgensen                                                    

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I, Gale K. Caruso, certify that:                                                

1. I have reviewed this annual report on Form 10-K of Kemper Investors Life     
Insurance Company;                                                        

2. Based on my knowledge, this annual report does not contain any untrue        
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such  
statements were made, not misleading with respect to the period covered by
this annual report;                                                       

3. Based on my knowledge, the financial statements, and other financial         
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of 
 the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for          
 establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:  

   a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
 particularly during the period in which this annual report is being
prepared;                                                         

  b) evaluated the effectiveness of the registrant's disclosure controls and
     procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and                        

  c) presented in this annual report our conclusions about the effectiveness
     of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;                                              

5. The registrant's other certifying officer and I have disclosed, based on our 
  most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent  
function):                                                                

a) all significant deficiencies in the design or operation of internal  
controls which could adversely affect the registrant's ability to 
      record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal 
controls; and                                                     

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and                                                     

6. The registrant's other certifying officer and I have indicated in this       
  annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls        
subsequent to the date of our most recent evaluation, including any       
corrective actions with regard to significant deficiencies and material   
weaknesses.                                                               

Date: March 24, 2003                                                            

/s/_GALE K. CARUSO                                                              
Gale K. Caruso                                                                  
Chief Executive Officer                                                         

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I, Frederick L. Blackmon, certify that:                                         

1. I have reviewed this annual report on Form 10-K of Kemper Investors Life     
Insurance Company;                                                        

2. Based on my knowledge, this annual report does not contain any untrue        
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such  
statements were made, not misleading with respect to the period covered by
this annual report;                                                       

3. Based on my knowledge, the financial statements, and other financial         
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of 
 the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for          
 establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:  

   a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
 particularly during the period in which this annual report is being
prepared;                                                         

  b) evaluated the effectiveness of the registrant's disclosure controls and
     procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and                        

  c) presented in this annual report our conclusions about the effectiveness
     of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;                                              

5. The registrant's other certifying officer and I have disclosed, based on our 
  most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent  
function):                                                                

a) all significant deficiencies in the design or operation of internal  
controls which could adversely affect the registrant's ability to 
      record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal 
controls; and                                                     

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and                                                     

 6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal  
   controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.                                              

Date: March 24, 2003                                                            

/s/  FREDERICK L. BLACKMON                                                      
--------------------------                                                      
Frederick L. Blackmon                                                           
Chief Financial Officer                                                         

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                                                                  SCHEDULE III

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

SUPPLEMENTARY INSURANCE INFORMATION 

December 31, 2002 
(in thousands)  

                                                        [Enlarge/Download Table]

                                                                Benefits,  Amortization          
         Deferred                  Other                         Claims,   Of Deferred           
          Policy      Future   Policyholder             Net     Losses and    Policy      Other  
        Acquisition   Policy   Benefits and  Premium Investment Settlement Acquisition  Operating
Segment    Cost      Benefits  Funds Payable Revenue   Income    Expenses     Costs     Expenses 
------- ----------- ---------- ------------- ------- ---------- ---------- ------------ ---------
                                                                                                 
Life...  $ 16,377   $  808,389   $177,279    $1,002   $ 49,360   $ 35,108    $ 2,365    $ 62,269 
Annuity   415,538    3,302,674     25,880        --    178,970    180,450     32,576     217,422 
         --------   ----------   --------    ------   --------   --------    -------    -------- 
Total..  $431,915   $4,111,063   $203,159    $1,002   $228,330   $215,558    $34,941    $279,691 
         ========   ==========   ========    ======   ========   ========    =======    ======== 

December 31, 2001 
(in thousands)  

                                                        [Enlarge/Download Table]

                                                                Benefits,  Amortization          
         Deferred                  Other                         Claims,   Of Deferred           
          Policy      Future   Policyholder             Net     Losses and    Policy      Other  
        Acquisition   Policy   Benefits and  Premium Investment Settlement Acquisition  Operating
Segment    Cost      Benefits  Funds Payable Revenue   Income    Expenses     Costs     Expenses 
------- ----------- ---------- ------------- ------- ---------- ---------- ------------ ---------
                                                                                                 
Life...  $ 14,919   $  628,899   $408,744     $486    $ 68,137   $ 36,023    $ 1,417    $ 25,035 
Annuity   366,587    3,005,262     27,705       --     201,282    145,037     16,635      94,399 
         --------   ----------   --------     ----    --------   --------    -------    -------- 
Total..  $381,506   $3,634,161   $436,449     $486    $269,419   $181,060    $18,052    $119,434 
         ========   ==========   ========     ====    ========   ========    =======    ======== 

December 31, 2000 
(in thousands)  

                                                                [Download Table]

                           Benefits,  Amortization          
                            Claims,   Of Deferred           
                   Net     Losses and    Policy      Other  
        Premium Investment Settlement Acquisition  Operating
Segment Revenue   Income    Expenses     Costs     Expenses 
------- ------- ---------- ---------- ------------ ---------
                                                            
Life... $8,394   $ 69,313   $ 36,410    $ 1,406    $ 29,277 
Annuity     --    188,157    129,597     21,825      92,847 
        ------   --------   --------    -------    -------- 
Total.. $8,394   $257,470   $166,007    $23,231    $122,124 
        ======   ========   ========    =======    ======== 

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                                                                   SCHEDULE IV

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

REINSURANCE 

Year Ended December 31, 2002  
(in thousands)  

                                                        [Enlarge/Download Table]

                                                   Assumed               Percentage of 
                          Gross       Ceded to    From Other    Net          Amount    
Description               Amount      Other(1)    Companies    Amount    Assumed to Net
-----------             ----------- ------------  ---------- ----------- --------------
                                                                                       
Life insurance in force $89,191,416 $(76,949,665)   $  --    $12,241,751      0.0%     
                        =========== ============    =====    ===========      ===      
Life insurance premiums $     3,336 $     (2,334)   $  --    $     1,002      0.0%     
                        =========== ============    =====    ===========      ===      

--------                                                                        
(1) Life insurance in force ceded to other companies was primarily ceded to an  
affiliated company, Zurich Insurance Company, Bermuda Branch.           

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                                                                    SCHEDULE V

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES  

VALUATION AND QUALIFYING ACCOUNTS 

Year Ended December 31, 2002  
(in thousands)  

                                                        [Enlarge/Download Table]

                                                           Additions                            
                                                     ---------------------                      
                                                                Charged to                      
                                          Balance at Charged to   Other               Balance at
                                          Beginning  Costs and   Accounts  Deductions   End of  
Description                               of Period   Expenses  --Describe --Describe   Period  
-----------                               ---------- ---------- ---------- ---------- ----------
                                                                                                
Asset valuation reserves:                                                                       
   Joint venture mortgage loans..........   $   --     $   --      $--        $--       $   --  
   Third-party mortgage loans............      600      2,000       --         --        2,600  
   Other real estate-related investments.    2,183         --       --         --        2,183  
                                            ------     ------      ---        ---       ------  
       Total.............................   $2,783     $2,000      $--        $--       $4,783  
                                            ======     ======      ===        ===       ======  

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INDEX TO EXHIBITS 

                                                        [Enlarge/Download Table]

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

   23       Consent of PricewaterhouseCoopers LLP.                                                        

   99.1     Certification of CEO Pursuant to 18 U.S.C. Section 1350, As adopted Pursuant to Section 906 of
            the Sarbanes-Oxley Act of 2002.                                                               

   99.2     Certification of CFO Pursuant to 18 U.S.C. Section 1350, As adopted Pursuant to Section 906 of
            the Sarbanes-Oxley Act of 2002.                                                               

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CONSENT OF INDEPENDENT ACCOUNTS 

We hereby consent to the incorporation by reference in the Registration         
Statement on Form S-1 (No. 333-22389, 333-32632, 333-54252 and 333-86044) of    
Kemper Investors Life Insurance Company and its subsidiaries of our report      
dated March 21, 2003 relating to the financial statements and financial         
statement schedules, which appears in this Form 10-K.                           

/s/  PricewaterhouseCoopers LLP                                                 

March 21, 2003                                                                  

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Certification of CEO Pursuant to  
18 U.S.C. Section 1350, 
As Adopted Pursuant to  
Section 906 of the Sarbanes-Oxley Act of 2002 

In connection with the Annual Report of Kemper Investors Life Insurance   
Company (the "Company") on Form 10-K for the period ended December 31, 2002, as 
filed with the Securities and Exchange Commission on the date hereof (the       
"Report"), I, Gale K. Caruso, Chief Executive Officer of the Company, hereby    
certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 
of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:           

   (1) The Report fully complies with the requirements of section 15(d) of
the Securities Exchange Act of 1934; and                                  

(2) The information contained in the Report fairly presents, in all 
 material respects, the financial condition and results of operations of the
Company.                                                                  

Dated:  March 24, 2003                                                          

                                       /S/  GALE K. CARUSO
                                                 -----------------------------
                                  Gale K. Caruso
                                           Chief Executive Officer

This certification accompanies this Report pursuant to section 906 of the 
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for     
purposes of section 18 of the Securities Exchange Act of 1934, as amended.      

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Certification of CFO Pursuant to  
18 U.S.C. Section 1350, 
As Adopted Pursuant to  
Section 906 of the Sarbanes-Oxley Act of 2002 

In connection with the Annual Report of Kemper Investors Life Insurance   
Company (the "Company") on Form 10-K for the period ended December 31, 2002, as 
filed with the Securities and Exchange Commission on the date hereof (the       
"Report"), I, Frederick L. Blackmon, Chief Financial Officer of the Company,    
hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to      
section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge,     
that:                                                                           

   (1) The Report fully complies with the requirements of section 15(d) of
the Securities Exchange Act of 1934; and                                  

(2) The information contained in the Report fairly presents, in all 
 material respects, the financial condition and results of operations of the
Company.                                                                  

Dated:  March 24, 2003                                                          

                                              /S/  FREDERICK L. BLACKMON
                                                 -----------------------------
                                         Frederick L. Blackmon
                                           Chief Financial Officer

This certification accompanies this Report pursuant to section 906 of the 
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for     
purposes of section 18 of the Securities Exchange Act of 1934, as amended.      

72  

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10-K’ Filing		Date		First		Last			Other Filings
		12/31/07		37
Filed on:		3/27/03
		3/24/03		65		73
		3/21/03		30		71
		3/12/03		61
		3/1/03		61
For Period End:		12/31/02		1		73
		9/20/02		11
		6/30/02		13		37			10-Q
		4/5/02		10		49
		3/29/02		62					10-K
		1/25/02		7		50
		1/1/02		12		36
		12/31/01		7		67			10-K
		10/30/01		49
		9/27/01		11
		9/24/01		10		49
		9/11/01		9		28
		6/28/01		11
		3/28/01		62					10-K
		2/14/01		49
		1/1/01		6		54
		12/31/00		18		67			10-K
		9/30/00		7					10-Q
		6/29/00		11					424B3
		4/30/00		7		50
		4/26/00		63
		3/1/97		7		50
		4/12/96		62					S-1
		1/4/96		16		37
		12/31/95		19					10-K
		4/14/95		63					POS AM
		11/19/93		62		63
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