Back to GetFilings.com

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

FORM 10-Q

(Mark One)

[X]

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 2003.

[ ]

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from N/A to N/A.

Commission file number 333-02491*.

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

ILLINOIS
(State of Incorporation)

36-3050975
(I.R.S. Employer Identification Number)

1600 McCONNOR PARKWAY
SCHAUMBURG, ILLINOIS
(Address of Principal Executive Offices)

60196-6801
(Zip Code)

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

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  X      No

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).

Yes

No  X

* Pursuant to Rule 429 under the Securities Act of 1933, this Form 10-Q also

  relates to Commission file numbers 333-22389, 333-32632,333-54252 and     
  333-86044.

KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES

FORM 10-Q

PART I. FINANCIAL STATEMENTS

Consolidated Balance Sheets -

  June 30, 2003 and December 31, 2002

3

Consolidated Statements of Operations -

  Six months and three months ended June 30, 2003 and 2002

5

Consolidated Statements of Comprehensive Income (Loss)-

  Six months and three months ended June 30, 2003 and 2002

6

Consolidated Statements of Cash Flows -

  Six months ended June 30, 2003 and 2002

7

Notes to Consolidated Financial Statements

9

Management's Discussion and Analysis

  Results of Operations

11

  Investments

22

  Liquidity and Capital Resources

24

Controls and Procedure

26

PART II. OTHER INFORMATION

ITEM 4. Submission of Matters to a vote of Security Holders

27

ITEM 6. Exhibits and Reports on Form 8-K

28

Signatures

29

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

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

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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

Kemper Investors Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)

See accompanying notes to consolidated financial statements.

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

1.

Kemper Investors Life Insurance Company 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 is a wholly-owned subsidiary that is licensed in the State of New York.  Kemper Investors Life Insurance Company and its subsidiaries (collectively, "KILICO" or "the Company"), 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 (“Z FS”), a Swiss holding company.

2.

In the opinion of management, all necessary adjustments consisting of normal recurring accruals have been made for a fair statement of the results of KILICO for the periods included in these financial statements. The results for the interim periods are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the financial statements and related notes in the 2002 Annual Report on Form 10-K.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.

3.

The Company, Federal Kemper Life Assurance Company ("FKLA"), Zurich Life Insurance Company of America ("ZLICA"), and Fidelity Life Association ("FLA"), operate under the trade name Zurich Life ("ZL").

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.

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, 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.

The following table reconciles the Company’s net operating income (loss) to its net income (loss):

4.

On May 30, 2003 ZFS and Bank One Corporation announced plans for the Bank One organization to acquire a significant portion of the ZL companies. As the acquisition is structured, Bank One will acquire all of the ZL companies, except the Company and FLA, and will administer and reinsure certain lines of business currently underwritten by the Company.  Bank One will also acquire the Company’s wholly-owned subsidiaries, including Zurich Life Insurance Company of New York, and the management contract under which FKLA currently provides employee and management services to FLA, a mutual legal reserve company owned by its policyholders.  The transaction is scheduled to close in the third quarter of 2003, pending regulatory approval.  Subsequent to the close, the Company will continue to operate a s an on-going life insurance company.

MANAGEMENT'S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS

The following discussion is for the six-month period ended June 30, 2003. Events for the three-month period ended June 30, 2003 are discussed where appropriate.

Kemper Investors Life Insurance Company and subsidiaries (collectively, "KILICO", "the Company", "we", "our" or "us") recorded net income of
$23.7 million in the first six months of 2003, compared with a net loss of $6.6 million for the first six months of 2002.

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

Net income (loss)

(in millions)

The following table reflects the major components of net realized capital gains and losses included in net income (loss):

Net realized capital gains (losses)
(in millions)

The $2.4 million of writedowns are related to other-than-temporary declines in value of certain securities, primarily certain airline issuers.

The $21.9 million in goodwill impairment in 2002, resulted from 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 required that goodwill and indefinite-lived intangible assets no longer be amortized, but be tested for impairment at the reporting unit level. 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, retroactive to January 1, 2002, the effective date of SFAS 142.

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 was the goodwill associated with the acquisition of the Zurich Life companies.  As a result, the Company recorded the complete write-down of the remaining goodwill of $156.5 million in the third quarter of 2002.

Operating earnings before goodwill impairment and amortization of definite-lived intangible assets resulted in a gain of $20.9 million for the first six months of 2003, compared with $8.9 million in the first six months of 2002. This increase was primarily due to:

*

a decrease in claims incurred and other policyholder benefits, primarily due to a decrease in policyholder reserves in 2003 for variable annuity guaranteed benefits resulting from the recent improvement in the stock market,

*

an increase in other income,

*

a decrease in taxes, licenses and fees,

*

a decrease in commissions and operating expenses, net of the deferral of insurance acquisition costs, and

*

a decrease in the amortization of business acquired,

offset by

*

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

*

a decrease in separate account fees and charges,

*

an increase in the amortization of deferred insurance acquisition costs, and

*

an increase in income tax expense on operations.

Sales and reinsurance assumed
(in millions)

Sales of annuity products consist of total deposits received, which are not recorded as revenue within the consolidated statements of operations. For variable annuity deposits we receive administrative fee revenue and on variable life insurance contracts we collect cost of insurance charges. For fixed-rate annuity business we manage spread revenue, defined as investment income less interest credited to policyholders.

Variable annuity deposits, including deposits under the fixed account option, decreased $436.6 million in the first half of 2003, compared with the same period in 2002. The decrease 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 and, in the first quarter of 2003, we discontinued all new sales of Destinations^SM. We have, however, continued to receive additional deposits in existing contracts.  We expect this to continue to some extent.

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 $70.6 million in the first half of 2003, compared with the same period in 2002, primarily due to  strong sales of our Zurich Classic II fixed annuity product in the first quarter of 2003. In the first quarter of 2003, our wholly-owned subsidiary, Zurich Life Insurance Company of New York, began sales of the Zurich Classic II product in the State of New York.

BOLI deposits decreased $48.6 million in the first half of 2003, compared with the same period in 2002. Due to the nature of the BOLI 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 company ratings can also affect the level of BOLI sales.  

Assets under management
(in millions)

Total assets under management increased $923.6 million from December 31, 2002, to June 30, 2003, primarily reflecting the recent improvement in the stock market as well as the volume of sales in the first half of 2003. Along with equity market fluctuations, total assets under management are also affected by interest rate fluctuations. The level of policyholder surrenders, withdrawals and death benefits also directly impacts the level of assets under management from year to year.  

Spread revenue decreased in the first six months of 2003, compared with the same period in 2002. Investment income decreased primarily due to the reinvestment of 2002 and 2003 sales proceeds, maturities and prepayments in lower yielding securities due to the lower interest rate environment. Also contributing to the decrease is the loss of investment income earned on the BOLI funds withheld account (“FWA”).  During the first quarter of 2002, we amended our BOLI reinsurance agreement with 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 of invested assets were transferred to the trust account. The trust account is not reflected in our consolidated financial statements but is included in ZICBB’s financial statements.

Interest credited increased in the first six months of 2003, compared with the same period in 2002, mainly due to higher average  account balances for policies in force, somewhat offset by lower average interest crediting rates.

Separate account fees and charges
(in millions)

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

⁽¹⁾ Includes $.7 million of cost of insurance charges               
    ceded, related to appreciation of the BOLI funds withheld account
    for the six months ended June 30, 2002.

⁽²⁾ There is a corresponding offset in taxes, licenses and fees.

Separate account fees on non-BOLI variable life and annuities decreased in the first six months of 2003, compared with the same period in 2002, primarily due to the prolonged decline in the stock market in 2002 and the first three months of 2003, as the fees are primarily asset-based. As the market continues to improve and separate account assets increase, the  separate account fees should increase over time.

Net BOLI cost of insurance charges and fees increased $1.2 million in the first six months of 2003, compared with 2002.  The increase is primarily  related to the transfer of the assets supporting the FWA to a trust.  Prior to the transfer, we ceded additional cost of insurance charges due to appreciation of the FWA. In addition, subsequent to the transfer, we received an increase in asset management fees in conjunction with the amended reinsurance agreement in 2002, as previously discussed.  

Other income increased $3.9 million in the first six months of 2003, compared with the same period in 2002. The increase was primarily due to the non-recurrence of separate account trading losses that occurred in the first half of 2002. The high volume of variable annuity sales and the subsequent investment of customer funds during periods of significant stock market volatility caused these losses in 2002.

Policyholder surrenders, withdrawals and death benefits
(in millions)

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

General account surrenders, withdrawals and death benefits decreased $29.2 million in the first six months of 2003, compared with the first six months of 2002, as policyholders opted for the relatively safer investment options offered by the general account.

Separate account surrenders, withdrawals and death benefits increased
$10.4 million in the first six months of 2003, compared with the first six months of 2002. Excluding a partial withdrawal on a BOLI contract of approximately $27.8 million, separate account surrenders, withdrawals and death benefits decreased $17.4 million in the first half of 2003, compared with the same period in 2002. The decrease occurred primarily in the second quarter of 2003, as the stock market improved.

Claims incurred and other policyholder benefits decreased $14.9 million for the first half of 2003, compared with the same period in 2002.  The decrease is primarily due to a decrease in policyholder reserves in 2003 for guaranteed minimum death benefits (“GMDB”) on certain of our variable annuity contracts.  The decrease in GMDB policyholder reserves is primarily due to a recent improvement in the stock market, somewhat offset by increasing variable annuity business in-force. 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 in excess of account value. Declines in the stock market would have the impact of increasing these GMDB and GRIB reserves. Conversely, a rally in the stock market w ould generally have the impact of decreasing these reserves.

Pursuant to accounting principles generally accepted in the United States of America (“GAAP”), no additional liabilities for future policy benefits related to guaranteed living benefits have been established for policies that have not been deemed to have elected annuitization.  However, the Statement of Position (“SOP”), Accounting And Reporting By Insurance Enterprises For Certain Nontraditional Long-Duration Contracts And For Separate Accounts (finalized in July of 2003), provides guidance for establishing additional reserves for guaranteed living benefits. Upon adoption, future policy benefits for GRIB in future periods could vary significantly from amounts recorded as of June 30, 2003.  We are currently evaluating the impact that this SOP will have on our financial statements.

Taxes, licenses and fees decreased in the first half of 2003, compared with the same period in 2002. The decrease occurred primarily in the second quarter of 2003 and was mainly due to the release of an over-accrual for prior years’ premium taxes payable as well as the decrease in BOLI premiums through the first half of 2003.  

Commissions and operating expenses, net of the deferral of insurance acquisition costs, decreased in the first six months of 2003, compared with the first six months of 2002. The decrease is primarily due to a decrease in operating expenses. The decrease in operating expenses was mainly attributable to exiting certain lines of business and a significant focus on operations and IT re-engineering and expense reductions.

The amortization of deferred insurance acquisition costs increased in the first half of 2003, compared with the same period in 2002.  The decrease in policyholder reserves for guaranteed minimum benefits, as previously discussed, caused current period gross profits to be higher than expected. The increase in current period gross profits accelerated the amortization of deferred insurance acquisition costs (“DAC”). This was partly offset by a decrease in the DAC amortization related to the improvement in the stock market. The improvement in the stock market led to appreciation of separate account assets, which increased asset-based separate account fees and future estimated gross profits (“EGPs”). The increase in future EGPs has the effect of deferring DAC amortization to future periods.

The improvement in the stock market and the related increase in future EGPs resulted in a decrease in the amortization of value of business acquired, as amortization is deferred into future periods.

Tax expense on operations increased in the first half of 2003, compared with the same period in 2002, primarily due to higher operating income.

Operations by Business Segment

As previously discussed in the footnotes, the Company, Federal Kemper Life Assurance Company ("FKLA"), Zurich Life Insurance Company of America ("ZLICA"), and Fidelity Life Association ("FLA"), operate under the trade name Zurich Life ("ZL").

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 the Company manages its operations and makes business decisions.

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 from net income. Net realized investment gains or losses are excluded from net operating income because they can, in part, be discretionary and  may not be  indicative of operational trends.

Total operating revenues for the life insurance segment decreased $2.7 million in the first six months of 2003, compared with the same period in 2002.  Total operating revenues for the annuities segment decreased $3.2 million in the first six months of 2003, compared with the same period in 2002.  The decrease in operating revenues for both segments was primarily due to a decrease in investment income.  

The decrease in investment income for both segments is mainly due to the reinvestment of 2002 and 2003 sales proceeds, maturities and prepayments in lower yielding securities due to the lower interest rate environment, as previously discussed.

Net operating income, before the cumulative effect of an accounting change, for the life insurance segment increased $3.5 million for the first half of 2003, compared with the same period in 2002. The increase is primarily attributable to lower claim experience and lower operating expenses in the first six months of 2003, compared with the same period in 2002, as previously discussed.

Net operating income, before the cumulative effect of an accounting change, for the annuities segment increased $8.5 million for the first six months of 2003, compared to the same period in 2002. The increase is primarily due to the decrease in policyholder reserves in 2003 for GMDB on certain of our variable annuity contracts, due to the recent improvement in the stock market.  This was somewhat offset by the increase in amortization of deferred insurance acquisition cost, which was caused mostly by the decrease in policyholder reserves, as previously discussed.  

Reconciliation of Non-GAAP Information

The following table reconciles our sales with premium revenue, as reported in our Consolidated Statements of Operations:

As previously discussed, the significant decline in sales is primarily due to management’s decision in 2001 to discontinue offering the GRIB option on our Destinations^SM product. Also contributing to the decline in sales is the decrease in BOLI deposits received.

The following table reconciles our policyholder surrenders, withdrawals and death benefits with claims incurred and other benefits, as reported in our Consolidated Statements of Operations:

Premiums paid by and benefits paid to policyholders related to annuity and certain life insurance products are treated as investment contract deposits and payments, respectively, per GAAP. Premiums are treated as deposits (increases) to policyholders’ account balances and benefits are treated as payments (decreases) from policyholders’ account balances.

Due to combining several categories on our GAAP Consolidated Statements of Operations, two additional items are shown above in the reconciliation.

The increase (decrease) in reserves primarily represents estimated future guaranteed policyholder benefits. Interest on benefits and other is primarily interest that accrues on annuity benefits and death benefits before pending claims are settled.

Critical Accounting Policies

Our Management’s Discussion and Analysis is based upon our consolidated financial statements that have been prepared in conformity with GAAP. The preparation of these financial statements 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 financial statements. We evaluate our estimates periodically, including those related to investments, DAC, value of business acquired and future policy benefits.

We believe the following critical accounting policies affect management’s more significant judgments and estimates used in the preparation of the consolidated financial statements.

Investments – All fixed maturity investments are reviewed at least quarterly  for impairment. We use a market value to book value test, along with a “watch list” prepared by our external asset managers. We use this information to analyze securities for possible write-downs. If an impairment is determined to be other-than-temporary, the issue is written down to its net realizable value during the current fiscal quarter. In addition, 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 temporary, would be analyzed for possible write-down. Thereafter, each issue on nonaccrual status is regularly reviewed, and additional write-downs may be taken in light of later developments.

For our securitized financial assets, we recognize an impairment loss if the fair value of the security is below book value and there was an adverse change in expected future cash flows since the most recent (prior) estimation date.

DAC – The level of operating expenses that can be deferred is a significant factor in our reported profitability in any given period. Also, DAC amortization is affected by changes in future estimated gross profits (“EGPs”) principally related to investment results, separate account fees, expected market rates of return, lapse rates and anticipated surrender charges. Changes in EGPs and the corresponding impacts on DAC amortization are reflected in earnings in the period such EGPs are reprojected.

Value of Business Acquired - The value of business acquired reflects the estimated fair value of our life insurance business in force as of January 4, 1996, 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. Such value is the present value of the actuarially 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 EGPs using current assumptions and a discount rate equal to the liability or contract rate on the business acquired. As with DAC, amortization of the value of business acquired may be affected by changes in EGPs. The impact of any changes in EGPs will be reflected in earnings in the period such EGPs are reprojected.

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 less withdrawals and fees charged. For contracts that have annuitized, the liabilities are equal to the present value of future payments. A liability has been established for guaranteed death benefits in excess of account values (“GMDB”). Reserves for GRIB have been established to cover the present value of future benefits in excess of account value for policies that were deemed to have elected annuitization. Both GMDB and GRIB reserves are based on models that involve numerous estimates and subjective judgments, including expected market rates of return and mortality experience.

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,

*

the interest rate environment,

*

liability durations, and  

*

changes in market and business conditions.

Invested assets and cash
(in millions)

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

⁽¹⁾

National Association of Insurance Commissioners ("NAIC").
       -- Class 1 = A- and above
       -- Class 2 = BBB- through BBB+

Fixed maturity securities

We carry our fixed maturity securities 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 (loss), net of any applicable income tax expense. The after-tax aggregate unrealized appreciation on fixed maturity securities at June 30, 2003 was $130.9 million. The aggregate after tax unrealized appreciation on fixed maturity securities at December 31, 2002 was $69.5 million. 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 June 30, 2003, investment-grade fixed maturity securities, cash and short-term investments accounted for 87.1 percent of invested assets and cash, compared with 85.7 percent at December 31, 2002.

At June 30, 2003, approximately 17.8 percent of investment-grade fixed maturity securities were residential mortgage-backed securities, up from 16.2 percent at December 31, 2002.  Approximately 7.7 percent of investment-grade fixed maturity securities were commercial mortgage-backed securities at June 30, 2003 compared with 6.3 percent at December 31, 2002.  

Approximately 6.3 percent of the investment-grade fixed maturity securities at June 30, 2003 consisted of asset-backed securities, compared with 7.3 percent at December 31, 2002. The majority of investments in asset-backed securities were backed by home equity loans, automobile loans, manufactured housing loans and credit card receivables.

Real estate-related investments

The $181.7 million real estate portfolio, consisting of joint venture and third-party mortgage loans and other real estate-related investments, constituted 4.3 percent of cash and invested assets at June 30, 2003, compared with $177.7 million, or 4.6 percent, at December 31, 2002.

Real estate outlook

Loans to a master limited partnership (the "MLP") between subsidiaries of Kemper Corporation and subsidiaries of Lumbermens Mutual Casualty Company, a former affiliate, amounted to $107.6 million at June 30, 2003. The MLP's underlying investment primarily consists of a water development project located in California's Sacramento River Valley. While efforts continue on obtaining numerous approvals and permits, various local permits are/may be required in addition to the state and federal permits.  This venture also contains uncertainty due to the difficulty of completing water projects in California and current fiscal difficulties being experienced by the state.

Troubled real estate-related investments consisted of loans on nonaccrual status, before reserves and write-downs, totaling $10.6 million at both June 30, 2003 and December 31, 2002. Loans on nonaccrual status, after reserves and write-downs, amounted to $5.0 million at both June 30, 2003 and December 31, 2002.  The loans classified as nonaccrual consist of mortgage loans on various unzoned lots located in Hawaii.

Net investment income

Pre-tax net investment income totaled $111.1 million in the first six months of 2003, compared with $115.9 million in the first six months of 2002. Investment income was adversely impacted in 2003 and 2002 by the declining interest rate environment.

Total foregone investment income before tax on nonaccrual real estate-related investments, nonperforming fixed maturity securities, and certain other invested assets was as follows:

Foregone investment income is primarily due to certain real estate-related  investments that have been placed on nonaccrual status, bonds that are in default and a leveraged lease covering two aircraft leased by United Airlines. 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.

Interest rates

In the first six months of 2003, the Federal Open Market Committee met four times, reducing interest rates 25 basis points at its most recent meeting on June 25, 2003.  Interest rate fluctuations can cause significant fluctuations in both future investment income and future realized and unrealized investment gains and losses.

LIQUIDITY AND CAPITAL RESOURCES

We carefully monitor cash and short-term investments to maintain adequate balances for timely payment of policyholder benefits, expenses, taxes and policyholders’ account balances. In addition, regulatory authorities establish minimum liquidity and capital standards. The major ongoing sources of liquidity are deposits for fixed annuities, premium income, investment income, separate account fees, other operating revenue and cash provided from maturing investments or investments sold from a large, publicly traded investment portfolio.

We also continuously monitor capital resources.  Our total adjusted capital and surplus (statutory accounting basis) is compared with required capital under the National Association of Insurance Commissioners risk-based capital (“RBC”) approach.  During the first half of 2003, our RBC ratio increased due to positive earnings on a statutory accounting basis and remains above the level that would require regulatory action.  One source of the increase in the capital ratio has been the decrease in reserves for guarantees on the Destinations^SM product.  The decrease in these reserves is driven by the recent improvement in the stock market. A rally in the stock market would generally have the impact of decreasing these reserves. Conversely, market declines will require establishment of additional reserves. We monitor capital resources very closely and m itigation strategies have been and will be put in place should sustained market declines recur.

Ratings

We receive a rating from Standard & Poor’s (“S&P”) that is not considered a “group” rating, so our rating is not shared with Zurich Financial Services (“ZFS”).  At June 30, 2003, our rating is “A+” and on CreditWatch with negative implications.

We share our A.M. Best rating with ZFS. Our financial strength rating at June 30, 2003 is “A” (Excellent) and is under review with negative implications.

We have a rating from Moody’s Investors Service (“Moody’s”) that is not considered a “group” rating.  Our Moody’s rating is “A3” at June 30, 2003 and is currently on CreditWatch for possible downgrade.

Quantitative and Qualitative Disclosures about Market Risk

Our businesses are subject to market risks arising from its insurance and investment management activities. The primary market risk exposures result from interest rate fluctuations, equity price movements and changes in credit quality.

Changes in equity markets impact asset-based policy fees charged on variable annuity and life products. For variable annuity and life products with guaranteed minimum death or income benefits, sustained periods with declines in the value of underlying separate account investments would increase our net exposure to guaranteed benefits under those contracts (increasing claims, net of any reinsurance) at a time when fee income for these benefits is also reduced from prior period levels.

Changes in equity markets also may impact DAC amortization on variable annuity and life contracts. To the extent that actual market trends and reasonable expectations as to future performance lead to reductions in the investment return and/or other related estimates underlying the DAC amortization rates, DAC amortization could be accelerated. Volatile equity markets can impact the level of contractholder surrender activity, which, in turn, can also impact future profitability.

The effects of significant equity market fluctuations on our operating results can be complex and subject to a variety of estimates and assumptions, such as assumed rates of long-term equity market performance, making it difficult to reliably predict effects on operating earnings over a broad range of equity markets performance alternatives. Further, these effects may not always be proportional for market increases and market decreases.

Margins on annuities and life insurance can be affected by interest rate fluctuations. In a declining interest rate environment, credited rates can generally be adjusted more quickly than the related invested asset portfolio is affected by declining reinvestment rates, tending to result in higher net interest margins in the short term. However, under scenarios in which interest rates fall and remain at significantly lower levels, minimum guarantees on annuities and life insurance (generally 3.0% to 4.5%) could cause the spread between the yield on the portfolio and the interest rate credited to policyholders to deteriorate.

For both annuities and life insurance, a rapid and sustained rise in interest rates poses risks of deteriorating spreads and higher levels of surrenders. In this environment, there is pressure to increase credited rates to match competitors' new money rates. However, such changes in credited rates generally occur more quickly than the earned rates on invested assets reflect changes in market yields. The greater and faster the rise in interest rates, the more the earned rates will tend to lag behind market rates.

Interest rate fluctuations can cause significant fluctuations in both future investment income and future realized and unrealized investment gains and losses. 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.

CONTROLS AND PROCEDURES

In order to ensure that the information that 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 the end of the period covered by this report and have concluded that our disclosure controls and procedures are appropriate and that no changes are required at this time.

No significant changes in our internal control over financial reporting occurred during the fiscal period ended June 30, 2003, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.

OTHER INFORMATION

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

         At the Annual Meeting of the Sole Shareholder of KILICO held on May     
         13, 2003, the following directors were elected:  
         

      Martin D. Feinstein, Chairman

Gale K. Caruso

Frederick L. Blackmon

Debra P. Rezabek

Richard M. Sousa

George Vlaisavljevich

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

           (a)  EXHIBITS.

(a)

REPORTS ON FORM 8-K.

The Company filed a Current Report on Form 8-K, Item 5, Other Events and Regulation FD Disclosure, on June 3, 2003.

On May 30, 2003, Zurich Financial Services Group and Bank One Corporation (Bank One) announced plans for the Bank One organization to acquire all  of the Zurich Life companies, except Kemper Investors Life Insurance Company.  Kemper Investors Life Insurance Company, Federal Kemper Life Assurance Company, Zurich Life Insurance Company of America, and Fidelity Life Association currently operate under the trade name "Zurich Life". This transaction is subject to necessary regulatory approvals and is expected to close late in the third quarter of 2003.

Kemper Investors Life Insurance Company and Subsidiaries
FORM 10-Q
For the fiscal period ended June 30, 2003
- --------------------------------------------

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Kemper Investors Life Insurance Company
(Registrant)

INDEX TO EXHIBITS

Exhibit No.

Description

2

Stock and Asset Purchase Agreement, dated as of May 29, 2003, between Zurich Holding Company of America, Kemper Corporation, Kemper Investors Life Insurance Company, Zurich Financial Services, Banc One Insurance Holdings, Inc., and Bank One Corporation

31.1            Rule 15d-14(a) Certification of CEO

31.2            Rule 15d-14(a) Certification of CFO

32.1            Section 1350 Certification of CEO

32.2            Section 1350 Certification of CFO

Exhibit 2

STOCK AND ASSET PURCHASE AGREEMENT

By and Among

ZURICH FINANCIAL SERVICES
(Solely for purposes of Section 5.17(e))

ZURICH HOLDING COMPANY OF AMERICA,

KEMPER CORPORATION,

KEMPER INVESTORS LIFE INSURANCE COMPANY,

BANK ONE CORPORATION
(Solely for the purposes of Section 5.5 and Section 5.23)

BANC ONE INSURANCE HOLDINGS, INC.

Dated as of May 29, 2003

TABLE OF CONTENTS
(continued)

Page

TABLE OF CONTENTS

Page

Section 1.1

Definitions

ARTICLE II

SALE OF SHARES OF THE SUBSIDIARIES AND TRANSFER OF THE KILICO TRANSFERRED BUSINESS

Section 2.1

Purchase and Sale of the Shares and the KILICO Sub Shares and KILICO Transferred Assets and Liabilities.

Section 2.2

Distribution of Excluded Assets, Excluded Investment Assets, Impaired Investment Liabilities and Excluded Liabilities.

Section 2.3

Closing.

Section 2.4

KILICO Post-Closing Adjustments.

Section 2.5

Post-Closing Adjustments to the Purchase Price

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE SELLER, THE PARENT AND KILICO

Section 3.1

The Seller, the Parent and KILICO.

Section 3.2

The Subsidiaries and FLA.

Section 3.3

Actions and Proceedings.

Section 3.4

No Conflict or Violation

Section 3.5

Governmental Consents and Approvals

Section 3.6

Financial Statements and Statutory Statements.

Section 3.7

Absence of Undisclosed Liabilities.

Section 3.8

Intellectual Property.

Section 3.9

Compliance with Laws

Section 3.10

Insurance Producers.

Section 3.11

Insurance Matters.

Section 3.12

Regulatory Filings

Section 3.13

Broker/Dealers.

Section 3.14

Permits, Licenses and Franchises.

Section 3.15

Contracts.

Section 3.16

Absence of Certain Changes

Section 3.17

Taxes.

Section 3.18

Employee Benefit Plans; ERISA.

Section 3.19

Labor Relations and Employment

Section 3.20

Real Property and Environmental.

Section 3.21

Litigation

Section 3.22

Brokers

Section 3.23

Investment Advisory Activities.

Section 3.24

Operations Insurance

Section 3.25

Affiliate Transactions

Section 3.26

Guarantees

Section 3.27

Bank Accounts

Section 3.28

Assets

Section 3.29

Risk Based Capital

Section 3.30

Solvency of KILICO

Section 3.31

Section 338(h)(10) Election

Section 3.32

Disclosure.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

Section 4.1

Organization, Standing and Authority

Section 4.2

Authorization

Section 4.3

Actions and Proceedings.

Section 4.4

No Conflict or Violation

Section 4.5

Governmental Consents and Approvals

Section 4.6

Compliance with Laws

Section 4.7

Sufficient Funds

Section 4.8

Investigation

Section 4.9

Brokers

Section 4.10

Section 338(h)(10) Election

Section 4.11

No Other Representations or Warranties

ARTICLE V

COVENANTS

Section 5.1

Conduct of the Business Pending the Closing

Section 5.2

Certain Transactions

Section 5.3

Investigations; Pre-Closing Access.

Section 5.4

Post-Closing Access

Section 5.5

HSR Act Filings; Consents; Insurance Regulatory Filings.

Section 5.6

Further Assurances.

Section 5.7

Expenses

Section 5.8

Use of Names.

Section 5.9

Certain Intercompany Matters.

Section 5.10

Certain Transactions Relating to the Excluded Items and Excluded Investment Assets and Other Assets and Contracts.

Section 5.11

Employees and Agents

Section 5.12

Employee Benefits.

Section 5.13

Windy Point Sublease; Florida Lease and New York Lease.

Section 5.14

Reinsurance and Administration Agreement

Section 5.15

Transition Services Agreement

Section 5.16

Intentionally Omitted.

Section 5.17

Non-Competition; Non-Solicitation of Employees.

Section 5.18

KILICO Cooperation

Section 5.19

KILICO Distributions

Section 5.20

Post-Closing KILICO Policies

Section 5.21

Additional Variable Authority and Product Approvals for FKLA

Section 5.22

Resources

Section 5.23

Purchase Price; Purchaser Net Worth

Section 5.24

Investment Guidelines

Section 5.25

Maintenance and Cooperation Concerning Certain Contracts.

Section 5.26

Supplements to Disclosure Schedules.

ARTICLE VI

TAX MATTERS

Section 6.1

Tax Returns.

Section 6.2

Section 338(h)(10) Election.

Section 6.3

Indemnification for Taxes.

Section 6.4

Termination of Tax Sharing Agreements

Section 6.5

Adjustment to Purchase Price

Section 6.6

Contest Rights.

Section 6.7

Access to Tax Records

Section 6.8

FIRPTA

ARTICLE VII

CONDITIONS PRECEDENT TO THE OBLIGATION OF THE PURCHASER TO CLOSE

Section 7.1

Representations and Warranties

Section 7.2

Compliance with Covenants

Section 7.3

Other Agreements

Section 7.4

Governmental and Regulatory Consents and Approvals

Section 7.5

Injunction

Section 7.6

Third Party Consents

Section 7.7

Transfer of Excluded Items

Section 7.8

Intercompany Accounts

Section 7.9

Resignations

Section 7.10

KILICO’s Capital

Section 7.11

Updated Schedules

Section 7.12

No Material Adverse Effect

ARTICLE VIII

CONDITIONS PRECEDENT TO THE OBLIGATION OF THE PARENT AND THE SELLER TO CLOSE

Section 8.1

Representations and Warranties

Section 8.2

Compliance with Covenants

Section 8.3

Other Agreements

Section 8.4

Governmental and Regulatory Consents and Approvals

Section 8.5

Purchase Price

Section 8.6

Injunction

Section 8.7

Purchaser Material Adverse Effect

Section 8.8

Investment Guidelines

ARTICLE IX

SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION

Section 9.1

Survival of Representations and Warranties

Section 9.2

Obligation to Indemnify.

Section 9.3

Claims Notice

Section 9.4

Right to Contest Claims of Third Parties.

Section 9.5

Indemnification Payments

Section 9.6

Exclusivity

ARTICLE X

TERMINATION PRIOR TO CLOSING

Section 10.1

Termination of Agreement

Section 10.2

Survival

ARTICLE XI

MISCELLANEOUS

Section 11.1

Publicity

Section 11.2

Confidentiality.

Section 11.3

Notices

Section 11.4

Governing Law

Section 11.5

Entire Agreement.

Section 11.6

Waivers and Amendments; Non-Contractual Remedies; Preservation of Remedies

Section 11.7

Binding Effect; Assignment

Section 11.8

Interpretation.

Section 11.9

No Third Party Beneficiaries

Section 11.10

Counterparts

Section 11.11

Other Agreements, Exhibits and Schedules

Section 11.12

Headings

-#-

EXHIBITS

The Exhibits and Schedules to this agreement (other than Exhibit A-3 and Exhibit A-5) have been omitted. The Exhibits and Schedules to this agreement will be furnished to the Securities and Exchange Commission supplementally upon request.

TABLE OF SCHEDULES

TABLE OF SCHEDULES (continued)

The Exhibits and Schedules to this agreement (other than Exhibit A-3 and Exhibit A-5) have been omitted. The Exhibits and Schedules to this agreement will be furnished to the Securities and Exchange Commission supplementally upon request.

STOCK AND ASSET PURCHASE AGREEMENT

This STOCK AND ASSET PURCHASE AGREEMENT (this “Agreement”), dated as of May 29, 2003, is entered into by and among Zurich Holding Company of America, a Delaware corporation (“ZHCA”) (ZHCA is sometimes referred to herein as the “Parent”); Kemper Corporation, a Delaware corporation (the “Seller”); Kemper Investors Life Insurance Company, an Illinois insurance company (“KILICO”); as to Section 5.17(e) only, Zurich Financial Services, a Swiss joint stock company (“Zurich Financial Services”); Banc One Insurance Holdings, Inc., an Arizona corporation (the “Purchaser”); and, as to Section 5.5 and Section 5.23 only, Bank One Corporation, a Delaware corporation (“Bank One”).

WHEREAS, the Parent indirectly owns 100% of the capital stock of the Seller;

WHEREAS, the Seller owns, directly or indirectly, all of the capital stock of the Kemper Subsidiaries (as hereinafter defined);

WHEREAS, the Purchaser desires to purchase from the Seller, and the Seller desires to sell to the Purchaser, all of the outstanding Shares (as hereinafter defined) of the Kemper Subsidiaries, on the terms and subject to the conditions set forth in this Agreement;

WHEREAS, the Purchaser desires to purchase from KILICO, and KILICO desires to sell to Purchaser, all of the outstanding KILICO Sub Shares (as hereinafter defined) of the KILICO Subsidiaries (as hereinafter defined), and KILICO desires to transfer and Purchaser desires to accept the KILICO Transferred Business (as hereinafter defined); and

WHEREAS, at the Closing (as hereinafter defined) but immediately preceding the other transactions contemplated by this Agreement and pursuant to this Agreement and the Coinsurance Agreement (as hereinafter defined), KILICO desires to transfer to the Purchaser’s Designee (as hereinafter defined), and the Purchaser’s Designee agrees to accept, the KILICO Transferred Liabilities (as hereinafter defined) and the KILICO Transferred Assets (as hereinafter defined);

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

DEFINITIONS

Definitions.  The following terms shall have the respective meanings set forth below throughout this Agreement:

“Additional Consultant” shall have the meaning set forth in Section 2.4(d).

“Adjusted Closing Statement” shall have the meaning set forth in Section 2.5(d).

“Adjusted Net Worth” shall mean the adjusted net worth of FKLA and ZLICA on a consolidated basis as of the Closing Date as shown on the Final Adjusted Net Worth Statement.  Adjusted Net Worth of the Purchaser’s Designee shall be calculated without regard to any transactions that occur as a result of the Coinsurance Agreement.

“Affected Employees” shall have the meaning set forth in Section 5.11.

“Affiliate” shall mean, with respect to any Person, at the time in question, any other Person controlling, controlled by or under common control with such Person.  “Control” shall mean the possession, directly or indirectly, of the power to independently direct or cause the direction of the management policies of the Person, whether through the ownership of a voting equity interest, by contract or otherwise.  Control shall be presumed to exist if any Person owns, directly or indirectly: (i) in the case of a corporation that is not an insurance company, 50% or greater of the capital stock in that corporation or has the ability to elect 50% or greater of such corporation’s Board of Directors, or (ii) in the case of a corporation that is an insurance company, 10% or greater of the capital stock in that corporation or has the ability to elect 10% or greater of such corporation’s Board of Directors, provided that this subpart (ii) shall not apply with respect to the definition of “Affiliate” for purposes of Section 5.17 hereof.

“Agreement” shall have the meaning set forth in the preamble to this Agreement.

“Allocation Schedule” shall have the meaning set forth in Section 6.2(b) hereof.

“Antitrust Division” shall have the meaning set forth in Section 5.5(a).

“Applicable Law” shall mean any statute, law, ordinance, regulation, rule, common law, order, writ, injunction, directive, judgment or decree of or agreement with any Government Entity applicable to the parties hereto, or any of their respective Affiliates, properties, or assets, as the case may be.

“Asserted Liability” shall have the meaning set forth in Section 9.4(a).

“Audited Financial Statements” shall have the meaning set forth in Section 3.6(a).

“Bank One” shall have the meaning set forth in the preamble to this Agreement.

“Benefit Plans” shall have the meaning set forth in Section 3.18(a).

“Bill of Sale” shall mean the Bill of Sale in the form of Exhibit B hereto.

“Book Value” shall mean the carrying value of the subject asset or liability on the books of the Insurance Subsidiaries or KILICO, as the case may be, for statutory statement purposes determined in accordance with SAP consistently applied and consistent with and using the same principles, policies, practices, procedures and methodologies used by the Seller in preparing the Statutory Statements.  

“Books and Records” shall mean all lists and databases identifying current, former or prospective customers and all information related to such customers, policy information, policy forms and rating plans, side letters and agreements related to policies, contracts, administrative and pricing manuals, claim records, sales records, underwriting records, financial records, reinsurance records, compliance or disclosure or other records prepared for or filed with regulators of the Subsidiaries, FLA or, with respect to the KILICO Transferred Business, KILICO, Tax Returns (including workpapers with respect to the Subsidiaries and FLA) other than consolidated, combined or unitary Tax Returns under federal, state, local or foreign law and workpapers with respect to such consolidated, combined or unitary Tax Returns, premium Tax records an d all other books and records primarily related to the operation of the Subsidiaries, FLA or, with respect to the KILICO Transferred Business, KILICO, each in the possession or control of the Seller, the Subsidiaries, FLA or KILICO, whether or not stored in hardcopy form or on electronic, magnetic or optical media (to the extent not subject to licensing restrictions) but excluding (i) any such records that are prohibited from being disclosed or transferred by statutory or regulatory requirements, provided, where originals of such records may not be transferred, copies of such records, shall be deemed Books and Records, (ii) any such records that relate solely to the Excluded Items, (iii) any such records that are of a group wide nature and are not only related to the Subsidiaries, FLA or, with respect to the KILICO Transferred Business, KILICO, but to all Affiliates of Zurich Financial Services, including but not limited to the General Strategic Marketing Plans and the Zurich Financial Services Risk P olicy Manual and (iv) any such records that primarily relate to any of the Excluded Items or to the business of KILICO which is not part of the KILICO Transferred Business, provided, that, in the case of clauses (iii) and (iv), to the extent such records relate to the Subsidiaries or the KILICO Transferred Business, excerpts of those portions applicable to the Subsidiaries or the KILICO Transferred Business shall be deemed Books and Records.  Notwithstanding the foregoing, the Books and Records of FLA shall only include those Books and Records which are in the possession or control of FKLA, in its capacity as manager of FLA.

“Business Day” shall mean any day other than a Saturday, Sunday, a day on which banking institutions in the State of Illinois are permitted or obligated by law to be closed or a day on which the New York Stock Exchange is closed for trading.

“Cap” shall have the meaning set forth in 9.2(e).

“Ceding Commission” shall have the meaning set forth in the Coinsurance Agreement.

“Claims Notice” shall have the meaning set forth in Section 9.3.

“Closing” shall have the meaning set forth in Section 2.3(a).

“Closing Balance Sheet” shall have the meaning set forth in Section 2.3(f).

“Closing Date” shall have the meaning set forth in Section 2.3(a).

“Closing Statement Report” shall have the meaning set forth in Section 2.5(c).

“COBRA” shall have the meaning set forth in Section 5.12(c).

“Code” shall mean the Internal Revenue Code of 1986, as amended.  Any citation to a provision of the Code includes a citation to any successor provision.

“Coinsurance Agreement” shall mean the Coinsurance Agreement, in the form of Exhibit A-3 hereto, to be entered into by KILICO and the Purchaser’s Designee effective as of the Closing Date, subject to any non-material changes required pursuant to or as a condition of any Insurance Regulatory Approvals.

“Computer Software” shall mean all computer software and databases owned by, licensed to or used by the Subsidiaries, or with respect to and to the extent used in the KILICO Transferred Business, KILICO, except computer software that is commercially available, off-the-shelf software that is subject to “shrink-wrap” or “click-wrap” license agreements.

“Confidential Information” shall have the meaning set forth in Section 11.2(c).

“Confidentiality Agreement” shall mean that certain confidentiality agreement dated January 7, 2003, by and between ZHCA and Bank One Corporation.

“Contracts” shall mean agreements, contracts and commitments (other than contracts implied in law) of the following types, to which any of the Subsidiaries or, to the Knowledge of the Seller, FLA, is a party or by which any of the Subsidiaries or, to the Knowledge of the Seller, FLA, or any of their respective properties is bound as of the date hereof or which is material to the operations of the Subsidiaries or, to the Knowledge of the Seller, FLA:

(a)

any mortgage, indenture, note, loan or credit agreement, security agreement or other agreement or instrument relating to the borrowing of money or extension of credit or any guarantee of the obligations of third parties (other than loans made to policyholders in the ordinary course of business), which in any case provides for payments in excess of $250,000 annually or total obligations in excess of $750,000;

(b)

any agreement with any Person containing any provision or covenant currently or hereafter in effect (i) limiting the ability of any of the Subsidiaries, FLA or, with respect to the KILICO Transferred Business, KILICO, to (1) sell any products or services of or to any other Person, (2) engage in any line of business (whether limited by geographic region or otherwise), (3) compete with or obtain products or services from any Person, or (4) solicit or hire any Person, or (ii) limiting the ability of any Person to compete with or to provide products or services to any of the Subsidiaries, FLA or, with respect to the KILICO Transferred Business, KILICO, other than any of the foregoing which is immaterial to a Subsidiary, FLA or the KILICO Transferred Business, as applicable, or which is terminable without penalty, contingent obligations, restrictions (other than confident iality restrictions or other similar restrictions not of the type described in this subsection) or payment on sixty days notice or less;

(c)

all outstanding written proxies, powers of attorney, or similar delegations of authority of any of the Subsidiaries or FLA (other than those that are immaterial);

(d)

all agreements with any present or former individual officer, director, employee, agent, consultant, or other similar representative of the Subsidiaries, FLA or, with respect to the KILICO Transferred Business, KILICO, under which there exists any present or future liability with respect to such contract requiring payments to any such individual;

(e)

any contracts for employment;

(f)

any contract requiring payment of any change of control, severance or bonus payments;

(g)

stock purchase agreements, asset purchase agreements and other acquisition or divestiture agreements relating to the acquisition, lease or disposition by any Subsidiary or FLA of material assets and properties or any capital stock or other equity interest of any Subsidiary or FLA, in each case (x) which was entered into by a Subsidiary after January 1, 1999, or (y) under which any Subsidiary or FLA has any executory indemnification or other obligations;

(h)

joint venture and limited partnership agreements (other than those solely related to the investment portfolios of the Subsidiaries, FLA or KILICO);

(i)

contracts of any Subsidiary or FLA with or for the direct benefit of the Seller or any Affiliate of the Seller (other than a Subsidiary or FLA);

(j)

all outsourcing, servicing, administrative or management agreements requiring annual payments in excess of $100,000;

(k)

all leases for real property and all material personal property;

(l)

all material agreements related to Intellectual Property;

(m)

all material sales or marketing agreements, including all material agreements with agents, brokers, producers or other sales representatives; and

(n)

any other agreement, contract or commitment (other than insurance policies, annuity contracts, reinsurance agreements, insurance agency or brokerage or other agency agreements entered into in the ordinary course of business) which, in any case, requires payments or receipts by a party thereto after the date of this Agreement of more than $150,000 annually or $450,000 in the aggregate over any three-year period.

Contracts shall not include any agreements, contracts or commitments that relate solely to any of the Excluded Items with no current or contingent liability or obligation of any Subsidiary, FLA or, with respect to the KILICO Transferred Business, KILICO.

“Copyrights” shall mean United States and foreign copyrights, copyrightable works and databases, whether registered or unregistered, as well as pending applications to register the same, owned by, licensed to or used by the Subsidiaries, or with respect to and to the extent used in the KILICO Transferred Business, KILICO.

“Cure” shall have the meaning set forth in Section 6.6(b).

“Deductible” shall have the meaning set forth in Section 9.2(e).

“Encumbrance” shall mean any lien, encumbrance, security interest, charge, mortgage, option, conditional seller agreement, pledge or restriction on transfer (except, in the case of the Shares, for restrictions on transfer arising under applicable securities and insurance laws) except for (i) liens and encumbrances for Taxes, assessments or other government charges not yet due; (ii) liens and encumbrances relating solely to the Excluded Items; (iii) zoning, building or other similar government restrictions with respect to real property; (iv) easements, covenants, rights of way or other similar restrictions with respect to real property; and (v) liens or other imperfections of title which, individually or in the aggregate, do not detract materially from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the Subsidiaries or the KILICO Transferred Business.

“Environmental Laws” shall have the meaning set forth in Section 3.20(b).

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

“ERISA Affiliate” shall mean (i) any corporation which at any time on or before the Closing Date is or was a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Seller; (ii) any partnership, trade or business (whether or not incorporated) which at any time on or before the Closing Date is or was under common control (within meaning of Section 414(c) of the Code) with the Seller; and (iii) any entity which at any time on or before the Closing Date is or was a member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as either the Seller, any corporation described in clause (i) or any partnership, trade or business described in clause (ii) of this paragraph.

“ERISA Benefit Plans” shall have the meaning set forth in Section 3.18(a).

“Estimated Adjusted Net Worth” shall have the meaning set forth in Section 2.3(h).

“Estimated Adjusted Net Worth Statement” shall have the meaning set forth in Section 2.3(h).

“Estimated Purchase Price” shall have the meaning set forth in Section 2.3(i).

“Exchange Act” shall have the meaning set forth in Section 3.13(a).

“Excluded Assets” shall have the meaning set forth in Section 2.2(a).

“Excluded Investment Assets” shall mean those investment assets listed on Exhibit C hereto.

“Excluded Item” (and collectively the “Excluded Items”) shall mean any one of (a) the Excluded Assets, (b) the Excluded Liabilities, (c) the Excluded Investment Assets, (d) the KILICO Retained Liabilities, (e) the transactions contemplated by Section 2.2 and Section 5.10, or (f) the transactions contemplated by Section 5.9(b) (relating to settlement of certain intercompany accounts).

“Excluded Liabilities” shall have the meaning set forth in Section 2.2(a).

“Existing Reinsurance Agreements” shall have the meaning set forth in Section 3.15(b).

“federal” shall mean of or pertaining to the government of the United States of America.

“Final and Binding” shall have the meaning set forth in Section 2.4(e).

“Final Adjusted Net Worth Statement” shall mean a statement setting forth the Adjusted Net Worth as of the Closing Date, as prepared and finally agreed to by the parties in accordance with Section 2.5.

“Final Closing Balance Sheet” shall have the meaning set forth in Section 2.4(b).  

“Florida Consent Agreement” shall have the meaning set forth in Section 5.13(b).

“Florida Estoppel Certificate” shall have the meaning set forth in Section 5.13(b).

“Florida Lease” shall have the meaning set forth in Section 5.13(b).

“Florida Lease Landlord” shall have the meaning set forth in Section 5.13(b).

“FKLA” shall mean Federal Kemper Life Assurance Company, an Illinois insurance company.

“FLA” means Fidelity Life Association, a Mutual Legal Reserve Company, an Illinois insurance company.

“FTC” shall have the meaning set forth in Section 5.5(a).

“GAAP” shall mean United States generally accepted accounting principles, as consistently applied by the Seller in the preparation of the Audited Financial Statements (which in any case shall be consistent with GAAP), as in effect from time to time.

“General Account Receivables” shall have the meaning set forth in the Coinsurance Agreement.

“General Account Reserves” shall have the meaning set forth in the Coinsurance Agreement.

“Government Entity” shall mean any federal, state, local, municipal, county, foreign or other governmental, quasi-governmental, administrative or regulatory authority, body, agency, court, tribunal, commission or other similar governmental entity (including any branch, department, agency or political subdivision thereof) or any self-regulating body of similar standing.

“Hazardous Material” shall have the meaning set forth in Section 3.20(b).

“HSR Act” shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder.

“Hire Date” shall have the meaning set forth in Section 5.11.

“Impaired Investment Asset” shall have the meaning set forth in Section 2.2(c).

“Impairment” shall have the meaning set forth in Section 3.30.

“Income Tax” (or “Income Taxes” as the context may require) shall mean all federal, state, local, or foreign Taxes based upon, measured by, or calculated with respect to (i) gross or net income or gross or net receipts or profits (including, but not limited to, any capital gains, minimum taxes and any Taxes on items of tax preference, but not including sales, use, goods and services, real or personal property transfer or other similar Taxes); (ii) multiple bases (including, but not limited to, corporate franchise, doing business or occupation Taxes) if one or more of the bases upon which such Tax may be based upon, measured, or calculated with respect to, is described in clause (i); or (iii) withholding taxes, measured by, or calculated with respect to, any payments or distributions (other than wages).

“Income Tax Return” (or “Income Tax Returns” as the context may require) shall mean a Tax Return filed, or required to be filed, with respect to any Income Tax.

“Indemnified Party” shall have the meaning set forth in Section 9.3.

“Indemnifying Party” shall have the meaning set forth in Section 9.3.

“Identified Warranted Policies” shall have the meaning set forth in Section 6.6(b).

“Independent Accounting Firm” shall mean Ernst & Young LLP.

“Independent Consultants” shall have the meaning set forth in Section 2.4(c).

“Insurance Contracts” shall have the meaning set forth in Section 3.11(a).

“Insurance Regulatory Approvals” shall have the meaning set forth in Section 3.5.

“Insurance Subsidiaries” shall mean FKLA, ZLICA and ZLICONY.

“Intellectual Property” shall mean Trademarks, Patent Rights, Copyrights, Computer Software and Trade Secrets.

“Intercompany Loans” shall mean all intercompany loans payable by a Subsidiary or FLA in favor of Zurich Financial Services or any of its Affiliates (other than any Subsidiary or FLA).

“Interest Maintenance Reserve” shall have the meaning set forth in the Coinsurance Agreement.

“Interest Rate” shall mean a rate per annum equal to the three month London Interbank Offered Rate as published in the Wall Street Journal, midwest edition.

“Internal Revenue Service” or “IRS” shall mean the U.S. Internal Revenue Service or successor thereto.

“Investment Company Act” shall have the meaning set forth in Section 3.11(e).

“Investment Advisers Act” shall have the meaning set forth in Section 3.23(b).

“Kemper Benefit Plans” shall have the meaning set forth in Section 5.12(a).

“Kemper Broker/Dealers” shall have the meaning set forth in Section 3.13(a).

“Kemper Purchase Price” shall have the meaning set forth in Section 2.1(a).

“Kemper Retirees” shall have the meaning set forth in Section 5.12(a).

“Kemper Subsidiaries” (or “Kemper Subsidiary” as the context may require) shall mean those entities listed on Exhibit E hereto.

“KILICO” shall mean Kemper Investors Life Insurance Company, a wholly owned subsidiary of the Seller.

“KILICO Assignment Agreement” shall mean the assignment agreements between KILICO, certain of its Affiliates and the Purchaser’s Designee substantially in the form attached as Exhibit A-4 hereto.

“KILICO Retained Investments” shall mean those Excluded Investment Assets held by KILICO and any Impaired Investment Assets held by KILICO.

“KILICO Retained Liabilities” shall mean all liabilities or obligations of any character or nature that are not KILICO Transferred Liabilities, whether or not incurred or payable before or after the Closing Date.

“KILICO Sub Shares” shall mean all of the issued and outstanding capital stock of the KILICO Subsidiaries owned directly by KILICO.

“KILICO Subsidiaries” (or “KILICO Subsidiary” as the context may require) shall mean those entities listed on Exhibit G hereto.

“KILICO Transferred Assets” shall mean (i) all rights and privileges of KILICO and the KILICO Subsidiaries accruing from and after the Closing Date arising under the KILICO Transferred Contracts; (ii) the assets of KILICO set forth on Exhibit F hereto; (iii) the Transferred Coinsurance Assets; and (iv) any other transfers or assignments provided under the terms of the Coinsurance Agreement.  KILICO Transferred Assets shall not include: (a) the KILICO Retained Investments; (b) any Excluded Investment Asset; or (c) the Separate Account Assets.

“KILICO Transferred Business” shall mean the marketing, issuing and administering of the Policies and the other business activities reasonably related thereto, in each case as currently conducted by KILICO.  The KILICO Transferred Business shall include the KILICO Transferred Assets and KILICO Transferred Liabilities, but the KILICO Transferred Business shall not include the KILICO Retained Liabilities.

“KILICO Transferred Business Balance Sheet” shall mean a pro forma balance sheet of KILICO which reflects the Transferred Coinsurance Assets (including, with respect to each investment asset, the name of the issuer, a reasonable identification of the asset and the Market Value thereof), the General Account Reserves, the Interest Maintenance Reserve and the General Account Receivables.

“KILICO Transferred Contracts” shall mean the contracts of KILICO set forth on Exhibit H hereto.

“KILICO Transferred Liabilities” shall mean (i) all liabilities and obligations of KILICO accruing from and after the Closing Date under the KILICO Transferred Contracts and (ii) the Reinsured Liabilities.  KILICO Transferred Liabilities shall not include any Separate Account Reserves.

“Knowledge” shall be interpreted for the purposes of this Agreement as follows:  (i) a matter will be deemed to be within the “Knowledge of the Seller” if such matter is, as of the date of this Agreement or as of the Closing Date, actually known to any of the officers of the Parent, the Seller, KILICO, FLA or the Subsidiaries listed on Exhibit I-1 hereto or, in light of the positions held by such persons, if the matter would reasonably be expected to be known if any such persons had made a reasonable inquiry; (ii) a matter will be deemed to be within the “Knowledge of the Purchaser” if such matter is, as of the date of this Agreement or as of the Closing Date, actually known to any of the officers of the Purchaser listed on Exhibit I-2 hereto or, in light of the positions held by such person s, if the matter would reasonably be expected to be known if any such persons had made a reasonable inquiry.

“Leases” shall have the meaning set forth in Section 3.20(a).

“Leased Properties” shall have the meaning set forth in Section 3.20(a).

“Litigation” shall have the meaning set forth in Section 3.21.

“Loss” and “Losses” shall have the meanings set forth in Section 9.2(f).

“Management Agreement” shall have the meaning set forth in Section 3.2(e).

“Market Value” shall have the meaning set forth in the Coinsurance Agreement.

“Material Adverse Effect” shall mean a material adverse effect on (1) the ability of the Parent, the Seller or KILICO to consummate the transactions described in this Agreement  or perform their obligations hereunder or (2) the business, financial condition, assets, property or results of operations of (i) the Subsidiaries and the KILICO Transferred Business taken as a whole or (ii) either FKLA or ZLICA individually; provided, however, that the following shall be excluded from the definition of “Material Adverse Effect” and from any determination of whether a Material Adverse Effect has occurred or may occur: (a) any effect to the extent resulting from securities market changes, fluctuations or conditions; (b) any effect to the extent relating to the identity of Bank One or the Purchaser, or (c)& nbsp;any effect to the extent related to an Excluded Item.

“NASD” shall mean NASD, Inc.

“New York Consent Agreement” shall have the meaning set forth in Section 5.13(c).

“New York Estoppel Certificate” shall have the meaning set forth in Section 5.13(c).

“New York Lease” shall have the meaning set forth in Section 5.13(c).

“New York Lease Landlord” shall have the meaning set forth in Section 5.13(c).

“Non-ERISA Commitments” shall have the meaning set forth in Section 3.18(a).

“Non-Income Tax” (or “Non-Income Taxes” as the context may require) shall mean any Tax other than an Income Tax.  

“Objections Notice” shall have the meaning set forth in Section 2.5(d).

“Other Government Consents” shall have the meaning set forth in Section 7.4.

“Other KILICO Assets” shall have the meaning set forth in the Coinsurance Agreement.

“Parent” shall have the meaning set forth in the preamble to this Agreement.

“Patent Rights” shall mean United States and foreign patents, patent applications, continuations, continuations-in-part, divisions, reissues, patent disclosures, designs, processes, research in progress, inventions and invention disclosures (whether or not patentable or reduced to practice) and improvements thereto owned by, licensed to or used by the Subsidiaries, or, with respect to and to the extent used in the KILICO Transferred Business, KILICO.

“Pension Plans” shall have the meaning set forth in Section 3.18(a).

“Permits” shall have the meaning set forth in Section 3.14(b).

“Permitted Encumbrance” shall mean (i) liens or other imperfections of title which, individually or in the aggregate, do not materially detract from the value of the specific and individual property subject thereto; (ii) liens and encumbrances for Taxes, assessments or other government charges not yet due or which are being contested in good faith and for which appropriate reserves have been established in accordance with GAAP or SAP; and (iii) liens and encumbrances on the Excluded Items.

“Person” shall mean any individual, corporation, partnership, limited liability company, limited liability partnership, firm, joint venture, association, joint-stock company, trust, unincorporated organization, governmental, judicial or regulatory body, business unit, division or other entity of any kind or nature.

“Pipeline Policies” shall have the meaning set forth in Section 5.17(e).

“PMG” shall have the meaning set forth in Section 5.13(b).

“PMG Marketing” shall have the meaning set forth in Section 5.13(c).

“Policies” shall have the meaning ascribed to such term in the Coinsurance Agreement.

“Post-Closing KILICO Policies” shall have the meaning set forth in Section 5.20.

“Post-Closing Tax Period” shall mean (i) any taxable year or period beginning after the Closing Date, and (ii) for any Straddle Period, the portion of such period beginning after the Closing Date.

“Pre-Closing Tax Period” shall mean (i) any taxable year or period ending on or before the Closing Date, and (ii) for any Straddle Period, the portion of such period ending on and including the Closing Date.

“Producers” shall have the meaning set forth in Section 3.10(a).

“Pro Forma Statements” shall have the meaning set forth in Section 3.6(f).

“Proposed Closing Statement” shall mean a statement, substantially in the same format as the Target Net Worth Statement, setting forth the proposed Adjusted Net Worth as of the Closing Date delivered by the Purchaser pursuant to Section 2.5(a), provided that the Purchaser and Seller agree that the Proposed Closing Statement shall reflect no liability for Income Taxes.  The Adjusted Net Worth reflected on the Proposed Closing Statement shall otherwise be calculated in a manner consistent with the Target Net Worth Statement.

“Purchase Price” shall have the meaning set forth in Section 2.1(c).

“Purchaser” shall have the meaning set forth in the preamble to this Agreement.

“Purchaser Benefit Plans” shall have the meaning set forth in Section 5.12(a).

“Purchaser Indemnitees” shall have the meaning set forth in Section 9.2(a).

“Purchaser Material Adverse Effect” shall mean a material adverse effect on the ability of the Purchaser to consummate the transactions contemplated hereby or to perform its obligations hereunder.

“Purchaser’s Designee” shall mean, on or after the Closing Date, FKLA.

“Purchaser’s 401(k) Plan” shall have the meaning set forth in Section 5.12(b).

“Reinsured Liabilities” shall mean the liabilities reinsured pursuant to the Coinsurance Agreement.

“Restricted Business” shall have the meaning set forth in Section 5.17(e).

“Restricted Period” shall have the meaning set forth in Section 5.17(d).

“Revised Closing Balance Sheet” shall have the meaning set forth in Section 2.4(a).

“Routine Litigation Deductible” shall have the meaning set forth in Section 9.2(d).

“SAP” shall have the meaning set forth in Section 3.6(c).

“SEC” shall mean the Securities and Exchange Commission, or any successor agency or commission.

“Section 338 Forms” shall mean all Tax Returns, documents, statements and other forms that are required to be submitted to any federal, state, county or other local or foreign Taxing Authority in connection with a Section 338(h)(10) Election, including, without limitation, any Form 8023 (together with any schedules or attachments thereto) that is required pursuant to applicable Treasury Regulations under Section 338.

“Section 338(h)(10) Election” shall mean, pursuant to Section 6.2 of this Agreement, (i) an election described in Section 338(h)(10) of the Code and the Treasury Regulations thereunder with respect to the Purchaser’s acquisition of the Shares and the KILICO Sub Shares and (ii) any similar corresponding election under state, local or foreign law pursuant to which a separate election is permissible with respect to the Purchaser’s acquisition of the Shares and the KILICO Sub Shares.

“Seller” shall have the meaning set forth in the preamble to this Agreement.

“Seller Indemnitees” shall have the meaning set forth in Section 9.2(c).

“Seller’s 401(k) Plan” shall have the meaning set forth in Section 5.12(b).

“Separate Account Assets” shall have the meaning ascribed to such term in the Coinsurance Agreement.

“Separate Account Reserves” shall have the meaning ascribed to such term in the Coinsurance Agreement.

“Separate Accounts” shall have the meaning set forth in Section 3.11(e).

“Shares” shall have the meaning set forth in Section 2.1(a).

“Special Coverage Period” shall have the meaning set forth in Section 5.12(a).

“Special Items” shall have the meaning set forth in Section 9.2(d).

“Specified Representations and Warranties” shall mean those representations and warranties contained in Section 3.8(c), the first sentence of Section 3.14(b), the first sentence of Section 3.15(a) and Section 3.18(a)(iv).

“state” shall mean any one of the fifty states of the United States of America and the District of Columbia.

“Statutory Statements” shall have the meaning set forth in Section 3.6(b).

“Straddle Period” shall mean any taxable year or period beginning on or before and ending after the Closing Date.

“Subsidiaries” shall mean the Kemper Subsidiaries and the KILICO Subsidiaries, collectively.

“Substitute Asset List” shall have the meaning set forth in Section 2.2(b).

“Substitute Assets” shall have the meaning set forth in Section 2.2(b).

“Supplemental Plan” shall have the meaning set form in Section 5.12(i).

“Target Net Worth” shall mean the adjusted net worth of FKLA and ZLICA on a consolidated basis as of December 31, 2002 as shown on the Target Net Worth Statement.

“Target Net Worth Statement” shall mean the statement attached hereto as Exhibit L showing the Target Net Worth.  The Target Net Worth Statement shall be prepared consistent with and using the same principles, policies, practices, procedures and methodologies utilized by the Seller in preparing the Statutory Statements.

“Tax” (or “Taxes” as the context may require) shall mean any federal, state, local or foreign net income, gross income, gross receipts, severance, property, production, sales, use, license, excise, franchise, employment, payroll, withholding, premium, alternative or add-on minimum, ad valorem, value-added, transfer, stamp, or environmental (including taxes under Section 59A of the Code) tax, or any other similar tax, customs duty, withholding, charge, fee, levy or other assessment, including any interest, penalty or addition imposed on such taxes by any Taxing Authority.

“Tax Allowance” shall have the meaning set forth in Section 6.3(e).

“Tax Proceeding” shall have the meaning set forth in Section 6.6.

“Tax Return” (or “Tax Returns” as the context may require) shall mean any return, report, claim for refund, information return, amended return or declaration of estimated Tax or similar statement (including any schedule attached thereto) filed, or required to be filed, with respect to any Tax or Taxes.

“Tax Sharing Arrangement” shall mean any written or unwritten agreement or arrangement for the allocation or payment of Tax liabilities or payment for Tax benefits with respect to a consolidated, combined or unitary Tax Return which Tax Return includes any Subsidiary.

“Taxing Authority” shall mean any agency or political subdivision of any foreign, federal, state, local or municipal Government Entity with the authority to impose any Tax.

“Termination Date” shall have the meaning set forth in Section 10.1(d).

“Third Party Claimant” shall have the meaning set forth in Section 9.4(a).

“Trademarks” shall mean United States, state and foreign trademarks, service marks, trade names (including all assumed or fictitious names under which the Subsidiaries are conducting business or have within the previous three years conducted business), and other product names, domain names, slogans, logos, designs and general intangibles of like nature, whether registered or unregistered, together with all applications therefor and the goodwill of the business associated therewith owned by, licensed to or used by the Subsidiaries, or, with respect to and to the extent used in the KILICO Transferred Business, KILICO.

“Trade Secret” shall mean confidential technical information, know-how, concepts, methods, processes, formulae, reports, data, current or former customer lists, lists of specifically identified, targeted prospective customers, and other information identifying current, former or specifically identified, targeted prospective customers, Producer lists, affinity group member lists, mailing lists, business plans, technology or know-how owned by, licensed to or used by the Subsidiaries, or, with respect to and to the extent used in the KILICO Transferred Business, KILICO.

“Transaction Agreements” mean the Bill of Sale, the KILICO Assignment Agreement, the Coinsurance Agreement, the Transition Services Agreement, the Windy Point Sublease and the Windy Point Sublease Consent.

“Transactions” shall have the meaning set forth in Section 11.2(e).

“Transferred Coinsurance Assets” shall have the meaning set forth in the Coinsurance Agreement.

“Transferred Investment Assets” shall have the meaning set forth in Section 2.3(f).

“Transition Services Agreement” means the Transition Services Agreement among Parent, Farmers Group, Inc., KILICO and the Purchaser attached hereto as Exhibit A-5.

“Treasury Regulation” (or “Treasury Regulations” as the context may require) shall mean a regulation promulgated by the Treasury Department under the Code, including a proposed regulation to the extent that, by reason of their actual or proposed effective date, would or could, as of the date of any determination or opinion as to the Tax consequences of any action or proposed action or transaction, be applicable.

“Valuation Methodology” shall have the meaning set forth in Section 2.2(c).

“VEBA Trust” shall have the meaning set forth in Section 5.12(j).

“Warranted Policies” shall have the meaning set forth in Section 3.17(c).

“Warranted Policy Arbitrator” shall have the meaning set forth in Section 6.6(b).

“Welfare Plans” shall have the meaning set forth in Section 3.18(a).

“Windy Point” shall mean Wells Operating Partnership, L.P., a Delaware limited partnership.

Windy Point Estoppel Certificate” shall have the meaning set forth in Section 5.13(a).

“Windy Point Lease” shall have the meaning set forth in Section 5.13(a).

“Windy Point Lease Landlord” shall have the meaning set forth in Section 5.13(a).

“Windy Point Sublease” shall have the meaning set forth in Section 5.13.(a)

“Windy Point Sublease Consent” shall have the meaning set forth in Section 5.13(a).

“ZAIC” shall mean Zurich American Insurance Company, a New York corporation.

“ZHCA” shall have the meaning set forth in the preamble hereto.

“ZHCA Group” is the affiliated group of corporations (within the meaning of Section 1504(a) of the Code) that file consolidated federal income Tax Returns with ZHCA as common parent that exists on the Closing Date and of which the Subsidiaries are members.

“ZLICA” shall mean Zurich Life Insurance Company of America, an Illinois insurance company.

“ZLICONY” shall mean Zurich Life Insurance Company of New York, a New York insurance company.

“Zurich Direct” shall mean Zurich Direct, Inc., an Illinois corporation.

“Zurich Financial Services” shall mean Zurich Financial Services, a joint stock company (as defined in Article 620 et seq., of the Swiss Code of Obligation).

“Zurich Welfare Plans” shall have the meaning set forth in Section 5.12(a).

SALE OF SHARES OF THE SUBSIDIARIES AND TRANSFER OF THE KILICO TRANSFERRED BUSINESS

Purchase and Sale of the Shares and KILICO Transferred Assets and Liabilities.

(o)

The Parent, the Seller and KILICO, jointly and severally, and the Purchaser, hereby agree that upon the terms and subject to the satisfaction or waiver, if permissible, of the conditions hereof, the Seller shall sell, transfer and deliver to the Purchaser, or cause to be transferred and delivered to Purchaser, and the Purchaser shall purchase from the Seller, all of the issued and outstanding capital stock of FKLA, ZLICA and Zurich Direct (the “Shares”) for an aggregate cash purchase price equal to $376,000,000 (the “Kemper Purchase Price”).

(p)

The Parent, the Seller and KILICO, jointly and severally, and the Purchaser hereby agree that upon the terms and subject to the satisfaction or waiver, if permissible, of the conditions hereof, (i) the Purchaser’s Designee and KILICO shall enter into the Coinsurance Agreement; and (ii) KILICO shall sell, transfer and deliver to the Purchaser’s Designee, and the Purchaser’s Designee shall purchase and assume from KILICO, the KILICO Transferred Assets and the KILICO Transferred Liabilities.

(q)

The “Purchase Price” shall be equal to:

(i)

the Kemper Purchase Price;

(ii)

plus the amount, if any, by which the Adjusted Net Worth as shown on the Final Adjusted Net Worth Statement exceeds the Target Net Worth; and

(iii)

less the amount, if any, by which the Adjusted Net Worth as shown on the Final Adjusted Net Worth Statement is less than the Target Net Worth.

Distribution of Excluded Assets, Excluded Investment Assets, Impaired Investment Liabilities and Excluded Liabilities.  

(r)

Prior to the Closing, and on terms and conditions which have been disclosed in writing to the Purchaser, the Seller and KILICO shall cause the Subsidiaries to distribute, convey, withdraw, sell, or otherwise transfer to the Seller or such Affiliates of the Seller as the Seller shall designate, all of the right, title and interest in, to or under any of the rights, properties, subsidiaries or assets listed or described on Schedule 2.2 (collectively, the “Excluded Assets”) or that are Excluded Investment Assets (provided, that Excluded Investment Assets shall be replaced in accordance with Section 2.2(b)), and the Seller or an Affiliate of the Seller, which has been disclosed in writing to the Purchaser, shall assume all of the right, title and interest in, to or under any of the liabilities and obligations listed or described on < U>Schedule 2.2 (the “Excluded Liabilities”).

(s)

Not later than the third Business Day prior to the Closing Date, the Seller shall submit a list of (i) KILICO investment assets which are not Transferred Investment Assets, Excluded Investment Assets or Impaired Investment Assets, indicating with respect to each investment asset its Market Value and Book Value (the “Substitute Asset List”), and (ii) the assets it has selected from those included on the Substitute Asset List that Seller proposes to substitute for the Excluded Investment Assets (other than the KILICO Retained Investments) (the “Substitute Assets”).  Purchaser shall have no right to object to any Substitute Asset provided that the ratio of Market Value to Book Value of the Substitute Assets is at least as favorable as the ratio of Market Value to Book Value of all assets included on the Substitute Asset List.   ;If the ratio of Market Value to Book Value of the Substitute Assets is less than the ratio of Market Value to Book Value of all assets on the Substitute Asset List, then Purchaser shall have the right to replace any of Seller’s proposed Substitute Assets with an asset or assets from the Substitute Asset List in order to equalize the ratios.  On or prior to the Closing, the Seller shall replace the Excluded Investment Assets (other than the KILICO Retained Investments) with Substitute Assets having a Book Value equal to the Book Value of the Excluded Investment Assets (other than the KILICO Retained Investments as of the Closing Date).  

(t)

No later than thirty (30) days after the Closing Date, the Purchaser and Seller shall agree on a list of Impaired Investment Assets.  The Seller shall transfer to the Purchaser cash, cash equivalents or investment grade bonds (valued in accordance with the Valuation Methodology) equal to the Book Value of the Impaired Investment Assets as of the Closing Date no later than ten (10) days after the date the Seller and the Purchaser finally agree on the list of Impaired Investment Assets, and Purchaser shall simultaneously transfer or cause to be transferred to Seller the Impaired Investment Assets.  If the Seller fails to make the transfer contemplated by this Section 2.2(c) within such ten (10) day period, the Seller shall pay to the Purchaser interest on the aggregate amount due to the Purchaser under this Section 2.2(c), from and including the date that suc h transfer was due to the Purchaser, to but excluding, the date of such transfer, which interest shall be computed at the Interest Rate.  All cash will be transferred by wire transfer of immediately available funds in U.S. Dollars to the bank account or accounts designated to the Seller in writing by the Purchaser along with the list of Impaired Investment Assets.

(i)

For purposes of this Section 2.2(c), the following terms shall have the respective meanings set forth below:

“Impaired Investment Assets” shall mean any investment asset of the Subsidiaries or any KILICO Transferred Asset that:

(ii)

With respect to any public corporate bond, corporate private placement bond, collateralized debt obligation or structured private placement security having a credit rating from Standard & Poor’s or Moody’s, any such security whose credit rating falls four or more rating notches, and falls below a Standard & Poor’s rating of A or a Moody’s rating of A2, after the date hereof and prior to the Closing Date; or

(iii)

With respect to any public corporate bond, any such bond with a yield that has increased, after the date hereof and prior to the Closing Date, to 12% or higher, calculated in accordance with the applicable Valuation Methodology, as of the Closing Date; or

(iv)

With respect to any standard corporate private placement bond, any such security with a yield that has increased, after the date hereof and prior to the Closing Date, to 13% or higher, calculated in accordance with the applicable Valuation Methodology, as of the Closing Date.

Impaired Investment Assets shall not include any (i) Excluded Investment Assets, (ii) KILICO Retained Investments, (iii) investment assets of FKLA or ZLICA or their respective subsidiaries which have been written-down to or otherwise adjusted for their price according to the Valuation Methodology on the Estimated Adjusted Net Worth Statement or the Final Adjusted Net Worth Statement, or (iv) investment assets of KILICO or its subsidiaries which have been written down or otherwise adjusted for their price according to the Valuation Methodology on the Closing Balance Sheet or the Final Closing Balance Sheet.

“Valuation Methodology” shall mean:

(v)

for all public corporate bonds, the price quote obtained from five dealers selected in good faith by the Seller, using the mid-point between the bid and the ask price (after eliminating the high and low dealer quotes) as of the Closing Date;

(vi)

for all corporate private placement bonds, (A) the price quote obtained by five dealers selected in good faith by the Seller, using the mid-point between the bid and the ask price (after eliminating the high and low dealer quotes) as of the Closing Date, (B) if less than five dealer quotes are available, the price quote obtained by dealers selected in good faith by the Seller, using the mid-point between the bid and the ask price as of the Closing Date or (C) if no dealer quotes are available, the methodology described in clause (iii) below; or

(vii)

for all collateralized debt obligations and structured private placements, the price and yield shall be determined by the good faith agreement of the Purchaser and the Seller; provided, however, that, in the event that the Purchaser and the Seller cannot in good faith agree as to the value of such investment, the price and yield of the security shall be the average of the values submitted in good faith by the Purchaser and the Seller.

Closing.  

(u)

The closing of the purchase and sale of the Shares, the KILICO Sub Shares and the transfer of the KILICO Transferred Business and the other transactions contemplated hereby (the “Closing”) shall be held at the offices of Lord, Bissell & Brook at 10:00 a.m. central daylight time on the date mutually agreed to by the parties that is not later than ten (10) Business Days following satisfaction or waiver of all of the conditions set forth in Article VII and Article VIII of this Agreement but no earlier than July 1, 2003; provided, that the Closing may occur on such other date or at such other time and place as the parties may mutually agree in writing.  The date on which the Closing actually occurs is hereinafter referred to as the “Closing Date.”

(v)

Notwithstanding anything else stated herein, at the Closing the Coinsurance Agreement shall become effective and the transfer of the KILICO Transferred Assets and KILICO Transferred Liabilities shall be completed before all other Closing transactions contemplated by this Agreement.

(w)

At the Closing, the Seller and KILICO, as applicable, shall deliver the following to the Purchaser:

(i)

stock certificate(s) with appropriate transfer stamps, if any, affixed thereto, representing the Shares and the KILICO Sub Shares, with appropriate stock powers duly endorsed in blank or accompanied by other duly executed instruments of transfer;

(ii)

the stock books, stock ledgers, minute books and corporate seals of the Subsidiaries and FLA (to the extent in the possession of the Seller or the Subsidiaries) and originals (if available) of the Books and Records relating to the Subsidiaries, FLA (to the extent in the possession of the Seller or the Subsidiaries) and, with respect to the KILICO Transferred Business, KILICO (together with copies of all other Books and Records); provided, that any of the foregoing items shall be deemed to have been delivered pursuant to this Section 2.3(c) if such item has been delivered to or is otherwise located at the principal executive office of the Subsidiaries;

(iii)

all other documents required to be delivered by the Seller on or prior to the Closing Date pursuant to this Agreement.

(x)

In addition to the transfers described in Section 2.4 with respect to the KILICO Transferred Business, at the Closing, KILICO and Seller, as applicable, shall execute and/or deliver the following to the Purchaser:

(i)

the Transition Services Agreement;

(ii)

the KILICO Assignment Agreement;

(iii)

the Bill of Sale; and

(iv)

all other documents required to be delivered by KILICO on or prior to the Closing Date pursuant to this Agreement.

(y)

At the Closing, the Purchaser or the Purchaser’s Designee, as the case may be, shall execute and/or deliver to the Seller and KILICO:

(i)

the Estimated Purchase Price;

(ii)

the Transition Services Agreement;

(iii)

the KILICO Assignment Agreement;

(iv)

the Bill of Sale; and

(v)

all other documents required to be delivered by the Purchaser on or prior to the Closing Date pursuant to this Agreement.

(z)

Not later than the third day prior to the Closing Date, KILICO will deliver to the Purchaser a KILICO Transferred Business Balance Sheet as of the last day of the second month immediately preceding the Closing Date (the “Closing Balance Sheet”), together with a certification that the items appearing on the Closing Balance Sheet were:  (i) estimated in good faith by KILICO as of such date; (ii) based upon the Books and Records of KILICO; and (iii) in the case of the General Account Reserves, the Interest Maintenance Reserve and the General Account Receivables, calculated in accordance with SAP and using the same principles, policies, practices, procedures and methodologies utilized by the Seller in preparing the Statutory Statements of KILICO.  For purposes of determining the investment assets to be transferred at Closing (the “Trans ferred Investment Assets”), Seller shall select the smallest number of investment assets of  KILICO (other than Excluded Investment Assets or Impaired Investment Assets) which have an aggregate Market Value equal to the amount of (i) the General Account Reserves, plus (ii) the Interest Maintenance Reserve, less (iii) the General Account Receivables, less (iv) the Market Value of the Other KILICO Assets, less (v) the Ceding Commission.

(aa)

On the Closing Date, KILICO will transfer Transferred Coinsurance Assets, less the Ceding Commission (taking into account an estimated Market Value Adjustment) to the Purchaser’s Designee.  All cash will be transferred by KILICO on the Closing Date by wire transfer of immediately available funds in U.S. Dollars to the bank account or accounts designated to KILICO in writing by the Purchaser at least three (3) Business Days prior to the Closing Date.

(bb)

Not later than the third day prior to the Closing Date, the Seller shall deliver to the Purchaser its estimate of the adjusted net worth of FKLA and ZLICA on a consolidated basis as of the last day of the second month immediately preceding the Closing Date (the “Estimated Adjusted Net Worth”) in substantially the same format as the Target Net Worth Statement hereto (the “Estimated Adjusted Net Worth Statement”), together with a certification that the Estimated Adjusted Net Worth was: (i) based upon the Books and Records of FKLA and ZLICA; and (ii) calculated in a manner consistent with the Target Net Worth Statement, provided that the Purchaser and the Seller agree that the Estimated Adjusted Net Worth Statement shall reflect no liability for Income Taxes.

(cc)

The “Estimated Purchase Price” shall be equal to:

(i)

the Kemper Purchase Price;

(ii)

plus the amount, if any, by which the Estimated Adjusted Net Worth as shown on the Estimated Adjusted Net Worth Statement exceeds the Target Net Worth; and

(iii)

less the amount, if any, by which the Estimated Adjusted Net Worth as shown on the Estimated Adjusted Net Worth Statement is less than the Target Net Worth.

(dd)

All payments to be made by the Purchaser pursuant to this Section 2.3 shall be made on the Closing Date by wire transfer of immediately available funds to such bank account or bank accounts as designated by the Seller at least two (2) Business Days prior to the Closing Date.

KILICO Post-Closing Adjustments.

(ee)

The Purchaser shall, on or before the date that is thirty (30) calendar days after the Closing Date, deliver to KILICO and the Seller (i) a KILICO Transferred Business Balance Sheet as of the Closing Date (the “Revised Closing Balance Sheet”), substantially in the same format as the Closing Balance Sheet; and (ii) a certification to the same effect with respect to the Revised Closing Balance Sheet as the certification delivered with respect to the Closing Balance Sheet.  After delivery of the Revised Closing Balance Sheet and prior to delivery of the Final Closing Balance Sheet, and during the period of any dispute with respect to the application of this Section 2.4, the Purchaser shall provide the Seller and KILICO and their representatives full access to the books, records, facilities and any former employees of the Seller and the Subsidiaries , and shall cooperate with the Seller and KILICO to the extent reasonably requested by it to investigate the basis for such dispute.

(ff)

The Seller shall have the right to review the Revised Closing Balance Sheet and comment thereon for a period thirty (30) calendar days after receipt thereof.  Any changes in the Revised Closing Balance Sheet that are agreed to by the Purchaser and the Seller within such 30-day period shall be incorporated into a final KILICO Transferred Business Balance Sheet as of the Closing Date (such balance sheet, as finally agreed upon by the Purchaser and the Seller pursuant to this Section 2.4, the “Final Closing Balance Sheet”).  Following the resolution of all disputed items (or, if there is no dispute, promptly after the parties reach agreement on the Final Closing Balance Sheet), the Purchaser shall prepare the Final Closing Balance Sheet and shall deliver copies thereof to the Seller and KILICO.

(gg)

In the event that the Purchaser and the Seller are unable to agree on the manner in which any item or items should be treated in the Final Closing Balance Sheet within such thirty (30) day period, then (i) the Market Value of any Transferred Coinsurance Asset with respect to which the Purchaser and the Seller are unable to agree shall be determined in accordance with the Valuation Methodology, and (ii) with respect to all other items, the Seller and the Purchaser shall prepare separate written reports of such item or items and refer such reports to two (2) third party accountants or actuaries, as appropriate (the “Independent Consultants”) within ten (10) Business Days after the expiration of the initial thirty (30) day period.  One of the Independent Consultants shall be selected by the Seller, and one of the Independent Consultants shall be se lected by the Purchaser.  The Independent Consultants shall be an audit partner with either Ernst &Young or Deloitte & Touche specializing in the U.S. life insurance industry, or a member of the American Academy of Actuaries specializing in the U.S. life insurance industry, but shall not be a partner, officer or employee of any of the parties to this Agreement, their auditors or Tillinghast-Towers Perrin.  The Independent Consultants shall together determine within ten (10) Business Days the manner in which such disputed item or items shall be treated in the Final Closing Balance Sheet; provided, however, that the dollar amount of each item in dispute shall be determined within the range of dollar amounts proposed by the Seller and the Purchaser.

(hh)

In the event that the Independent Consultants cannot agree as to the manner in which the disputed item or items should be treated in the Final Closing Balance Sheet within such ten (10) Business Day period, then the Independent Consultants shall select an additional, qualified third party accountant or actuary, as appropriate, mutually acceptable to both Independent Consultants (the “Additional Consultant”) within ten (10) Business Days after expiration of the prior ten (10) Business Day period.  The Additional Consultant shall be a member of the American Academy of Actuaries specializing in the U.S. life insurance industry, but shall not be a partner, officer or employee of any of the parties to this Agreement, their auditors, the Independent Consultants or Tillinghast-Towers Perrin.  The Additional Consultant then shall determine within t en (10) Business Days the manner in which such disputed item or items shall be treated in the Final Closing Balance Sheet; provided, however, that the dollar amount of each item in dispute shall be determined within the range of dollar amounts proposed by the Seller and the Purchaser.

(ii)

The determination by the Independent Consultants, or Additional Consultant, as to the items in dispute shall be in writing and shall be Final and Binding on the parties and shall be so reflected in the Final Closing Balance Sheet.  For purposes of this Agreement, “Final and Binding” shall mean that the aforesaid determinations shall have the same preclusive effect for all purposes as if such determinations had been embodied in a final judgment, no longer subject to appeal, entered by a court of competent jurisdiction, and either party may petition a court having jurisdiction over the parties and subject matter to reduce the arbitrator’s decision to judgment.  The fees, costs and expenses of each Independent Consultant shall be paid by the party retaining the Independent Consultant, and the fees, costs and expenses of retaining the Addi tional Consultant shall be shared 50% by the Purchaser and 50% by the Seller.

(jj)

During the time in which the Revised Closing Balance Sheet is being reviewed by the Independent Consultants and the Additional Consultant, the Seller, KILICO and the Purchaser will each make available to the Independent Consultants and the Additional Consultant interviews with such individuals and such information, books and records as may be reasonably required by the Independent Consultants or the Additional Consultant to finalize the Final Closing Balance Sheet.

(kk)

In the event that the amount of the Transferred Coinsurance Assets, less the Ceding Commission (having taken into account the estimated Market Value Adjustment as provided in Section 2.3(g)), transferred by KILICO to the Purchaser’s Designee on the Closing Date is less than the Transferred Coinsurance Assets, as reflected by the Final Closing Balance Sheet, minus the Ceding Commission as finally determined to reflect the Market Value Adjustment, KILICO or the Seller, as the case may be, shall transfer to the Purchaser cash or cash equivalents equal to the amount of such difference, together with interest thereon from and including the Closing Date to, but not including the date of, such transfer, which interest shall be computed at the Interest Rate.  In no event shall KILICO or the Seller transfer to the Purchaser any Separate Account Assets, Excluded Investment Assets or I mpaired Investment Assets.  All cash will be transferred by wire transfer of immediately available funds in U.S. Dollars to the bank account or accounts designated to KILICO in writing by the Purchaser at least three (3) Business Days prior to the Closing Date.

(ll)

In the event that the amount of the Transferred Coinsurance Assets, less the Ceding Commission (having taken into account the estimated Market Value Adjustment as provided in Section 2.3(g)), transferred to the Purchaser’s Designee on the Closing Date is greater than the Transferred Coinsurance Assets, as reflected by the Final Closing Balance Sheet, minus the Ceding Commission as finally determined to reflect the Market Value Adjustment, the Purchaser’s Designee shall transfer to KILICO cash or cash equivalents equal to the amount of such difference, together with interest thereon from and including the Closing Date to, but not including the date of, such transfer, computed at the Interest Rate.  All cash will be transferred by wire transfer of immediately available funds in U.S. Dollars to the bank account or accounts designated to the Purchaser in w riting by KILICO at least three (3) Business Days prior to the Closing Date.

Post-Closing Adjustments to the Purchase Price.  The Purchase Price shall be subject to adjustment as follows:

(mm)

The Purchaser shall, on or before the date that is thirty (30) calendar days after the Closing Date, deliver to the Seller the Proposed Closing Statement, substantially in the same format as the Target Net Worth Statement, together with a certification to the same effect with respect to the Proposed Closing Statement as the certification delivered with respect to the Estimated Adjusted Net Worth Statement.  For purposes of this Section 2.5, the Proposed Closing Statement shall be prepared in accordance with SAP and consistent with and using the same principles, policies, practices, procedures and methodologies utilized by the Seller in preparing the Statutory Statements.

(nn)

After delivery of the Proposed Closing Statement to the Seller and prior to delivery of the Closing Statement Report to the Purchaser, and during the period of any dispute with respect to the application of this Section 2.5, the Purchaser shall provide the Seller and its representatives full access to the books, records, facilities and employees of the Subsidiaries, and shall cooperate with the Seller to the extent reasonably requested by it to investigate the basis for such dispute.

(oo)

Not later than thirty (30) calendar days after receipt of the Proposed Closing Statement, the Seller shall provide the Purchaser with a list of those items, if any, disputed by it, the reasons set forth in reasonable detail for such dispute and the Seller’s proposed adjustment (the “Closing Statement Report”).  Any items not so disputed by the Seller shall be deemed agreed to by it.  If the Seller fails to deliver to the Purchaser the Closing Statement Report within thirty (30) calendar days following receipt of the Proposed Closing Statement, the Seller shall be deemed to have accepted the Proposed Closing Statement for the purposes of any Purchase Price adjustment under this Section 2.5, and the Proposed Closing Statement shall become the Final Adjusted Net Worth Statement for purposes of this Section 2.5.

(pp)

If the Purchaser does not give the Seller notice of objections (an “Objections Notice”) within fifteen (15) calendar days following receipt of the Closing Statement Report, the Purchaser shall be deemed to have accepted the Closing Statement Report for the purposes of any Purchase Price adjustment under this Section 2.5.  Any items not so disputed by the Purchaser shall be deemed agreed to by the Purchaser.  Within ten (10) calendar days after the date on which the Purchaser provides the Seller with the Objections Notice or, in the event there is no Objections Notice, within fifteen (15) calendar days following receipt of the Closing Statement Report, the Proposed Closing Statement, together with any changes to the Proposed Closing Statement agreed to by the Purchaser and the Seller but excluding any items that remain in dispute between the Purchaser and the Seller, shall be incorporated by the Purchaser into an adjusted Proposed Closing Statement (the “Adjusted Closing Statement”) and delivered by the Purchaser to the Seller.

(qq)

If the Purchaser gives the Seller an Objections Notice, and if the Purchaser and the Seller are able, within fifteen (15) calendar days after receipt by the Seller of the Adjusted Closing Statement, to resolve the disputed exceptions, the Adjusted Closing Statement, as modified by such items as to which the Purchaser and the Seller shall agree, shall become the Final Adjusted Net Worth Statement for purposes of this Section 2.5.  If the Purchaser gives the Seller an Objections Notice, and if the Purchaser and the Seller are unable, within fifteen (15) calendar days after receipt by the Seller of the Adjusted Closing Statement, to resolve the disputed exceptions, such disputed exceptions will be referred to the Independent Consultants, who shall be selected in accordance with the procedures set forth in Section 2.4.  The Purchaser and the Seller shall be for eclosed from presenting to the Independent Consultants for consideration any item not disputed in accordance with the terms of this Section 2.5.  The Independent Consultants shall determine as promptly as practicable the manner in which such item or items should be treated on the Final Adjusted Net Worth Statement; provided, however, that the dollar amount of each item in dispute shall be determined within the range of dollar amounts proposed by the Seller, on the one hand, and the Purchaser, on the other hand.  The Independent Consultants shall together determine within ten (10) Business Days any disputed exception in accordance with the provisions of this Section 2.5, including Section 2.5(a), and such determination shall be Final and Binding. In the event that the Independent Consultants cannot agree as to the manner in which the disputed exceptions should be treated on the Final Adjusted Net Worth Statement within such ten (10) Business Day period, then the Independent Consultants shall select an Additional Consultant in accordance with the procedures set forth in Section 2.4 within ten (10) Business Days after expiration of the prior ten (10) Business Day period.  The Additional Consultant shall prepare and deliver, within ten (10) Business Days of receiving the disputed exceptions, to the Purchaser and the Seller a written report setting forth the net change to the Proposed Closing Statement as shown in the Adjusted Closing Statement that results from its determinations regarding the resolution of such disputed items.  The Additional Consultant shall determine any disputed items in accordance with the provisions of this Section 2.5, including Section 2.5(a).  The Adjusted Closing Statement, as modified by such determinations, shall become the Final Adjusted Net Worth Statement for purposes of this Section 2.5.  Such determinations by the Additional Consultant shall be Final and Binding.

(rr)

During such 10-Business Day periods, the Seller and the Purchaser will each make available to the Independent Consultants and the Additional Consultant interviews with such individuals and such information, books and records as may be reasonably required by the Independent Consultants or the Additional Consultant to issue their reports. The fees, costs and expenses of each Independent Consultant shall be paid by the party retaining the Independent Consultant, and the fees, costs and expenses of retaining the Additional Consultant shall be shared 50% by the Purchaser and 50% by the Seller.

(ss)

If the Adjusted Net Worth as reflected on the Final Adjusted Net Worth Statement is less than the Estimated Adjusted Net Worth, then Seller shall pay to the Purchaser in cash the amount of the difference between the Estimated Adjusted Net Worth and the Adjusted Net Worth as reflected on the Final Adjusted Net Worth Statement.  If the Adjusted Net Worth as reflected on the Final Adjusted Net Worth Statement exceeds the Estimated Adjusted Net Worth, then Purchaser shall pay to the Seller in cash the amount of such excess.  Any such payments shall be made within five (5) Business Days of the date on which the Final Adjusted Net Worth Statement is finally determined in accordance with this Section 2.5 by wire transfer of immediately available funds to such account as the parties may specify in writing, together with interest thereon from the Closing Date to, bu t not including, the date of payment, at the Interest Rate.

(tt)

The Purchaser agrees that following the Closing Date through the date on which payment, if any, is made by either party pursuant to Section 2.5(g), or if the parties agree that no such payment is required, on the date of such determination, the Purchaser will not take any actions with respect to the accounting records, books, policies or procedures that would make it impossible or impracticable to calculate the Adjusted Net Worth as finally determined in accordance with this Section 2.5 in the manner contemplated hereby.

REPRESENTATIONS AND WARRANTIES OF THE SELLER, THE PARENT AND KILICO

The Seller and the Parent, jointly and severally, make all of the representations and warranties contained in this Article III to the Purchaser; KILICO makes those representations and warranties contained in this Article III to the Purchaser only with respect to KILICO or a KILICO Subsidiary (for purposes of the representations and warranties, the terms “Subsidiary” and “Subsidiaries” shall be deemed to include all direct and indirect subsidiaries of each Subsidiary):

The Seller, the Parent and KILICO.  

(uu)

The Seller and the Parent are duly incorporated and validly existing and in good standing under the laws of the State of Delaware, respectively, and each has the corporate and legal power and authority to conduct its respective business and to own or lease and operate its respective assets and properties as and in the places where such business is now conducted and such properties are now owned or leased and operated, with such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect.  

(vv)

KILICO is duly incorporated and validly existing as a stock life insurance company, and is in good standing, under the laws of the State of Illinois, with the corporate and legal power and authority to conduct the KILICO Transferred Business and to own or lease and operate its properties as and in the places where such business is now conducted and such properties are now owned or leased and operated, with such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect.  

(ww)

Each of the Seller, the Parent and KILICO have the corporate and legal right, power and authority, and have taken all corporate action necessary, to execute and deliver this Agreement and the Transaction Agreements to which it is, respectively, a party, to perform its respective obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby.  This Agreement has been, and the Transaction Agreements to which it is a party when executed and delivered will be, duly authorized, executed and delivered by the Seller, the Parent and KILICO and, subject to due authorization, execution and delivery by the other parties, this Agreement is, and the Transaction Agreements to which it is a party when executed and delivered will be, the legal, valid and binding obligation of the Seller, the Parent and KILICO, respectively, enforceable a gainst the Seller, the Parent and KILICO, respectively, in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles (whether considered in proceedings at law or in equity).  Assuming receipt of the approvals and consents indicated in Sections 3.5, 4.5 and 5.5 and Schedule 3.4, Schedule 3.5, Schedule 4.4 and Schedule 4.5, there are no restrictions (whether contractual or by a Government Entity) on the ability of the Seller to transfer the Shares to Purchaser at the Closing, KILICO to transfer the KILICO Sub Shares to the Purchaser at the Closing, or KILICO to transfer the KILICO Transferred Business to the Purchaser’s Designee at the Closing.

The Subsidiaries and FLA.  

(xx)

Schedule 3.2(a) lists the authorized capital stock of each of the  Subsidiaries, the issued and outstanding shares of capital stock of each class, the par value and the owner of record of such shares.  All issued and outstanding shares of capital stock of each of the Subsidiaries are duly authorized and validly issued and are fully paid and non-assessable, and are owned, directly or indirectly, by the Seller or KILICO, respectively (except as otherwise set forth on Schedule 3.2(a)), and are free and clear of all Encumbrances, except for restrictions on transfer arising under applicable securities and insurance laws.  The Seller has good and marketable title to the Shares and KILICO has good and marketable title to the KILICO Sub Shares, and the delivery at the Closing representing the Shares and the KILICO Sub Shares in the manner provide d in Section 2.1 will transfer to the Purchaser good and marketable title to the Shares and the KILICO Sub Shares, free and clear of any Encumbrances.  Except for rights created pursuant to this Agreement, and, to the Knowledge of the Seller, with respect to FLA, rights created pursuant to Insurance Contracts issued by FLA, there are no outstanding options, warrants, securities, rights (preemptive or other), subscriptions, exchange, conversion, calls, repurchase, redemption or other similar rights, agreements or commitments of any kind that give any Person the right to purchase or otherwise receive or be issued any shares of capital stock of any of the Subsidiaries or, to the Knowledge of the Seller, any membership interests or rights of the members of FLA, or any security convertible into or exchangeable for any shares of capital stock of any of the Subsidiaries, or, to the Knowledge of the Seller, any membership interests or rights of the members of FLA, and no authorization therefor has been given. & nbsp;There are no capital appreciation rights, phantom stock plans, securities with participation rights or features, or similar obligations and commitments of any of the Subsidiaries with respect to the capital stock of any of the Subsidiaries.  There are no voting arrangements with respect to the shares of the capital stock of any of the Subsidiaries or, to the Knowledge of the Seller, any membership interests or rights of the members of FLA.  There are no effective contractual restrictions or, as of the date hereof, limitations or orders or decrees of Government Entities, that restrict or limit the payment of dividends by any of the Subsidiaries, except for statutory or regulatory provisions applicable to insurance companies generally.

(yy)

Each Subsidiary and FLA is duly organized and validly existing and in good standing under the laws of its state of organization, with full power and authority to conduct its business and to own or lease and operate its properties as and in the places where such business is now conducted and such properties are now owned or leased and operated, with such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect.  Each Subsidiary and FLA is qualified or otherwise authorized to do business as a foreign entity and is in good standing in each jurisdiction in which the character of the properties owned or held by it under lease or license or its business requires such qualification or authorization (each of which is listed in Schedule 3.2(b)), except where the failure so to qualify or be authorized would not, individually or in t he aggregate, have a Material Adverse Effect.  Schedule 3.2(b) lists each jurisdiction in which each Subsidiary and FLA is qualified or authorized as a foreign entity.

(zz)

Except as set forth on Schedule 3.2(c), the Subsidiaries do not directly or indirectly, own, of record or beneficially, any outstanding voting securities or other equity interests in or control any corporation, limited liability company, partnership, trust, joint venture or other entity (excluding securities in the investment portfolios of the Subsidiaries held in the ordinary course of business and cash management activities in the ordinary course of business).

(aaa)

True and complete copies of the certificate or articles of incorporation and all amendments thereto, the by-laws, or other equivalent organizational documents, as amended to date, for the Subsidiaries and FLA have been delivered to the Purchaser.

(bbb)

A true and complete copy of the Second Amended and Restated Administrative Management Services Agreement dated January 1, 2000 between FLA and FKLA (the “Management Agreement”) has been delivered to the Purchaser.  Such Management Agreement is in full force and effect and constitutes a legal, valid, and binding obligation of FKLA and, to the knowledge of the Seller, FLA (subject, in each case, to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles (whether considered in proceedings at law or in equity).  There has been no modification to the terms thereof or waiver of any rights or duties under the Management Agreement since January 1, 2000.  There are no current and material breaches or default s under the Management Agreement by FKLA or, to the Knowledge of the Seller, FLA.  Neither FLA nor FKLA has received any written notice of termination or intention to terminate the Management Agreement from the other party.  As of the date hereof, to the Knowledge of the Seller, no policyholder of FLA, or any other Person on such policyholder’s behalf, has instituted or threatened to institute any Litigation challenging or objecting to, in any way, the transactions contemplated by this Agreement or the Transaction Agreements.

Actions and Proceedings.  

(ccc)

Except as set forth on Schedule 3.3(a) hereto, as of the date hereof, there are no outstanding orders, decrees or judgments by or with any Government Entity to which the Parent, the Seller, KILICO (to the extent related to the KILICO Transferred Business), any Subsidiary or, to the Knowledge of the Seller, FLA, or any of their respective assets or properties is subject, that would, individually or in the aggregate, have a Material Adverse Effect.

(ddd)

Except as disclosed on Schedule 3.3(b) hereto, as of the date hereof, there are no actions, suits, claims, arbitrations or legal, administrative or other proceedings, or investigations pending or, to the Knowledge of the Seller, threatened against the Parent, the Seller, FLA, KILICO (to the extent related to the KILICO Transferred Business) or any Subsidiary or their respective properties or assets, at law or in equity, by or before any Government Entity, which, if adversely determined, would, individually or in the aggregate, have a Material Adverse Effect.

No Conflict or Violation.  Except as set forth on Schedule 3.4 hereto, in Section 3.5 hereof, or on Schedule 3.5 hereto, the execution, delivery and performance by the Parent, the Seller and KILICO of this Agreement or any of the Transaction Agreements and the consummation of the transactions contemplated hereby or thereby by the Seller, the Parent and KILICO, respectively, in accordance with the terms hereof or thereof do not violate, conflict with or result in a breach of any of the terms of, or constitute a default, event of default or an event creating rights of acceleration, termination or cancellation or causing a loss of the rights under, or result in the creation or imposition of any Encumbrance (except Permitted Encumbrances) upon any of the assets of any Subsidiary or any KILICO Transferred Asset under, (a) any provisi on of the charter, bylaws or other organizational documents of the Seller, the Parent, KILICO, any Subsidiary or, to the Knowledge of the Seller, FLA, (b) any agreement, license, lease or contract to which the Seller, the Parent, KILICO (to the extent such agreement, license, lease or contract relates to the KILICO Transferred Business), any Subsidiary or, to the Knowledge of the Seller, FLA, is a party or by or to which the Seller, the Parent, KILICO, any Subsidiary or, to the Knowledge of the Seller, FLA, or any of their respective assets or properties may be bound or subject, (c) any order, judgment, injunction, award or decree of any court, arbitrator or Government Entity against, or binding upon, the Seller, the Parent, KILICO, any Subsidiary or, to the Knowledge of the Seller, FLA, (d) to the Knowledge of the Seller, any Applicable Law, or (e) any Permit, except in the case of each of the foregoing clauses (b) and (e) for such violations, conflicts, breaches, defaults, rights, loss of rights or Encumbr ances that would not, individually or in the aggregate, have a Material Adverse Effect, and assuming that all notices, filings, authorizations, consents and approvals contemplated by Section 3.5 or otherwise set forth on Schedule 3.5 have been obtained prior to the Closing.

Governmental Consents and Approvals.  The execution, delivery and performance by the Seller, the Parent and KILICO of this Agreement or any of the Transaction Agreements to which it is a party and the consummation of the transactions contemplated hereby or thereby in accordance with the terms hereof or thereof do not require the Seller, the Parent or KILICO, any of their Affiliates, any Subsidiary or, to the Knowledge of the Seller, FLA, to obtain any consent or approval of, make any filing with, or give any notice to, any Government Entity, except (i) as required under the HSR Act, (ii) for Permits, filings and approvals required by the applicable insurance regulatory authorities as set forth on Schedule 3.5 hereto (“Insurance Regulatory Approvals”), (iii) approvals from the NASD and any relevant state regulator in connection with a change of control of the Kemper Broker/Dealers, (iv) as otherwise disclosed on Schedule 3.5 hereto, or (v) any consent, approval, filing or notice required subsequent to the Closing Date.

Financial Statements and Statutory Statements.  

(eee)

The Seller has delivered true and correct copies of the (i) audited, consolidated balance sheet of the Seller as of December 31, 2002 and (ii) audited, consolidated statements of operations and cash flows of the Seller for the year ended December 31, 2002, together, in each case, with the notes thereon and the related report of PricewaterhouseCoopers LLP (collectively, the “Audited Financial Statements”).

(fff)

The Seller and KILICO have delivered to the Purchaser the annual statements of each of FLA, KILICO and the Insurance Subsidiaries as at December 31, 2002, as filed with the insurance regulatory authority of its jurisdiction of domicile, including the statutory basis financial statements of FLA, KILICO, each Insurance Subsidiary and the Separate Accounts, as audited by PricewaterhouseCoopers LLP, as at December 31, 2002, together with the exhibits, schedules and notes thereto and any affirmations and certifications filed therewith (collectively, the “Statutory Statements”).

(ggg)

Except as set forth on Schedule 3.6, the Audited Financial Statements and the Statutory Statements, respectively, are consistent with the Books and Records of the Seller, KILICO, the Subsidiaries, and, to the knowledge of the Seller, FLA, as the case may be, and present fairly, in all material respects, the GAAP (with respect to the Audited Financial Statements) and statutory (with respect to the Statutory Statements) financial condition and results of operations of the Seller, KILICO, the Insurance Subsidiaries or, to the Knowledge of the Seller, FLA, as the case may be, for the periods therein specified, and were prepared, in all material respects, in conformity with GAAP as in effect as of the date thereof (with respect to the Financial Statements) and statutory accounting principles prescribed or permitted by the applicable insurance regulatory authority a s in effect as of the date thereof (“SAP”) (with respect to the Statutory Statements), in each case applied on a consistent basis during the periods presented and with prior periods, except as expressly set forth within the subject financial statements; provided that for purposes of this Section 3.6 (c) the term “Books and Records” includes consolidated, combined and unitary Tax Returns under federal, state, local or foreign law that include KILICO or any of the Subsidiaries.  

(hhh)

Each of the Insurance Subsidiaries, KILICO and, to the Knowledge of the Seller, FLA, has filed or submitted all Statutory Statements required to be filed with or submitted to the insurance regulatory authorities in its respective state of domicile and of any state where it is licensed or from which it has received a Permit, and no material deficiency has been asserted with respect to such Statutory Statements by the applicable insurance regulatory authority which has not been cured, waived or otherwise resolved to the material satisfaction of such insurance regulatory authority.

(iii)

Attached to Schedule 3.6 is a true and correct copy of (i) the unaudited, unconsolidated balance sheet of the Seller as of December 31, 2002 and (ii) the unaudited unconsolidated statements of operations of the Seller for the year ended December 31, 2002.  Except as set forth on Schedule 3.6, such financial statements are consistent with the Books and Records of the Seller, present fairly, in all material respects, the GAAP financial condition and results of operations of the Seller for the periods therein specified, and were prepared, in all material respects, in conformity with GAAP as in effect as of the date thereof, in each case applied on a consistent basis during the periods presented.

(jjj)

KILICO has previously delivered to the Purchaser certain consolidated balance sheets of the KILICO Transferred Business as of December 31, 2002 (the “Pro Forma Statement”).  Except as set forth on Schedule 3.6 hereto, the Pro Forma Statement presents fairly, in all material respects, the financial position of the KILICO Transferred Business as of and for the year ended December 31, 2002 in accordance with SAP in a manner consistent with the methodologies utilized in preparing the Statutory Statements, except for items that were treated differently for presentation purposes.

(kkk)

The data furnished to Tillinghast-Towers Perrin in the preparation of its actuarial analysis reports (a copy of which was delivered to Purchaser with the confidential memorandum of Morgan Stanley & Co. Incorporated dated December 2002) (i) was obtained from the Books and Records of KILICO, the Insurance Subsidiaries and, to the Knowledge of the Seller, FLA, (ii) was generated from the same underlying sources and systems that were utilized by the KILICO and the Insurance Subsidiaries to prepare the Statutory Statements, and (iii) to Seller’s Knowledge, to the extent the data relates to liabilities under Insurance Contracts, was based on the statutory liabilities relating to the Insurance Contracts in effect at the time the data was furnished.

Absence of Undisclosed Liabilities.  

Except for (i) liabilities and obligations reflected on or reserved against in the Audited Financial Statements and the Statutory Statements, including the notes thereto, and the Pro Forma Statements and (ii) liabilities and obligations not required by GAAP or SAP to be reflected in the Audited Financial Statements, Statutory Statements, and the Pro Forma Statements, as of December 31, 2002, the Subsidiaries and KILICO had no liabilities required by GAAP or SAP, as applicable and as in effect on the date thereof, to be reflected on a balance sheet or in the notes thereto.  Except for liabilities reflected on Schedule 3.7 hereto, since December 31, 2002, none of the Subsidiaries or KILICO has incurred any liabilities (absolute, accrued, contingent or otherwise) required by GAAP or SAP, as applicable and as in effect on the date hereof, to be refl ected on a balance sheet, including the notes thereto, except liabilities and obligations reflected on or reserved against in the Audited Financial Statements, the Statutory Statements, and the Pro Forma Statements, liabilities and obligations that will be reflected on the Closing Balance Sheet, the Final Closing Balance Sheet, the Estimated Adjusted Net Worth Statement or the Final Adjusted Net Worth Statement, or other liabilities or obligations, other than those under Insurance Contracts, not in excess of $100,000 individually or $300,000 in the aggregate that were incurred in the ordinary course of business after December 31, 2002 and which would not, individually or in the aggregate, have or be reasonably expected to have a Material Adverse Effect.

Intellectual Property.

(lll)

Except as set forth on Schedule 3.8(a), the Subsidiaries and, with respect to the KILICO Transferred Business, KILICO, as applicable, own or have valid licenses to use all Intellectual Property, except where the failure to have such ownership or license would not, individually or in the aggregate, have a Material Adverse Effect.

(mmm)

Except as set forth on Schedule 3.8(b), as of the date hereof, the validity of the Intellectual Property and the title or rights of the Subsidiaries and, with respect to the KILICO Transferred Business, KILICO, to use the Intellectual Property are not being questioned in any litigation or proceeding to which the Seller, KILICO or the Subsidiaries is a party, nor to the Knowledge of the Seller or KILICO, respectively, are any such rights or title being questioned or litigation or proceeding threatened, except for such litigation which would not, individually or in the aggregate, have a Material Adverse Effect.

(nnn)

Schedule 3.8(c) contains (i) a complete and accurate list of registered and applied for Intellectual Property, and all material unregistered Copyrights and Trademarks, owned or used by the Subsidiaries or, with respect to the KILICO Transferred Business, KILICO, in each case specifying whether such Intellectual Property is owned or licensed, the jurisdiction in which such owned patent, registration or pending application has been filed, whether the Subsidiaries or KILICO, as applicable, has exclusive or non-exclusive use of the licensed Intellectual Property, and, where applicable, the patent, registration or application number therefor, and (ii) a list and description of all material agreements, contracts, licenses, sublicenses and assignments to which any Subsidiary or, with respect to the KILICO Transferred Business, KILICO is a party and which relate to th e Intellectual Property.  KILICO does not own any of the Trademarks, Copyrights or Patents indicated on Schedule 3.8(c).

(ooo)

To the Knowledge of the Seller, except as set forth on Schedule 3.8(d), the conduct of the business of the Subsidiaries or, with respect to the KILICO Transferred Business, KILICO, does not infringe, misappropriate or violate the proprietary rights of any third party and, to the Knowledge of the Seller, there are no infringements, misappropriations or violations of the Intellectual Property by any third party, except, in either case, for such infringements, misappropriations or violations which would not, individually or in the aggregate, have a Material Adverse Effect.

(ppp)

Except as set forth on Schedule 3.8(e), as of the date hereof, there are no claims pending or, to the Knowledge of the Seller, threatened (i) alleging that the business of any Subsidiary or the KILICO Transferred Business, in each case as currently conducted infringes, misappropriates or violates, or constitutes an unauthorized use or violation of, the proprietary rights of any third party, (ii) alleging that the Intellectual Property is being infringed, misappropriated or violated by any third party, or (iii) challenging the ownership, validity or enforceability of the Intellectual Property, except, in each case, for such claims which would not, individually or in the aggregate, have a Material Adverse Effect.

Compliance with Laws.  The business and operations of the Subsidiaries, KILICO (with respect to the KILICO Transferred Business) and, to the Knowledge of the Seller, FLA, have been conducted in compliance with all Applicable Laws except for those violations, if any, which would not, individually or in the aggregate, have a Material Adverse Effect.  Except as set forth on Schedule 3.9 hereto, neither any Subsidiary, KILICO (with respect to the KILICO Transferred Business) nor, to the Knowledge of the Seller, FLA, has received any written notice since January 1, 2001 from any Government Entity alleging any violation of any such Applicable Law or directing any Subsidiary, KILICO (with respect to the KILICO Transferred Business,) or, to the Knowledge of the Seller, FLA, to take any remedial action with respect to such Applicable Law w hich, individually or in the aggregate with all other alleged violations or remedial actions would be reasonably expected to have a Material Adverse Effect.  Since January 1, 1999, each Subsidiary, KILICO and, to the Knowledge of the Seller, FLA, has filed all reports, statements, documents, registrations, filings or submissions required to be filed by such entities with any Governmental Entity, except where the failure to make such filings, individually or in the aggregate, would not have a Material Adverse Effect.  All such reports, registrations, filings and submissions were in compliance with Applicable Law when filed or as of that date such reports were amended or supplemented, except for any such noncompliance as would not, individually or in the aggregate, have a Material Adverse Effect.  No deficiencies have been asserted in writing by any such Government Entity with respect to such reports, registrations, filings or submissions that have not been remedied to the satisfaction of the ap plicable Government Entity, except for any such deficiencies as would not, individually or in the aggregate, have a Material Adverse Effect.

Insurance Producers.  

(qqq)

Except as set forth on Schedule 3.10(a), each Person, including salaried employees of the Insurance Subsidiaries or, to the Knowledge of the Seller, FLA, performing the duties of insurance producer, agency, agent, managing general agent, wholesaler, broker, solicitor, adjuster or customer representative for any Insurance Subsidiary or, to the Knowledge of the Seller, FLA, (collectively, “Producers”), at the time such Producer wrote, sold, or produced business, or performed such other act for or on behalf of the Insurance Subsidiaries or, to the Knowledge of the Seller, FLA, that may require a producer’s, solicitor’s, broker’s or other insurance license, was duly licensed and appointed, where required, as an insurance producer, managing general agent, broker, solicitor or adjuster, as applicable (for the type of business written, sold, or produced by such insurance producer, agency, managing general agent, broker, solicitor, adjuster or customer representative), in the particular jurisdiction in which such Producer wrote, sold, produced, solicited, or serviced such business, as may be required by any Applicable Laws, in each case, with such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect.

(rrr)

Except as set forth in Schedule 3.10(b), since January 1, 1999, neither any Subsidiary nor, to the Knowledge of the Seller, FLA, has made a filing with any Government Entity seeking an exemption under 18 USC §1033(e)(2) with respect to any Producer.

(sss)

Except as set forth in Schedule 3.10(c), as of the date hereof, to the Knowledge of the Seller, no Producer has indicated to the Seller, FLA, KILICO or any Subsidiary that any Producer will be unable or unwilling to continue its relationship as a Producer with FLA, KILICO or any of the Insurance Subsidiaries after the Closing, except as would not, individually or in the aggregate, have a Material Adverse Effect.

(ttt)

The Seller has made available to the Purchaser copies of the Subsidiaries’ written procedures designed to provide assurance that Producers comply with all Applicable Law.

Insurance Matters.  

(uuu)

Except as set forth on Schedule 3.11(a), all insurance policy forms and annuity contracts issued by the Insurance Subsidiaries, KILICO (with respect to the KILICO Transferred Business) or, to the Knowledge of the Seller, FLA (“Insurance Contracts”), are, to the extent required by Applicable Law, on forms approved by all applicable Government Entities or filed with and not objected to by such Government Entities within the period provided by Applicable Law for objection, subject to such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect.  Except as indicated in Schedule 3.11(a), all such forms comply in all material respects with Applicable Law, and have been administered in all material respects in accordance with Applicable Law and the terms of the applicable Insurance Contracts.  Except as set forth on Schedule 3.11(a), any Insurance Contract which is required to be filed with or approved by any Government Entity has been so filed or approved, subject to such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect.  Except as set forth on Schedule 3.11(a), there are no in-force Insurance Contracts of any Insurance Subsidiary under which the holders or owners of such Insurance Contracts have any rights with respect to dividends (other than with respect to separate account assets allocated to such owner or holder), surplus, profit participation or voting.

(vvv)

Except as set forth on Schedule 3.11(b) or except where the failure to do so would not, individually or in the aggregate, have a Material Adverse Effect, each Insurance Subsidiary, to the Knowledge of the Seller, FLA, and KILICO (with respect to the KILICO Transferred Business) and, to the Knowledge of the Seller, each of their respective Producers has marketed, sold and issued the Insurance Contracts in compliance with all Applicable Laws, including, without limitation, in compliance with (i) all applicable requirements and prohibitions relating to suitability of sales and replacement of policies, (ii) all applicable requirements relating to the disclosure of the nature of insurance products as policies of insurance, (iii) all applicable requirements relating to insurance product projections and illustrations, (iv) all applicable prohibitions on the use of un fair methods of competition and deceptive acts or practices relating to the advertising, sales and marketing of insurance, annuities or guaranteed investment contracts, and (v) all applicable disclosure, filing and other requirements with respect to any variation in premiums or other charges resulting from the time at which such premiums or charges are paid.  The Insurance Subsidiaries, KILICO (with respect to the KILICO Transferred Business) and, to the Knowledge of the Seller, FLA, are not subject to any market conduct claim or complaint with respect to the Insurance Contracts, except for such claims or complaints as would not, individually or in the aggregate, have a Material Adverse Effect.  Neither the Parent, the Seller, nor KILICO has received written notice or, to the Knowledge of the Seller, is aware of any action by FLA, the Insurance Subsidiaries or, with respect to the KILICO Transferred Business, KILICO, or any of the Producers acting on behalf of any Insurance Subsidiary, FLA or, with respect to the KILICO Transferred Business, KILICO, that could reasonably be expected to give rise to a market conduct claim relating to the Insurance Contracts, except for such claims as would not, individually or in the aggregate, have a Material Adverse Effect.  KILICO and the Insurance Subsidiaries have (i) timely paid all guaranty fund assessments that are due, or claimed or asserted by any state guaranty fund or association or by any insurance regulatory authority to be due and (ii) provided for all such assessments in the Statutory Financial Statements and the Pro Forma Statements, to the extent necessary to be in conformity with SAP in all material respects as then in effect.

(www)

Except as set forth on Schedule 3.11(c), all Insurance Contract benefits payable by or on behalf of KILICO (with respect to the KILICO Transferred Business), any Insurance Subsidiary or, to the Knowledge of the Seller, FLA, have in all respects been paid in accordance with the terms of the Insurance Contracts under which they arose, except for such exceptions (i) as would not, individually or in the aggregate, have a Material Adverse Effect or (ii) for which KILICO or the Insurance Subsidiary or, to the Knowledge of the Seller, FLA has a reasonable basis to believe that there is a reasonable basis to contest payment.

(xxx)

Except as set forth on Schedule 3.11(d), the reserves, and other liability amounts required by SAP to be determined using actuarial methods, of each of the Insurance Subsidiaries, KILICO (with respect to the KILICO Transferred Business), and, to the Knowledge of the Seller, FLA, reflected in the Statutory Statements were determined in accordance with commonly accepted actuarial methods and standards, consistently applied (except as set forth therein).  The reserves of each of the Insurance Subsidiaries, KILICO (with respect to the KILICO Transferred Business), and, to the Knowledge of the Seller, FLA, reflected in the Statutory Statements:  (i) were computed in accordance with commonly accepted actuarial standards consistently applied and were fairly stated in accordance with sound actuarial principles; and (ii) were based on actuarial  assumptions which produce reserves at least as great as those called for in any contract provision as to reserve basis and method and are in accordance with all other contract provisions; (iii) met the requirements of the insurance laws and regulations of its state of domicile and were at least as great as the minimum aggregate amount required by Applicable Law; (iv) were computed on the basis of assumptions consistent with those used in computing the corresponding items in the annual statement of the preceding year-end; and (v) included provision for all actuarial reserves and related statement items which ought to be established, as required to be certified by KILICO’s actuary pursuant to Illinois Insurance Regulation 1408, Illustration A.

(yyy)

Schedule 3.11(e) sets forth a true and complete list of all separate accounts maintained by the Insurance Subsidiaries and KILICO (collectively, the “Separate Accounts”).  Except as set forth on Schedule 3.11(e): (i) each Separate Account (A) is duly and validly established and maintained under the laws of its state of domicile, (B) is and since January 1, 1999 has been operated in compliance in all material respects with all Applicable Laws and (C) is either excluded from the definition of an investment company pursuant to Sections 3(c)(1), 3(c)(7) or 3(c)(11) of the Investment Company Act of 1940, as amended (the “Investment Company Act”), or is a unit investment trust duly registered as an investment company under the Investment Company Act; (ii) the assets of each Separate Account are not chargea ble with liabilities arising out of any other business that KILICO or the Insurance Subsidiaries or their Affiliates may conduct or may have conducted; and (iii) each such Separate Account, if registered, has filed all reports and amendments of its registration statement required to be filed under Applicable Law and has been granted all exemptive relief necessary for its operations as presently conducted.  The Insurance Contracts under which the assets of the Separate Accounts are held are duly and validly issued and where required by Applicable Law, were sold pursuant to an effective registration statement under the Securities Act of 1933 and any applicable state securities laws, and each such registration statement is currently in effect to the extent necessary to allow KILICO and the Insurance Subsidiaries, as applicable, to receive contributions under such Insurance Contracts.  Since January 1, 1999, KILICO has filed each prospectus and statement of additional information, as amended or supplem ented, under which the assets of the Separate Accounts are held that are required by Applicable Law to be filed, and each such prospectus and statement of additional information, as of its respective mailing date or date of use, complied in all material respects with all Applicable Laws when filed.

Regulatory Filings.  The Seller and KILICO have heretofore made available for inspection by the Purchaser (i) with respect to KILICO, the Subsidiaries and, to the Knowledge of the Seller, FLA, each material registration, filing or submission of each of the Subsidiaries with any Government Entity and (ii) with respect to KILICO, the Insurance Subsidiaries, the Kemper Broker/Dealers and, to the Knowledge of the Seller, FLA, any reports of examination (including, without limitation, financial, market conduct and similar examinations) issued by any Government Entity, in each case since January 1, 1999.  To the Knowledge of the Seller and KILICO, respectively, all material deficiencies or violations noted in the examination reports described in clause (ii) above have been resolved to the satisfaction of the Government Entity that noted such d eficiencies or violations.  Except as set forth on Schedule 3.12, to the Knowledge of the Seller, since January 1, 1999, no material deficiencies have been asserted in writing by any such Government Entity with respect to any registrations, filings or submissions filed by the Subsidiaries, KILICO (with respect to the KILICO Transferred Business) and FLA, that have not been satisfied.  None of the Insurance Subsidiaries, KILICO, or, to the Knowledge of the Seller, FLA, is a “commercially domiciled insurer” under the laws of any jurisdiction or is otherwise treated as domiciled in a jurisdiction other than its jurisdiction of organization.

Broker/Dealers.  

(zzz)

Among the Subsidiaries, the only entities conducting securities broker/dealer business are PMG Securities Corporation and Investors Brokerage Services, Inc. (collectively, the “Kemper Broker/Dealers”).  The Kemper Broker/Dealers are registered as a broker-dealer in all fifty states and in the District of Columbia.  Each such registration is, and has been since the later of the date any such registration was initially required or January 1, 1999, in full force and effect.  Except as set forth in Schedule 3.13, none of the Subsidiaries, KILICO or, to the Knowledge of the Seller, FLA, including the Kemper Broker/Dealers, is required to be registered as a broker-dealer in any jurisdiction in order to conduct the business presently conducted by the Subsidiaries, KILICO or FLA.  Except as would not, individually or in the aggrega te, have a Material Adverse Effect, each “associated person” of a Kemper Broker/Dealer (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that is required, in order to conduct its securities broker-dealer business as it is now conducted, to be registered as a registered principal or registered representative with any Government Entity or under Applicable Law is so registered and is and has been since the later of the date any such registration was initially required or January 1, 1999 while an associated person of the Kemper Broker/Dealers.  Each of the Kemper Broker/Dealers is a member in good standing of the NASD and such other organizations in which its membership is required in order to conduct its securities broker dealer business as now conducted, except where such failure would not have a Material Advise Effect.

(aaaa)

Except as would not, individually or in the aggregate, have a Material Adverse Effect and except as set forth on Schedule 3.13, no Kemper Broker/Dealer or any “associated person” of it is subject to a “statutory disqualification” (as such terms are defined in the Exchange Act) or subject to a disqualification which would be a basis for censure, limitations on the activities, functions or operations of, or suspension or revocation of the registration of any broker-dealer affiliate of the Subsidiaries as a broker-dealer, municipal securities dealer, government securities broker or government securities dealer under Sections 15, 15B or 15C of the Exchange Act.

(bbbb)

Except as set forth in Schedule 3.13, each Kemper Broker/Dealer has net capital (as defined in Rule 15c3-1 under the Exchange Act) that satisfies the minimum net capital requirements of the Exchange Act and the laws of any jurisdiction in which such company conducts business.

(cccc)

Except as set forth in Schedule 3.13, none of the Subsidiaries nor any of their respective directors (other than, in the case of ZLICONY, directors who are not also officers of ZLICONY), officers or employees is subject to any cease and desist, censure or other disciplinary or similar order issued by, or is a party to any written agreement, consent agreement, memorandum of understanding or disciplinary agreement with, or is a party to any commitment letter or similar undertaking to, or subject to any order or directive by, or a recipient of any supervisory letter from, any Government Entity with respect to the business of such Person.

(dddd)

Except where the failure to do so would not, individually or in the aggregate, have a Material Adverse Effect, each Kemper Broker/Dealer and, to the Knowledge of the Seller, each “associated person” of a Kemper Broker/Dealer has appropriately supervised, marketed and sold all securities products in compliance with all Applicable Laws, including, without limitation, in compliance with all applicable requirements and prohibitions relating to market conduct and suitability.

Permits, Licenses and Franchises.  

(eeee)

Schedule 3.14(a) hereto lists (i) all jurisdictions in which the Insurance Subsidiaries, KILICO and, to the Knowledge of the Seller, FLA, are licensed to write insurance business and (ii) the lines of business which the Insurance Subsidiaries, KILICO and, to the Knowledge of the Seller, FLA, are authorized to transact in each such jurisdiction.

(ffff)

All permits, licenses, approvals, franchises, authorizations, exemptions, classifications, registrations, and similar documents or instruments issued by any Government Entity to any Subsidiary, KILICO or, to the Knowledge of the Seller, FLA, the loss, revocation, termination or expiration of which would have, individually or in the aggregate, a Material Adverse Effect (collectively, the “Permits”), are listed in Schedule 3.14(b).  Except as indicated in Schedule 3.14(b), all Permits are valid and in full force and effect, with such exceptions as would not, individually or in the aggregate, have a Material Adverse Effect.  The Subsidiaries, KILICO and, to the Knowledge of the Seller, FLA, are in compliance in all material respects with all terms required for the continued effectiveness of each such Permit.  Except as set f orth in Schedule 3.14(b), as of the date hereof, neither KILICO, any Subsidiary nor, to the Knowledge of the Seller, FLA, is the subject of any suit or pending proceeding seeking the revocation, suspension, non-renewal or material impairment of any Permit, nor to the Knowledge of Seller, is any such suit or proceeding threatened.

Contracts.  

(gggg)

Schedule 3.15(a) lists all written Contracts and written descriptions of all oral Contracts.  There are no breaches or defaults under any Contract or KILICO Transferred Contract, or under any contract listed on Schedule 5.10(f), or under any contract pursuant to which KILICO receives revenue that would be “Separate Account Revenues” or “BOLI Revenues” as those terms are defined in the Coinsurance Agreement, by any of the Subsidiaries, KILICO or, to the Knowledge of the Seller, FLA or any other party thereto, the effect of which would, individually or in the aggregate, have a Material Adverse Effect.  Except as would not, individually or in the aggregate, have a Material Adverse Effect, each such Contract, each KILICO Transferred Contract, each contract listed on Schedule 5.10(f), and each such contract pursuant to wh ich KILICO receives revenue that would be “Separate Account Revenues” or “BOLI Revenues” as those terms are defined in the Coinsurance Agreement, is in full force and effect and constitutes a legal, valid, and binding obligation of KILICO, the relevant Subsidiary or, to the Knowledge of the Seller, FLA and each other party thereto, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles.  Except as would not, individually or in the aggregate, have a Material Adverse Effect, neither the Seller, KILICO, any Subsidiary nor, to the knowledge of the Seller, FLA, has received any notice of termination or intention to terminate from any other party to any such Contract or KILICO Transferred Contract.  Except as set forth on Schedule 3.15(a), no consent is required from any party to any Contract or KILICO Transferred Contract in con nection with the transactions contemplated by this Agreement or the Transaction Agreements and none of the Contracts or KILICO Transferred Contracts contain any provision providing that the other party may modify, amend, cancel or terminate such Contract or KILICO Transferred Contract as a result of the consummation of the transactions contemplated by this Agreement or the Transaction Agreements.

(hhhh)

Schedule 3.15(b) lists all ceded or assumed reinsurance or retrocessional contractual treaties and agreements to which any of the Insurance Subsidiaries, KILICO (with respect to the KILICO Transferred Business) or, to the Knowledge of the Seller, FLA, is a party and under which there is a current liability by either party to such agreement (collectively, including all amendments thereto, the “Existing Reinsurance Agreements”).  Each of the Existing Reinsurance Agreements constitutes a valid and binding in all material respects obligation of the Insurance Subsidiaries or KILICO, as applicable, in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles (whether consi dered in proceedings at law or in equity).  Except as described on Schedule 3.15(b) or as disclosed in the Statutory Statements, there are no amounts recoverable by the Insurance Subsidiaries, KILICO (with respect to the KILICO Transferred Business) or, to the Knowledge of the Seller, FLA, under any of the Existing Reinsurance Agreements that would be required to be disclosed in a Statutory Statement of the Insurance Subsidiaries and which are more than ninety (90) days past due or greater than $500,000 as of December 31, 2002.  Except as described on Schedule 3.15(b), neither the Seller, the Parent, KILICO, the Subsidiaries or, to the Knowledge of the Seller, FLA, has received any written notice from any of the reinsurers party to the Existing Reinsurance Agreements that any amount in excess of $500,000 recoverable by KILICO, FLA or the Insurance Subsidiaries pursuant to an Existing Reinsurance Agreement is not fully collectible in due course.  The Insurance Subsid iaries, KILICO, and to the Knowledge of the Seller, FLA and the other parties to the Existing Reinsurance Agreements, are not in material default as to any Existing Reinsurance Agreement.  Except as disclosed on Schedule 3.15(b), no consent is required from any party to any Existing Reinsurance Agreement in connection with the transactions contemplated by this Agreement or the Transaction Agreements, and none of the Existing Reinsurance Agreements contain any provision providing that the other party thereto may modify, amend, cancel or terminate such Existing Reinsurance Agreement as a result of the consummation of the transactions contemplated by this Agreement or the Transaction Agreements.  Except as disclosed on Schedule 3.15(b), the Insurance Subsidiaries, KILICO, and to the Knowledge of the Seller, FLA, are entitled to take full credit on their statutory financial statements filed with state insurance regulatory authorities with respect to any Existing Reinsurance Agreement purs uant to which the Insurance Subsidiaries or KILICO have ceded reinsurance.

Absence of Certain Changes.  Except (i) as expressly contemplated by this Agreement or the Transaction Agreements, (ii)  as set forth in Schedule 3.16 hereto, (iii) with respect to the Excluded Items or (iv) any actions that would be required in order for the Board of Directors of FLA to fulfill their fiduciary obligations under Applicable Law, since December 31, 2002 through the date hereof, (a) the business of the Insurance Subsidiaries and, with respect to the KILICO Transferred Business, KILICO, taken as a whole, has been conducted in the ordinary course of business consistent with past practice, (b) there has been no Material Adverse Effect and (c) neither any Subsidiary, KILICO (with respect to the KILICO Transferred Business) nor, to the Knowledge of the Seller, FLA, has:

(i)

individually incurred any liabilities or obligations, other than those under Insurance Contracts, except liabilities and obligations not in excess of $100,000 annually and $300,000 in the aggregate in the ordinary course of business;

(ii)

mortgaged, pledged or subjected to any Encumbrance any of its material properties or assets;

(iii)

suffered any material damage, destruction or loss to any of its material property (whether or not covered by insurance);

(iv)

failed to maintain all material assets in good repair and condition, except to the extent of wear and tear or use in the ordinary course of business or damaged by fire or other unavoidable casualty;

(v)

changed its accounting practices or policies, except as required by GAAP or SAP, or changed its actuarial, pricing, underwriting, reinsurance, reserving, sales, marketing or claims management principles, practices, methods or policies;

(vi)

disposed or agreed to dispose of any material properties or assets;

(vii)

canceled or forgiven without fair consideration any material debts or claims of any Subsidiary or, with respect to the KILICO Transferred Business, KILICO;

(viii)

declared or paid any dividend or other distribution to its shareholders with respect to its capital stock, or redeemed or repurchased any of its capital stock from, any Person other than any of the Subsidiaries;

(ix)

entered into or terminated any reinsurance or retrocessional agreement, either as ceding company or as reinsurer;

(x)

entered into any other material transaction, or materially changed any business practice, including without limitation, any material change in its agent distribution system;

(xi)

entered into any new line of business or materially changed the operations or business plan for any existing line of business;

(xii)

made or granted any bonus or any wage, salary or compensation increase to any director, officer or employee, or made or granted any material increase in any employee benefit plan or arrangement, or amended, suspended or terminated any existing employee benefit plan or arrangement or adopted any new employee benefit plan or arrangement (including split dollar insurance arrangements), or paid or agreed to pay any pension, retirement allowance or other employee benefit not required by any existing Benefit Plan or other agreement or arrangement to any director, officer or employee, whether past or present, except for normal annual increases in the ordinary course of business, consistent with past practices;

(xiii)

made any other material change in employment terms or benefits for any of its directors, officers or employees;

(xiv)

made any capital expenditures or commitments for capital expenditures that aggregate in excess of $300,000;

(xv)

made any loans, capital contributions or advances to, or guarantees for the benefit of, any Persons (except for loans to policyholders made in the ordinary course of business) in excess of $300,000 at any one time;

(xvi)

made any change (or authorized any change) in its certificate of incorporation or by-laws or other organizational documents;

(xvii)

made any additional investment in any Excluded Investment Asset;

(xviii)

issued, sold or pledged, or authorized or proposed the issuance, sale or pledge of additional shares of capital stock of any class, or securities convertible into or exchangeable for shares of capital stock, or any rights, warrants or options to acquire any such shares, or other convertible securities of any Subsidiary;

(xix)

entered into an agreement with respect to any merger, consolidation, liquidation, dissolution or business combination involving the Parent, the Seller, the KILICO Transferred Business, FLA or any Subsidiary, or any acquisition or disposition of all or substantially all of the assets or securities of the Parent, the Seller, FLA, any Subsidiary or the KILICO Transferred Business;

(xx)

(A) acquired (by merger, consolidation or acquisition of stock or assets or bulk reinsurance or otherwise) any corporation, partnership or other business organization or material segment, line of business or division thereof or (B) made any material investment either by purchase of stock or securities, contributions to capital (other than to another Subsidiary), property transfer or purchase of any property or assets of any Person, except for investments in the ordinary course of business;

(xxi)

(A) incurred any indebtedness for borrowed money or issued any Debt securities or (B) assumed or guaranteed the obligations of any other Person, or (C) incurred any Intercompany Loans, except (i) for those obligations for which a liability was accrued by the Subsidiary, KILICO or, to the Knowledge of the Seller, FLA, as applicable, (ii) obligations satisfied in full prior to the date hereof, and (iii) in the cases of clauses (A) or (C), for the accrual of interest in the ordinary course of business.

(xxii)

abandoned, modified, waived, terminated or otherwise changed any Permit of the Insurance Subsidiaries, the KILICO Transferred Business or, to the Knowledge of the Seller, FLA, except (a) as may be required in order to comply with Applicable Law or (b) such modifications or waivers of insurance licenses as would not, individually or in the aggregate, restrict the business or operations of the KILICO Transferred Business, FLA or such Insurance Subsidiary in any material respect;

(xxiii)

entered into or materially modified any management or material administrative services agreement binding on the Subsidiaries or FLA; or

(xxiv)

agreed or committed to take any of the foregoing actions.

Taxes.

(iiii)

ZHCA is the common parent of an affiliated group of corporations (within the meaning of Section 1504(a) of the Code) that file consolidated federal income Tax Returns; KILICO and the Subsidiaries are members of such group.  Except as set forth on Schedule 3.17(a) hereto neither KILICO, any Subsidiary, nor to the Knowledge of the Seller, FLA has any liability for the Taxes of any Person other than itself.

(jjjj)

Except as set forth on Schedule 3.17(b) hereto: (i) each of the ZHCA Group, KILICO, the Subsidiaries, and to the Knowledge of the Seller, FLA has filed, or has joined in the filing of, when due (taking into account all applicable extensions), all material Tax Returns required to be filed by or with respect to KILICO, the Subsidiaries, or FLA, respectively, with the appropriate Taxing Authorities; (ii) (A) to the Knowledge of the Seller, such Tax Returns filed by or with respect to FLA, and (B) all other such Tax Returns, are true, correct, and complete in all material respects as of the date of such filing; (iii) (A) to the Knowledge of the Seller, all Taxes shown as due on such Tax Returns filed by or with respect to FLA and (B) all Taxes shown as due on all other such Tax Returns, have been paid; and (iv) any material liability of KILICO, the Subsidiari es, or to the Knowledge of the Seller, FLA for Taxes that have accrued but are not yet due and payable as of the date of each of the Audited Financial Statements and Statutory Statements, as applicable, have been provided for in such financial statements.

(kkkk)

Except as set forth on Schedule 3.17(c) hereto, (i) there are no Encumbrances for Taxes, except Permitted Encumbrances, upon any of the assets of KILICO, the Subsidiaries, or to the Knowledge of the Seller, FLA that would, individually or in the aggregate, have a Material Adverse Effect; (ii) to the Knowledge of the Seller, neither KILICO, any Subsidiary, nor FLA has received any written notice of deficiency or assessment or written notice of proposed adjustment from any Taxing Authority with respect to liabilities for Taxes of KILICO, the Subsidiaries, or FLA which, if not satisfied, would have a Material Adverse Effect and which has not been fully paid or finally settled, and any such deficiency or assessment disclosed on Schedule 3.17(c) is being contested in good faith through appropriate proceedings; (iii) none of the assets of any of KILICO, the S ubsidiaries, or to the Knowledge of the Seller, FLA is “tax-exempt use property” within the meaning of Section 168(h) of the Code; (iv) each of the Insurance Subsidiaries, KILICO, and to the Knowledge of the Seller, FLA is taxable as a domestic “life insurance company” within the meaning of Section 816 of the Code; (v) all annuity contracts and life insurance policies issued or reinsured by the Insurance Subsidiaries, KILICO (with respect to the KILICO Transferred Business), or to the Knowledge of the Seller, FLA (collectively, the “Warranted Policies”), are and at all times have been in material compliance with the applicable provisions of Sections 72, 101(f), 817, 817A, 7702 and 7702A of the Code; (vi) the tax treatment under the Code or other applicable Tax law of the Warranted Policies is and at all times has been in all material respects no less favorable to the purchaser, policyholder, annuitant, or intended beneficiaries thereof than the tax treatment under the Cod e or other applicable Tax law for which such Warranted Policies qualified or purported to qualify at the time of their issuance or purchase, except for changes to the Code or other applicable Tax law, or binding interpretations thereof, effective after the date of such issuance or purchase; (vii) all reinsurance contracts entered into by the Insurance Subsidiaries and, to the Knowledge of the Seller, FLA are insurance contracts for federal income tax purposes; (viii) each of the Subsidiaries and, to the Knowledge of the Seller, FLA is and has at all times been in material compliance with the provisions of Sections 6011, 6111 and 6112 of the Code relating to tax shelter disclosure, registration, and list maintenance, and with the Treasury Regulations thereunder; and (ix) with respect to reinsurance contracts to which any of the Subsidiaries, FLA, or KILICO (with respect to the KILICO Transferred Business) is a party, to the Knowledge of the Seller, no facts, circumstances or basis exists under which the IRS c ould make any material reallocation, recharacterization or other adjustment under Section 845(a) of the Code, or make any material adjustment arising from a determination that any reinsurance contract had or has a significant tax avoidance effect under Section 845(b) of the Code.

Employee Benefit Plans; ERISA.

(llll)

Schedule 3.18(a) hereto contains a list of (i) all “employee pension benefit plans,” as defined in Section 3(2) of ERISA, established, maintained, or contributed to by the Subsidiaries for the benefit of any present or former employees or agents of the Subsidiaries (the “Pension Plans”); (ii) all “employee welfare benefit plans,” as defined in Section 3(1) of ERISA, established, maintained, or contributed to by the Subsidiaries for the benefit of any present or former employees or agents of the Subsidiaries (the “Welfare Plans”) (the Pension Plan and the Welfare Plans being the “ERISA Benefit Plans”); (iii) to the Knowledge of the Seller, all other incentive, employment, equity based (including stock option), welfare benefit, supplemental retirement, severance, deferred compensation and oth er employee benefit plans, policies, programs, agreements and arrangements, established, maintained, or contributed to by the Subsidiaries for the benefit of any present or former employees, directors, consultants or agents of the Subsidiaries, without regard to the coverage of any such plan, policy, program, agreement or arrangement by ERISA or any provision of the Code (the “Non-ERISA Commitments”) (the Pension Plans, the Welfare Plans and the Non-ERISA Commitments being the “Benefit Plans”); and (iv) all material oral Non-ERISA Commitments.  Except as disclosed on Schedule 3.18(a), none of the ERISA Benefit Plans or the Non-ERISA Commitments is subject to the law of any jurisdiction outside of the United States of America.

(mmmm)

Each of the Benefit Plans has been administered in accordance with its terms and Applicable Law (including, where applicable, ERISA and the Code), except where the failure to so administer such Benefit Plan would not, individually or in the aggregate, have a Material Adverse Effect.  There is no pending or, to the Knowledge of Seller, threatened claim in respect of any of the ERISA Benefit Plans other than claims for benefits in the ordinary course of business which would not, individually or in the aggregate, have a Material Adverse Effect.  

(nnnn)

Each of the Benefit Plans intended to be “qualified” within the meaning of Section 401(a) of the Code has been determined by the United States Internal Revenue Service to be so qualified and, to the Knowledge of the Seller, nothing has occurred with respect to the operation of any such Benefit Plans that would cause the loss of such qualification.

(oooo)

Except as set forth on Schedule 3.18(d), none of the Benefit Plans provide retiree life or retiree health benefits to any former employees or any other person except as may be required under Section 4980B of the Code or Section 601 of ERISA, any other Applicable Law or at the expense of the participant or the participant’s beneficiary.  

(pppp)

Except to the extent the following would not, individually or in the aggregate, have a Material Adverse Effect:  (i) there is no “accumulated funding deficiency” (whether or not waived) with respect to any pension plan maintained by the Subsidiaries or the ERISA Affiliates that is subject to Code Section 412 or ERISA Section 302; (ii) all payments and/or contributions required to have been made (under the provisions of any agreements or other governing documents or Applicable Law) with respect to all ERISA Benefit Plans for all periods prior to the Closing Date either have been timely made or have been accrued (and all such unpaid but accrued amounts are described on Schedule 3.18(e) and all such payments and/or contributions have been or shall be made before the applicable due date); (iii) neither the Subsidiaries nor, to the Knowledge of the Seller, any other “disqualified person” (within the meaning of Section 4975 of the Code) or “party in interest” (within the meaning of Section 3(14) of ERISA) has taken any action with respect to any ERISA Benefit Plan which could subject any such plan (or its related trust) or the Subsidiaries or any officer, director or employee of any of the foregoing to the penalty or Tax under Section 502(i) or Section 502(l) of ERISA or Section 4975 of the Code; and (iv) none of the Subsidiaries has any potential liability, whether direct or indirect, contingent or otherwise, under Sections 4063, 4064, 4069, 4204 or 4212(c) of ERISA.

(qqqq)

FLA does not sponsor, nor does it have any liabilities to or under, any Benefit Plans.

Labor Relations and Employment.  Except as set forth on Schedule 3.19 hereto, and except as would not, individually or in the aggregate, have a Material Adverse Effect, since January 1, 2002:  (i) to the Knowledge of the Seller, there is no labor strike, slowdown, stoppage or lockout, or any other dispute or controversy with a labor organization or with respect to unionization or collective bargaining, pending or threatened against or affecting the Subsidiaries or FLA; (ii) no Subsidiary or, to the Knowledge of the Seller, FLA, is a party to or bound by any collective bargaining or other agreement with any labor organization applicable to any employees or other agents of the Subsidiaries or FLA; (iii) no charges are pending or threatened in writing against the Subsidiaries or, to the Knowledge of the Seller, FLA, before the Nation al Labor Relations Board, the Equal Employment Opportunity Council, the Department of Labor or any other comparable authority; and (iv) there are not and have not been any labor union organizing or election activities with respect to any of the employees or other agents of the Subsidiaries or, to the Knowledge of the Seller, FLA, including without limitation, any request or demand for negotiations, recognition or representation.

Real Property and Environmental.

(rrrr)

The Seller and the Parent are not selling to the Purchaser and the Purchaser is not purchasing from Seller or Parent any interest in real property (fee or leasehold) owned by either the Seller or the Parent.  Except as set forth on Schedule 3.20, the Subsidiaries do not own any fee interest in any real property.  Notwithstanding the foregoing, the Subsidiaries do own certain leasehold interests in real property (the “Leased Properties”).  Schedule 3.20 sets forth the Leased Properties, other than leases primarily related to the Excluded Items, and identifies the lease agreement, and any and all amendments, modifications or other side agreements relating thereto (the “Leases”).  True, authentic, correct, full and complete copies of the Leases have been delivered or made available to the Purchaser. &nb sp;Each Subsidiary has good and valid leasehold estates in the Leased Properties and except as set forth on Schedule 3.20:  (i) no Subsidiary has received any written notice of, nor to the actual Knowledge of Seller are there, any violations of any zoning ordinance, health code or any Environmental Law affecting the Leased Properties or the use, occupancy or enjoyment thereof and (ii) neither the Subsidiaries nor, to the Knowledge of the Seller, their respective landlords is in material default under any of the Leases.

(ssss)

No Subsidiary has brought any Hazardous Material onto the Leased Properties in violation of any Environmental Laws, nor to the actual Knowledge of Seller are there any Hazardous Materials on the Leased Properties.  For purposes hereof, “Hazardous Material” means asbestos, asbestos-containing materials, PCBs, petroleum products, urea formaldehyde foam insulation and any other hazardous, toxic or special substance, material or waste that is defined, determined or identified as such in any federal, state or local statute, law, regulation, ordinance, order or code, in each case as amended and whether now existing or hereafter enacted or promulgated (collectively, the “Environmental Laws”), including, without limitation, the Water Pollution Control Act, 33 U.S.C. ‘1251 et seq.; the Resource Conservation and Recovery Act, 42 U.S. C. ‘6901 et seq.; the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ‘9601 et seq.; the Safe Drinking Water Act, 42 U.S.C. ‘3000(f) et seq.; the Toxic Substances Control Act, 15 U.S.C. ‘2601 et seq.; and the Clean Air Act, 42 U.S.C. ‘7401 et seq.

Litigation.  Except as set forth on Schedule 3.21, as of the date hereof, there is no Litigation (as defined below), pending or, to the Knowledge of Parent, the Seller or KILICO, threatened, against the Parent, the Seller, KILICO or any Subsidiary or any of its or their respective assets or properties.  As used in this Agreement, “Litigation” shall mean any and all judicial, regulatory and administrative actions, suits, claims, arbitrations, proceedings or investigations (including, without limitation, any actual or certified class actions, any putative or threatened class actions or any actions, proceedings or investigations under environmental, occupational safety and health and employment discrimination laws and regulations).

Brokers.  No broker, investment bank, finder, financial advisor or other person has acted as such for, or is entitled to any compensation from, the Seller or its Affiliates in connection with this Agreement or the transactions contemplated hereby, except Morgan Stanley & Co. Incorporated, the fees of which will be paid by the Seller.

Investment Advisory Activities.  

(tttt)

Except for PMG Asset Management, Inc., none of the Subsidiaries is required to be registered as an investment adviser or transfer agent in any jurisdiction in order to conduct the business presently conducted by the Subsidiaries.  Except as set forth in Schedule 3.23, none of the Subsidiaries is a investment adviser, distributor, underwriter, administrator or transfer agent to any investment company required to be registered under the Investment Company Act.  None of the Subsidiaries is a commodity trading adviser or commodity pool operator or engaged in any activity subject to the Commodity Exchange Act, as amended, or subject to the jurisdiction of the Commodity Futures Trading Commission.

(uuuu)

Except as would not, individually or in the aggregate, have a Material Adverse Effect, neither the Subsidiaries, nor, to the Knowledge of the Seller, any other “person associated with” (as defined under the Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”)) the Subsidiaries is subject to:  (i) a disqualification to serve as an investment adviser or a “person associated with” an investment adviser or subject to any censure, material limitation on activities, functions or operations, or suspension or revocation pursuant to an order issued by the SEC under Section 203 of the Investment Advisers Act; (ii) a disqualification to serve as a solicitor for any investment adviser registered under the Investment Advisers Act pursuant to Rule 206(4)-3 under the Investment Advisers Act; (iii) a disqualification t o serve as a broker-dealer pursuant to Section 15(b)(4) of the Exchange Act, unless in each such case the Subsidiaries, as applicable, have received exemptive relief from the SEC with respect to such disqualification; or (iv) the subject of a rebuttable presumption pursuant to Rule 206(4)-4(b) under the Investment Advisers Act.  The Seller has provided the Purchaser with a true, complete and current copy of each Subsidiary’s Form ADV.

(vvvv)

Each of the Subsidiaries has administered all accounts for which such Person acts as fiduciary, administrator or agent, including but not limited to accounts for which it serves as a trustee, agent, custodian, personal representative, guardian or conservator, in substantial compliance with the terms of the governing documents and all Applicable Laws.

Operations Insurance.  Schedule 3.24 sets forth a complete and correct list of the policies of insurance maintained by any Subsidiary or, to the Knowledge of the Seller, FLA, or by the Seller or an Affiliate of the Seller for the benefit of the business or properties of any of the Subsidiaries or FLA.  As of the date hereof, neither the Seller nor any of its Affiliates has received any written notice of termination or cancellation of such policy.  All premiums due and payable on such policies prior to the Closing have been or will be (on or prior to the Closing Date) paid up to and through the Closing.  The Seller and the Subsidiaries are not in breach or default (including with respect to the payment of premiums or the giving of notices) under any such policies, which default would entitle the insurer under such policies to ca ncel or terminate the policy or rescind coverage under the policy.

Affiliate Transactions.  Except as set forth on Schedule 3.25, none of the Subsidiaries, KILICO (with respect to the KILICO Transferred Business) or, to the Knowledge of the Seller, FLA, is a party to any agreement or arrangement with, or for the benefit of, any of its directors or officers, the Seller or the Seller’s Affiliates (other than any of the Subsidiaries) or FLA.  Each of the agreements or arrangements, if any, listed on Schedule 3.25 has been reported to and not disapproved by the applicable Government Entity if required by Applicable Law.

Guarantees.  Except as set forth on Schedule 3.26(a), there are no guarantees of the Seller or any of the Seller’s Affiliates (other than any of the Subsidiaries) for the benefit of any of the Subsidiaries or FLA.  Except as set forth on Schedule 3.26(b), there are no guarantees, keep-well agreements or other similar obligations of any of the Subsidiaries or FLA for the benefit of the Seller or any of its Affiliates (other than any of the Subsidiaries).

Bank Accounts.  Schedule 3.27 sets forth a list of (a) the name and address of each bank, mutual fund or stock brokerage firm or similar financial institution with which any of the Subsidiaries has an account or safe deposit box and the numbers of such accounts or safe deposit boxes maintained by that member, and (b) the names of all Persons authorized to draw on each such account or to have access to each such safe deposit box.

Assets.  Except as set forth on Schedule 3.28, KILICO has good and marketable title to all assets included within the KILICO Transferred Assets (other than cash or cash equivalents), free of any Encumbrance.

Risk Based Capital.  The Total Adjusted Capital and Company Action Level Risk Based Capital (as those terms are defined by the Applicable Laws in the respective state of domicile of each of the Insurance Subsidiaries, FLA and KILICO) for each of the Insurance Subsidiaries, KILICO and, to the Knowledge of the Seller, FLA, as of December 31, 2002 are set forth on Schedule 3.29.  For each of the Insurance Subsidiaries, KILICO and, to the Knowledge of the Seller, FLA, the Total Adjusted Capital exceeds the Company Action Level Risk Based Capital.

Solvency of KILICO.  KILICO does not have an Impairment and will not have an Impairment as a result of the transactions contemplated by this Agreement or the Transaction Agreements.  “Impairment” shall have the meaning ascribed to such term in Chapter 215, Act. 5, Article II, Section 34 of the Illinois Compiled Statutes Annotated.

Section 338(h)(10) Election.  The Parent is and will be on the Closing Date eligible to, and has or will on the Closing Date have the authority to, consent to the Section 338(h)(10) Election and similar applicable state, local or foreign elections with respect to this transaction.  The Parent and its Affiliates have no plan or intention to take any action that would have the effect of causing any Section 338(h)(10) Election to be ineffective with respect to any of the Subsidiaries.

Disclosure.

(wwww)

Except for the representations and warranties contained in this Article III, or any schedules or exhibits thereto, or set forth in any Transaction Agreement or closing certificates delivered hereunder or thereunder, neither the Parent, the Seller, the Subsidiaries, KILICO, any advisor to any Person referred to in this paragraph (a) nor any other Person makes any express or implied representation or warranty on behalf of the Parent, the Seller, the Subsidiaries, KILICO or FLA, and the Parent, the Seller and KILICO hereby disclaim any such representation or warranty whether by the Parent, the Seller, the Subsidiaries, KILICO any of the respective Affiliates, officers, directors, employees, agents or representatives of any Person referred to in this paragraph (a) or by any other Person.  

(xxxx)

In particular, without limiting the foregoing disclaimer, none of the following shall be deemed to constitute a representation or warranty of any Person referred to in paragraph (a) of this Section 3.32:  (i) any information set forth in the Confidential Offering Memorandum dated December 2002, (ii) any financial projection or forecast relating to the business of the Parent, the Seller, the Subsidiaries, KILICO or FLA, or (iii) any oral or written information presented to the Purchaser during any management presentation, including any question and answer session thereto.  With respect to any projection or forecast delivered by or on behalf of the Parent, the Seller, KILICO, any of the Subsidiaries or FLA to the Purchaser, the Purchaser acknowledges that (A) there are uncertainties inherent in attempting to make such projections and forecasts, (B) it is fami liar with such uncertainties, (C) it is taking full responsibility for making its own evaluation of the adequacy and accuracy of all such projections and forecasts so furnished to it, and (D) it shall have no claim against any Person with respect thereto other than a claim for fraud or bad faith.

REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

The Purchaser hereby represents and warrants to the Parent and the Seller as follows:

Organization, Standing and Authority.  The Purchaser is duly incorporated and validly existing and in good standing under the laws of its state of incorporation, with full power and authority to conduct its business and to own or lease and operate its properties as and in the places where such business is now conducted and such properties are owned or leased and operated, with such exceptions as would not, individually or in the aggregate, have a Purchaser Material Adverse Effect.

Authorization.  The Purchaser has full corporate and legal right, power and authority, and has taken all corporate action necessary, to execute and deliver this Agreement and the other Transaction Agreements to which it is a party, to perform its obligations hereunder and thereunder and to consummate the transactions hereby and thereby.  This Agreement has been, and the other Transaction Agreements to which it is a party when executed and delivered will be, duly executed and delivered by the Purchaser, and, subject to due authorization, execution and delivery by the other parties, this Agreement is, and the other Transaction Agreements to which it is a party, when executed and delivered will be, the legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, subject to bankruptcy, insolv ency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting Creditors’ rights and to general equity principles (whether considered in proceedings at law or in equity).

Actions and Proceedings.

(yyyy)

Except as set forth on Schedule 4.3 hereto, as of the date hereof, there are no outstanding orders, decrees or judgments by or with any Government Entity to which the Purchaser is a party or any of its assets or properties is subject, that would, individually or in the aggregate, have a Purchaser Material Adverse Effect.

(zzzz)

Except as disclosed on Schedule 4.3 hereto, as of the date hereof, there are no actions, suits, arbitrations or legal, administrative or other proceedings pending or, to the Knowledge of the Purchaser, threatened against the Purchaser or any of its assets or properties, at law or in equity, by or before any Government Entity, which would, if adversely determined, individually or in the aggregate, have a Purchaser Material Adverse Effect.

No Conflict or Violation.  Except as set forth on Schedule 4.4 hereto, in Section 4.5 hereof, or on Schedule 4.5 hereto, the execution, delivery and performance by the Purchaser of this Agreement or any of the Transaction Documents and the consummation of the transactions contemplated hereby or thereby by the Purchaser in accordance with the terms hereof and thereof do not violate, conflict with or result in a breach of any of the terms of, or constitute a default, event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under, or result in the creation or imposition of any Encumbrance (except Permitted Encumbrances) upon any of the assets of the Purchaser under, (a) any provision of the charter, bylaws or other organizational documents of the Purchaser, (b) any agreement, lic ense or contract to which the Purchaser is a party or by or to which it or any of its assets or properties may be bound or subject, (c) any order, judgment, injunction, award or decree of any court, arbitrator or Government Entity against, or binding upon the Purchaser, (d) to the Knowledge of the Purchaser, any Applicable Law, or (e) any permit necessary to conduct the Purchaser’s business as presently conducted, except in the case of each of the foregoing clauses (b), (d) and (e), for such violations, conflicts, breaches, defaults, impairments or revocations that would not, individually or in the aggregate, have a Purchaser Material Adverse Effect.

Governmental Consents and Approvals.  The execution, delivery and performance by the Purchaser of this Agreement or any of the Transaction Agreements, and the consummation of the transactions contemplated hereby and thereby by the Purchaser in accordance with the terms hereof and thereof, do not require the Purchaser or any of its Affiliates to obtain any consent or approval of, make any filing with, or give any notice to, any Government Entity, except (i) as required under the HSR Act, (ii) for Permits and Insurance Regulatory Approvals set forth on Schedule 4.5, (iii) as otherwise disclosed on Schedule 4.5 hereto, or (iv) any consent, approval, filing or notice required subsequent to the Closing Date.

Compliance with Laws.  The business and operations of the Purchaser have been conducted in compliance with all Applicable Laws except for those violations, if any, which would not, individually or in the aggregate, have a Purchaser Material Adverse Effect.  Except as set forth on Schedule 4.6 hereto, the Purchaser has not received any written notice since January 1, 2001 from any Government Entity alleging any violation of any such Applicable Law or directing the Purchaser to take any remedial action with respect to such Applicable Law, in either case which would have a Purchaser Material Adverse Effect.

Sufficient Funds.  The Purchaser has on hand or access to sufficient funds available to pay the Purchase Price hereunder and all fees and expenses required to be paid by the Purchaser related to the transactions contemplated hereunder and under the Transaction Agreements.

Investigation.  The Purchaser has conducted its own independent review and analysis of the business, operations, accounting and actuarial methodology, technology, assets, liabilities, results of operations, financial condition and prospects of the Seller, KILICO, FLA and the Subsidiaries and acknowledges that the Seller has provided the Purchaser with access to certain personnel, properties, premises and records of the Seller, KILICO, FLA and the Subsidiaries for this purpose.

Brokers.  No broker, investment bank, finder, financial adviser or other person has acted as such for, or is entitled to any compensation from, the Purchaser or its Affiliates in connection with this Agreement or the transactions contemplated hereby.

Section 338(h)(10) Election.  The Purchaser is and will be on the Closing Date eligible to, and has or will on the Closing Date have the authority to, consent to the Section 338(h)(10) Election and similar applicable state, local or foreign elections with respect to this transaction.  The Purchaser and its Affiliates have no plan or intention to take any action that would have the effect of causing any Section 338(h)(10) Election to be ineffective with respect to any of the Subsidiaries, including transferring the shares of any of the Subsidiaries to any entity that is not treated as a corporation for federal Income Tax purposes or is otherwise not eligible to make the Section 338(h)(10) Election.

No Other Representations or Warranties.  Except for the representations and warranties contained in this Article IV, neither the Purchaser nor any other Person makes any express or implied representation or warranty on behalf of the Purchaser, and the Purchaser hereby disclaims any such representation or warranty whether by the Purchaser or any of its Affiliates, officers, directors, employees, agents or representatives or any other Person.

COVENANTS

Conduct of the Business Pending the Closing.  Except (a) as contemplated by this Agreement or any of the Transaction Agreements, (b) as set forth in Schedule 5.1, (c) as required by Applicable Law, (d) with respect to the Excluded Items, (e) for any actions that would be required in order for the Board of Directors of FLA to fulfill their fiduciary obligations under Applicable Law, or (f) with the prior written consent of the Purchaser, during the period from the date of this Agreement to the Closing, KILICO will, and the Parent, the Seller and KILICO will cause the Subsidiaries and FLA (x) to conduct their respective businesses according to their ordinary course of business and will use commercially reasonable efforts consistent therewith (y) to preserve intact the material properties, assets and business organizations of KILICO (to the extent related to the KILICO Transferred Business), the Subsidiaries and FLA and (z) to maintain satisfactory relationships with material customers, suppliers, distributors, regulators, creditors, employees, agents, brokers and others having business relationships with KILICO (to the extent related to the KILICO Transferred Business), the Subsidiaries and FLA, in each case in the ordinary course of business; provided, that neither the Parent, the Seller, KILICO, FLA, nor the Subsidiaries shall be required to incur any costs or expenses or otherwise expend any monies out of the ordinary course of business in connection with such efforts.  The Parent, the Seller and KILICO will not, and will not permit the Subsidiaries to, or cause FLA to, take any action with the purpose of causing any of the conditions to the Purchaser’s obligations set forth in Article VII hereof to not be satisfied.  Nothing in this Section 5.1 shall require FLA to take or omit to take any action that would cr eate a reasonable possibility of a breach of its fiduciary duties.  Without limiting the generality of the foregoing and except as set forth in Schedule 5.1, or as otherwise provided in this Agreement or in any of the Transaction Agreements or with respect to the Excluded Items, KILICO will not (to the extent related to the KILICO Transferred Business), and the Parent, the Seller and KILICO will not permit the Subsidiaries, or cause FLA (subject to the exercise of its fiduciary obligations) prior to the Closing, without the prior written consent of the Purchaser, to take the following actions:

(i)

issue, sell or pledge, or authorize or propose the issuance, sale or pledge of additional shares of capital stock of any class, or securities convertible into or exchangeable for shares of capital stock, or any rights, warrants or options to acquire any such shares, or other convertible securities of any Subsidiary;

(ii)

split, combine, reclassify, amend any terms of, purchase, redeem or retire any shares of the capital stock of any Subsidiary or declare, set aside for payment or pay any dividend or distribution, payable in cash, stock, property or otherwise, with respect to any of the capital stock of any Subsidiary, other than with respect to dividends or distributions, cash dividends and distributions by a Subsidiary to another Subsidiary;

(iii)

enter into an agreement with respect to any merger, consolidation, liquidation, dissolution or business combination involving the Parent, the Seller, the KILICO Transferred Business, FLA or any Subsidiary, or any acquisition or disposition of all or substantially all of the assets or securities of the Parent, the Seller, FLA or any Subsidiary;

(iv)

propose or adopt any amendment to the certificate of incorporation or by-laws or other organizational documents of KILICO, FLA or any Subsidiary;

(v)

(A) acquire (by merger, consolidation or acquisition of stock or assets or bulk reinsurance or otherwise) any corporation, partnership or other business organization or material segment, line of business or division thereof or (B) make any material investment either by purchase of stock or securities, contributions to capital (other than to another Subsidiary), property transfer or purchase of any property or assets of any Person, except for investments in the ordinary course of business;

(vi)

(A) incur or pay any indebtedness for borrowed money or issue any debt securities or (B) assume or guarantee the obligations of any other Person or (C) incur any Intercompany Loans not in existence as of the date hereof, except, in the cases of clauses (A) or (C), for the accrual of interest and any payments of interest in the ordinary course of business;

(vii)

except in the ordinary course of business (A) increase in any manner the rate or terms of compensation or benefits of any of its directors, officers, employees, consultants or agents except as may be required or permitted under existing employment, consulting or agency agreements, or (B) pay or agree to pay any pension, retirement allowance or other employee benefit not required by any existing Benefit Plan or other agreement or arrangement to any director, officer or employee, whether past or present, or (C) enter into, amend, suspend or terminate any employment, bonus, severance or retirement contract or other Benefit Plan or adopt any employee benefit plan (including split dollar insurance arrangements);

(viii)

except in the ordinary course of business (A) sell, lease, transfer or otherwise dispose of any of its material property or assets or (B) create Encumbrances, except for Permitted Encumbrances, on any of its material property or assets;

(ix)

make any loans, advances or capital contributions to (except for advances for travel and other related business expenses to officers, agents and employees), or guarantees for the benefit of any Persons in an aggregate amount outstanding at any one time exceeding $300,000;

(x)

fail to maintain all material assets in good repair and condition, except to the extent of wear and tear or use in the ordinary course of business or damage by fire or other unavoidable casualty;

(xi)

except as may be required as a result of a change in law, regulation, in generally accepted accounting principles or in any applicable state statutory accounting practices, change in any material respect any accounting principles or practices used by the Subsidiaries or FLA;

(xii)

institute, settle or dismiss any action, claim, demand, lawsuit, proceeding, arbitration or grievance by or before any court, arbitrator or governmental or regulatory body threatened against, relating to or involving any business, asset or property of FLA, the Subsidiaries or, with respect to the KILICO Transferred Business, KILICO, other than in the ordinary course of business but not, in any individual case, in excess of $500,000;

(xiii)

other than as may be required as a result of a change in law, regulation, in generally accepted accounting principles or in any applicable state statutory accounting practices, change the reserving methods of KILICO, FLA or any of the Insurance Subsidiaries’ reserving methods (it being understood that the foregoing shall not apply to changes in the amount of reserves);

(xiv)

abandon, modify, waive, terminate or otherwise change any Permit of the Insurance Subsidiaries, FLA or the KILICO Transferred Business, except (a) as may be required in order to comply with Applicable Law or (b) such modifications or waivers of insurance licenses as would not, individually or in the aggregate, restrict the business or operations of the KILICO Transferred Business, FLA or such Insurance Subsidiary in any material respect;

(xv)

take any action that is not contemplated by this Agreement that would reasonably be expected to result in a reduction of the insurer financial strength ratings of the Insurance Subsidiaries, FLA or KILICO;

(xvi)

make any material change in its actuarial, sales, marketing, underwriting, claims management, pricing, reserving or reinsurance practices;

(xvii)

make any material change in existing product offerings or make any new product offerings;

(xviii)

(y) enter into or modify any Contract (other than an Insurance Contract) that would involve KILICO (with respect to the KILICO Transferred Business), FLA or the Subsidiaries incurring an obligation of more than $100,000 annually or $200,000 in the aggregate or (z) modify any KILICO Transferred Contract;

(xix)

enter into or materially modify any management or material administrative services agreement binding on the Subsidiaries, FLA or with respect to the KILICO Transferred Business, KILICO, including but not limited to any investment management agreement and any contract pursuant to which KILICO receives revenue that would be “Separate Account Revenues” as defined in the Coinsurance Agreement;

(xx)

make any additional investments in an Excluded Investment Asset or in any asset which, at the time the investment was made, was other than in NAIC Class I or NAIC Class II debt obligations, the kind and quality of which are: (A) publicly available; (B) readily marketable, and (C) the issuer is not, at the time of purchase, rated BBB or Baa2 or lower by a Nationally Recognized Statistical Rating Organization and under review with negative implications, if such review is publicly available information;

(xxi)

make any capital expenditures or commitments for capital expenditures that aggregate in excess of $300,000;

(xxii)

cancel or forgive without fair consideration any material debts or material claims of any Subsidiary or, with respect to the KILICO Transferred Business, KILICO; or

(xxiii)

agree or commit to take any of the foregoing actions.

Certain Transactions.  From the date of this Agreement through the Closing, neither the Parent, the Seller, KILICO (primarily with respect to the KILICO Transferred Business), nor any of the Subsidiaries, or any of their respective Affiliates, officers, employees, representatives or agents, will, directly or indirectly, solicit, encourage or initiate any negotiations or discussions with, or provide any information to, or otherwise cooperate in any other manner with, any Person or group (other than the Purchaser and its Affiliates and representatives) concerning any direct or indirect sale or other disposition of all or a substantial part of the capital stock or assets (in one transaction or a series of related transactions) of the Seller, KILICO or any of the Subsidiaries (other than with respect to the Excluded Items).  

Investigations; Pre-Closing Access.  

(aaaaa)

Prior to the Closing Date, the Purchaser shall be entitled, through its employees and representatives, to make such further investigation of the assets, liabilities, business and operations of KILICO (to the extent related to the KILICO Transferred Business), FLA or the Subsidiaries, and such further examination of the Books and Records, as the Purchaser may reasonably request.  Any investigation, examination or interview by the Purchaser of employees of KILICO or the Subsidiaries or access pursuant to this Section 5.3(a) shall be conducted or occur at reasonable times during regular business hours upon reasonable advance notice.  The Parent, the Seller and KILICO shall cause KILICO and the Subsidiaries and their respective employees and representatives to cooperate with the Purchaser’s employees and its representatives in connection with such review a nd examination; and any such investigation, examination or interview shall be subject to the terms and conditions of the Confidentiality Agreement.  Any access, examination or review by the Purchaser, its employees and representatives shall not unreasonably interfere with the business operations of KILICO, FLA or any of the Subsidiaries.  Prior to obtaining access to Confidential Material (as defined in the Management Agreement) of FLA, the Purchaser shall enter into a confidentiality agreement with FLA with respect to such information and all such information shall remain subject to the confidentiality provisions of the Management Agreement.

(bbbbb)

The foregoing and Section 5.4 shall not require the Parent, the Seller, KILICO or any of the Subsidiaries to permit any inspection, or to disclose any information, that in the reasonable judgment of the Seller could reasonably be expected to result in (i) the disclosure of any trade secrets of third parties or the violation of any obligations of the Parent, the Seller, KILICO, FLA or any of the Subsidiaries with respect to the confidential information of any third party if the Seller shall have used commercially reasonable efforts to obtain the consent of such third party to such inspection or disclosure but was unable to obtain such consent, (ii) the waiver of any applicable attorney-client privilege or (iii) the violation of any Applicable Law.

Post-Closing Access.  Following the Closing Date, the Purchaser shall (i) allow the Parent and the Seller, upon reasonable prior notice and during regular business hours, through their respective employees and representatives, the right, at the expense of the Parent and the Seller, to examine and make copies of the Books and Records transferred to the Purchaser at the Closing for any reasonable business purpose, including, without limitation, the preparation or examination of Tax Returns, regulatory filings and financial statements and the conduct of any litigation or the conduct of any regulatory, contract holder, participant or other dispute resolution whether pending or threatened, and (ii) maintain such Books and Records for examination and copying by the Parent and the Seller for a period of not less than six years following the Clo sing Date or any longer period as mandated by Applicable Law.  Access to such Books and Records may not unreasonably interfere with the Purchaser’s or any successor company’s business operations.

HSR Act Filings; Consents; Insurance Regulatory Filings.  

(ccccc)

The Seller, Bank One and the Purchaser shall, as promptly as practicable and in any event within fifteen (15) Business Days of the date hereof, file, or cause to be filed, Notification and Report Forms under the HSR Act with the Federal Trade Commission (the “FTC”) and the Antitrust Division of the United States Department of Justice (the “Antitrust Division”) in connection with the transactions contemplated by this Agreement and the Transaction Agreements, and will use their respective reasonable best efforts to respond as promptly as practicable to all inquiries received from the FTC or the Antitrust Division for additional information or documentation and to cause the waiting periods under the HSR Act to terminate or expire at the earliest possible date.

(ddddd)

The Parent, the Seller, Bank One and the Purchaser shall cooperate and use reasonable best efforts to obtain all consents, approvals and agreements of, and to give and make all notices and filings with, any Government Entities necessary to authorize, approve or permit the consummation of the transactions contemplated by this Agreement and the Transaction Agreements, including without limitation, the Insurance Regulatory Approvals and the Permits set forth on Schedule 5.5(b) hereto.  The Parent, the Seller, Bank One and the Purchaser shall cooperate and use reasonable best efforts to obtain all other approvals and consents to the transactions contemplated by this Agreement and the Transaction Agreements, including (i) the matters set forth on Schedule 3.5, Schedule 4.5 or Schedule 5.5(b) hereto, (ii) any Person from whom appr ovals and consents are required under any of the KILICO Transferred Contracts or Contract to which any of the Subsidiaries is a party and (iii) the consents of any other third parties required by the transactions contemplated hereunder.

(eeeee)

The Purchaser shall, as promptly as practicable and in any event within thirty (30) days of the date hereof, make (and cause its Affiliates to make) all necessary filings of preacquisition statements required by applicable state insurance holding company systems and acquisition of control filings in all jurisdictions indicated in Schedule 4.5.

(fffff)

Each party shall provide all necessary information, documentation and communications to any insurance regulatory authorities and such other Government Entities and other Persons required to consummate the transactions contemplated hereby.  Each party shall cooperate with the other in obtaining, as promptly as practicable, all approvals, authorizations and clearances of Government Entities and other Persons required to consummate the transactions contemplated hereby.  Each party hereto shall have the right to review in advance, and to the extent practicable each will consult the other on, in each case subject to Applicable Law relating to the exchange of information or other applicable confidentiality requirements, all the information relating to the Seller, KILICO, FLA (to the extent such information is known by or in the Seller’s possession) or the Su bsidiaries, the Purchaser or any of their respective Affiliates, as the case may be, that appears in any filings or other submissions with, or other written materials submitted to, any third party or Government Entity in connection with the transactions contemplated by this Agreement and the Transaction Agreements.  The Seller and the Purchaser agree that they will keep the other apprised of the status of matters relating to completion of the transactions contemplated by this Agreement and the Transaction Agreements, including promptly furnishing the other with copies of any notice or other communications received by the Seller, KILICO or the Subsidiaries, the Purchaser or any of their respective Affiliates, as the case may be, from any third party or Government Entity with respect to the transactions contemplated hereby, including, without limitation, all inquiries from insurance regulators and all notices of claims, suits and actions for which either party receives service of process.

(ggggg)

The Seller shall use reasonable and diligent efforts to obtain, on behalf of PMG Asset Management, Inc., all required consents to the assignment (within the meaning of Section 202(a)(1) of the Investment Advisers Act) of the investment management contracts of PMG Asset Management, Inc. that will result from the consummation of the transactions contemplated by this Agreement in accordance with Section 205(a)(2) of the Investment Advisers Act and the terms and conditions of each of the Investment Management Contracts.  Without limitation of the foregoing, the Seller shall:

(i)

to the extent permissible under the Investment Advisers Act and the terms of any particular Investment Management Contract, inform each client by written notice at least 10 days prior to the Closing Date, that (A) PMG Asset Management, Inc. will continue to provide the client with investment advisory services following the Closing Date, subject to the client’s right to terminate the Investment Management Contract following the Closing Date, and (B) the client shall be deemed to have consented to the assignment of the Investment Management Contract and to PMG Asset Management, Inc.’s continued provision of services thereunder if the client fails to terminate the Investment Management Contract either before or within 60 days following the Closing Date; or

(ii)

to the extent that the consent procedure set forth in (i) above is not permissible under the Investment Advisers Act and the terms of any particular Investment Management Contract, Seller shall seek to obtain, before the Closing Date, from each client to which PMG Asset Management, Inc. provides investment advisory services, the written consent of such client to the assignment of such client’s Investment Management Contract that will result from the consummation of the transactions contemplated by this Agreement.  The Seller shall provide the Purchaser, on a regular basis prior to the Closing, with copies of any consents or notices of termination received by the Seller or PMG Asset Management, Inc.

Further Assurances.  

(hhhhh)

Upon the terms and subject to the conditions herein provided, on and prior to the Closing Date, each of the Parent, the Seller and the Purchaser shall use commercially reasonable efforts to take, or cause to be taken, all actions or do, or cause to be done, all things or execute any documents necessary, proper or advisable under Applicable Laws to consummate and make effective the transactions contemplated by this Agreement and the Transaction Agreements.

(iiiii)

On and after the Closing Date, the Seller (as reasonably requested from time to time by the Purchaser) and the Purchaser (as reasonably requested from time to time by the Seller) shall take all reasonably appropriate action and execute any additional documents, instruments or conveyances of any kind (not containing additional representations and warranties) which may be reasonably necessary to carry out any of the provisions hereof.

(jjjjj)

Without limiting the generality of the foregoing, on or immediately after the Closing Date, the Purchaser agrees to furnish the Seller and KILICO with true and accurate information concerning itself and its Affiliates (including Bank One and, from and after the Closing, the Purchaser’s Designee and the other Subsidiaries) and such other matters as may be necessary or advisable in connection with any filing required or necessary with the SEC in connection with this Agreement, the Coinsurance Agreement, or the transactions contemplated hereunder or thereunder, including, without limitation, timely furnishing true and accurate information necessary for the filing of amended registration statements with respect to the Separate Accounts maintained by KILICO.

Expenses.  Except as otherwise specifically provided in this Agreement, the parties to this Agreement shall bear their respective expenses incurred in connection with the preparation, execution and performance of this Agreement and the Transaction Agreements and the transactions contemplated hereby and thereby, including, without limitation, all fees and expenses of agents, representatives, counsel, investment bankers, actuaries and accountants; provided, however, that (a) the Seller and the Purchaser shall split equally the cost of the filing fees in connection with all filings by any of the parties hereto with the FTC and the Antitrust Division under the HSR Act with respect to the transactions contemplated hereby; (b) the Purchaser and Seller shall split equally all fees and sales, use, transfer or similar taxes in connection with the transactions hereunder or the Transaction Agreements; (c) the Seller shall bear the cost of obtaining Insurance Regulatory Approval pursuant to Section 1011(c) of the California Insurance Code; (d) the Seller shall bear the cost of making all filings with and obtaining any approvals from any Government Entity as required by Applicable Law in connection with the Subsidiaries’ transfer of the Excluded Items; and (e) the Purchaser shall bear the cost of obtaining Insurance Regulatory Approvals required by the change of control of the Insurance Subsidiaries.

Use of Names.

(kkkkk)

Commencing as promptly as practicable after the Closing, but in no event later than one (1) year after Closing, the Parent, KILICO and the Seller shall, and shall cause their respective Affiliates to, refrain from using the name “Kemper” or those that are suggestive or derivative thereof (except for the purposes of historical identification in materials not designed as advertising or solicitation), except in connection with the KILICO Retained Investments, the KILICO Retained Liabilities, any Excluded Item, the business of KILICO that is not part of the KILICO Transferred Business, or as contemplated hereunder or the Transaction Agreements or as required by Applicable Law; provided that all such use in connection with the KILICO Retained Liabilities, the Excluded Items, and the business of KILICO that is not part of the KILICO Transferred Business sh all be limited to that which is reasonably necessary to the maintenance or management thereof.  Seller, Parent and KILICO may not sell, license, sublicense, pledge, assign, or transfer to any Person any of their respective rights to use the “Kemper” name or any name that is suggestive or derivative thereof.

(lllll)

Commencing as promptly as practicable after the Closing, but in no event later than ninety (90) days after the Closing, the Purchaser shall make all filings with Government Entities (including without limitation, filing amendments to the charters and by-laws of the applicable Subsidiaries and filing appropriate amendments to policy form filings) to cause the applicable Subsidiaries to change any of their names that contain the word “Kemper” or “Zurich” to a new corporate name, provided that the new corporate name does not include the words “Kemper” or “Zurich” or those that are suggestive or derivative thereof.  As soon as practicable, but in no event longer than twelve (12) months after the Closing Date, the Purchaser shall cause the applicable Subsidiaries to cease to use in any form whatsoever any marks, designs, logos, slogans, names, words, letters, trade dress or other indications of origin which include the words “Kemper” or “Zurich” or those that are suggestive or derivative thereof, except for the purposes of historical identification in materials not designed as advertising or solicitation.  Notwithstanding paragraphs (d) and (e) of this Section 5.8, the applicable Subsidiaries shall have the right to use the marks, designs, logos, slogans or names that include the words “Kemper” or “Zurich,” but solely in connection with the current uses by the Subsidiaries and during and for the purposes of the transition period provided for in the immediately preceding sentence.

(mmmmm)

Commencing as promptly as practicable after the Closing, and except as permitted by the preceding paragraph or as required by Applicable Law, the Purchaser shall cause the Subsidiaries and FLA to refrain from using any printed materials or other means of communication which state, suggest or imply any affiliation with Zurich Financial Services or any of its Affiliates or the group of companies as a whole.

(nnnnn)

The Purchaser, effective as of the Closing and except as expressly set forth in this Section 5.8, acting on behalf of itself and its Affiliates (including the Subsidiaries) hereby assigns and relinquishes to the Seller any right, including, without limitation, all Intellectual Property rights, any Subsidiary may heretofore have had to use the marks, designs, logos, slogans or names of the Seller or its Affiliates including, without limitation, “Kemper” and “Zurich”, or any marks, designs, logos, slogans, words, names or letters suggestive or derivative thereof identified on Schedule 3.8(c), in any trade or business or otherwise, other than as permitted by this Section 5.8.

(ooooo)

Notwithstanding anything to the contrary contained in this Agreement, the Purchaser acknowledges and agrees that those trademarks and service marks identified with an asterisk (*) on Schedule 3.8(c), and any associated registrations and applications, as well as all goodwill associated therewith and represented thereby, shall be conveyed at or prior to the Closing from the Subsidiaries to the Seller.

Certain Intercompany Matters.

(ppppp)

Except as set forth on Schedule 5.9 hereto, and except as contemplated by the Transaction Agreements, on or prior to the Closing Date, all data processing, accounting, insurance, banking, personnel, legal, communications and other products or services provided by the Seller or its Affiliates (other than the Subsidiaries) to the Subsidiaries or FLA, or provided by the Subsidiaries or FLA to the Seller or its Affiliates (other than the Subsidiaries), including any agreements or understandings (written or oral) with respect thereto, will terminate, including, without limitation, any stop loss agreements and capital maintenance agreements.

(qqqqq)

Except as set forth on Schedule 5.9 hereto, on or prior to the Closing Date, all intercompany accounts (including the Intercompany Loans) between the Subsidiaries or FLA, on the one hand, and the Seller or any of its Affiliates (other than the Subsidiaries), on the other hand, shall be paid and satisfied in full without any remaining liability of the Subsidiaries or FLA.

(rrrrr)

Prior to the Closing Date, Seller shall cause FKLA and ZLICA to pay to Taxing Authorities as Income Tax or to the appropriate Person under all Tax Sharing Arrangements relating to Income Taxes, an aggregate amount equal to the accrued liability for Income Taxes shown on the Target Net Worth Statement.

Certain Transactions Relating to the Excluded Items and Excluded Investment Assets and Other Assets and Contracts.

(sssss)

On or prior to the Closing Date, the Seller shall (at its sole cost) cause the Subsidiaries to distribute, convey, withdraw or otherwise transfer to the Seller or such Affiliates of the Seller as the Seller shall designate, all of the right, title and interest in, to or under the assets designated as Excluded Items (provided that Excluded Items that are Excluded Investment Assets shall be replaced in accordance with Section 2.2) and will transfer to an Affiliate of the Seller (other than a Subsidiary or FLA) all liabilities designated as Excluded Items.  From time to time, the Purchaser shall, upon the Seller’s request and at the sole cost of the Seller, (i) deliver the Books and Records relating solely to any of the Excluded Items (and copies of Books and Records related to the Excluded Items and other items) in the possession of the Purchaser or th e Subsidiaries and (ii) do, execute, acknowledge and deliver, or cause to be done, executed, acknowledged and delivered, all deeds, assignments, transfers and conveyances as may be reasonably required for the better assigning, transferring, granting, conveying and confirming to the Seller or its Affiliates, or for aiding and assisting in collecting and reducing to possession of the Seller or its Affiliates, any of the Excluded Items.

(ttttt)

Effective as of the Closing Date, the Subsidiaries shall distribute, convey, withdraw or otherwise transfer to the Seller or a designee of the Seller all of the right, title and interest of the Purchaser and the Subsidiaries in and to the Excluded Items; provided, that no distribution, conveyance, withdrawal or transfer shall be made of any Excluded Item or portion thereof if an attempted sale, assignment, transfer or delivery, without the consent of a third party, would constitute a breach or other contravention thereof.  With respect to any Excluded Item or portion thereof not distributed, conveyed, withdrawn or otherwise transferred at the Closing because of failure to obtain third party consent as contemplated by the immediately preceding sentence, the Purchaser and the Subsidiaries shall enter into any arrangements and take any actions reasonably req uested by the Seller designed to provide the Seller with the full and exclusive benefits of such Excluded Items; provided, that the Seller shall have assumed the duty to perform all obligations relating to such Excluded Items accruing on and after the Closing Date.  From and after the Closing Date, the Purchaser shall, and shall cause the Subsidiaries to, take any and all lawful actions requested by the Seller with respect to any Excluded Items or portion thereof not distributed, conveyed, withdrawn or transferred as contemplated hereunder including, without limitation, the giving or withholding of any waiver, consent or approval with respect thereto, and shall keep the Seller informed of all notices and other communications received by any of them with respect to such Excluded Items.

(uuuuu)

Subject to Section 7.6, KILICO, with the Purchaser’s cooperation and assistance, shall use commercially reasonable efforts to obtain all approvals, consents or waivers necessary to assign to the Purchaser’s Designee the KILICO Transferred Contracts.

(vvvvv)

Subject to Section 7.6, with respect to the KILICO Transferred Contracts for which consent is not obtained on or prior to the Closing Date, KILICO, instead of obtaining any approval, consent or waiver necessary to sell, assign, transfer, or otherwise convey to the Purchaser’s Designee such KILICO Transferred Contracts, shall enter into any arrangements and take any actions reasonably requested by the Purchaser’s Designee designed to provide the Purchaser’s Designee with the full and exclusive benefits of such KILICO Transferred Contracts; provided, that the Purchaser’s Designee shall have agreed with KILICO to perform all obligations relating to such KILICO Transferred Contract accruing on and after the Closing Date.  From and after the Closing Date, KILICO shall take any and all lawful actions requested by the Purchaser’s Designe e with respect to any KILICO Transferred Contract or portion thereof not assigned, transferred or otherwise conveyed to the Purchaser’s Designee as contemplated hereunder including, without limitation, the giving or withholding of any waiver, consent or approval with respect thereto, and shall keep the Purchaser’s Designee informed of all notices and other communications received by it with respect to such KILICO Transferred Contracts.

(wwwww)

Subject to Section 5.8(d) and Section 5.8(e) hereof, Seller shall, and Parent and Seller shall cause Zurich Insurance Company and Zurich American Insurance Company to, prior to the Closing, assign to FKLA, or grant to FKLA a license to use, their respective rights, title and interest in the Trademarks used by the Subsidiaries or by KILICO (in connection with the KILICO Transferred Business) identified in Schedule 3.8(a) hereto.  

(xxxxx)

Subject to Section 7.6, Seller shall, and Parent and Seller shall cause their respective Affiliates to, assign to FKLA prior to the Closing, the contracts specified on Schedule 5.10(f) hereto, to the extent such contracts are assignable, and to use commercially reasonable efforts to obtain all approvals, consents or waivers necessary to assign such contracts to FKLA.  With respect to any such contract for which consent is not obtained on or prior to the Closing Date, Parent and Seller, instead of obtaining any approval, consent or waiver necessary to sell, assign, transfer, or otherwise convey to FKLA such contracts, shall enter into any arrangements and take any actions reasonably requested by FKLA designed to provide FKLA with the full and exclusive benefits of such contracts; provided, that FKLA shall have agreed with KILICO to perform all obligations relating to such contract accruing on and after the Closing Date.  From and after the Closing Date, KILICO shall take any and all lawful actions requested by FKLA with respect to any contract or portion thereof not assigned, transferred or otherwise conveyed to FKLA as contemplated hereunder including, without limitation, the giving or withholding of any waiver, consent or approval with respect thereto, and shall keep FKLA informed of all notices and other communications received by it with respect to such contracts.

(yyyyy)

Without limiting the generality of the foregoing, the Purchaser shall, and from and after the Closing the Purchaser shall cause the Subsidiaries to, reasonably cooperate in the defense or prosecution of any claim, litigation, action, proceeding or investigation which is an Excluded Item, which cooperation shall include the retention and provision of copies of or access to relevant portions of Books and Records and other information which is reasonably relevant to any defense or prosecution of any such claims, and making employees and officers reasonably available to provide additional information, explanation and testimony regarding any such defense or prosecution.

Employees and Agents.  The Purchaser shall employ as of the Closing Date (the “Hire Date”) each employee of the Seller or any of the Subsidiaries who is actively employed (excluding employees who are absent on long- or short-term disability leaves) on the Closing Date (collectively, the “Affected Employees”), on terms that are comparable in the aggregate (including with respect to position, duties, responsibilities, compensation, incentives and location) to those provided on the date hereof to similarly-situated employees of the Purchaser.  Affected Employees shall be considered “at will” employees of the Purchaser, and the Purchaser shall have no obligation to retain Affected Employees for any specific period of time following the Hire Date.  If an employee of the Seller is not actively e mployed on the Closing Date because he/she is receiving short term disability benefits from the Seller, such employee, while receiving short-term disability benefits, shall be considered an employee of Seller or one of its Affiliates for purposes of continued participation in the Benefit Plans (including Kemper Benefit Plans assumed by Purchaser), and Seller will reimburse Purchaser for the premium cost of such employee’s participation in Kemper Benefit Plans during such period.   The Purchaser shall thereafter employ any such employee on the terms described above effective on the date within 180 days following the Closing Date that the individual (i) is released by his or her physician to return to work; (ii) promptly submits a request to return to work for the Purchaser; and (iii) is considered fit to return to work under the short-term disability policies and practices maintained by the Purchaser for similarly-situated employees.  Immediately following the signing of this Agreemen t, the Seller shall provide the Purchaser with such information as the Purchaser reasonably requires to begin the process of transferring the Affected Employees to the Purchaser, including but not limited to, service-related information and payroll data.  The Seller shall facilitate the transfer of employment, benefit and payroll-related information to the Purchaser from any service providers that currently hold such information, maintain contract relationships with such service providers through the Closing Date and assist the Purchaser in contacting the service providers, as needed.  The parties mutually acknowledge that the purpose of such information transfer is to ensure a smooth transition of employment for the Affected Employees, that such information transfer needs to be expedited as quickly as possible and that both parties shall use good faith in dealing with each other for such purpose.

Employee Benefits.  

(zzzzz)

As of the Closing Date, Purchaser or one or more subsidiaries shall assume all Benefit Plans that are maintained by the Seller or one or more Subsidiaries set forth on Schedule 5.12(a) (the “Kemper Benefit Plans”) provided that, prior to the Closing Date, the Seller shall cause the Subsidiaries to make all contributions and pay all premiums which are accrued and due prior to the Closing Date under the terms of the Kemper Benefit Plans.  During the “Special Coverage Period” (as defined below), Seller shall continue to provide benefits under the Benefit Plans that provide welfare benefits in which Affected Employees are participating on the Closing Date and which are not Kemper Benefit Plans (the “Zurich Welfare Plans”).  With respect to the Zurich Welfare Plans that are fully insured by third-party insurers, Purchaser shall reimburse the Seller for any employer-paid premiums towards the cost of coverage for Affected Employees during the Special Coverage Period.  With respect to Zurich Welfare Plans that are self-insured, Purchaser shall reimburse Seller for a pro-rata portion (based on the number of Affected Employees participating) of administrative fees paid by Seller or its Affiliates with respect to such plans, and for all amounts actually paid by Seller or its Affiliates with respect to claims arising with respect to Affected Employees during the Special Coverage Period.  Affected Employees shall be required to continue to make employee contributions towards the cost of coverage under the Zurich Welfare Plans as in effect on the Closing Date.  Purchaser shall remit to Seller amounts owed as a result of Affected Employees’ participation in the Zurich Welfare Plans promptly upon receipt of an invoice therefor from Seller or any of its Affiliates.  Purchaser and S eller shall cooperate in good faith to resolve any disputes over amounts required to be remitted to Seller or its Affiliates under this paragraph.  Participation by Affected Employees in the Zurich Welfare Plans shall terminate as of the end of the Special Coverage Period.  Former employees of Seller and its Affiliates who are receiving post-retirement medical and/or life insurance benefits under Zurich Welfare Plans on the Closing Date, and Affected Employees who retire on or after the Closing Date and who, upon such retirement, satisfy the eligibility requirements to receive post-retirement medical and life insurance benefits under the terms of the Zurich Welfare Plans (collectively, “Kemper Retirees”), shall continue to participate in such Zurich Welfare Plans until December 31, 2003, and Purchaser shall reimburse Seller for the cost of such participation and benefits in the same manner as that described above with respect to Affected Employees.  “Special Coverage P eriod” shall mean the period beginning on the date Affected Employees become employed by the Purchaser and ending on the earlier of:  (i) December 31, 2003; and (ii) the end of the last coverage period for which the Affected Employee makes the required employee contribution.  

As of January 1, 2004, Purchaser shall provide Affected Employees who are actively employed by the Purchaser with benefit programs and arrangements which are made available to similarly situated employees of the Purchaser (the “Purchaser Benefit Plans”).  With respect to the Purchaser Benefit Plans, the Purchaser shall (i) provide that each Affected Employee shall receive full credit for all service with the Seller or any of the Subsidiaries to the extent that such service is counted under the Seller Benefit Plans, including, without limitation, recognition of service for eligibility, vesting and, to the extent not duplicative of benefits received under any Purchaser Benefit Plan, the amount and accrual of benefits, except that no credit shall be given for benefit accruals that would require any contribution to or benefits under any or all of the Purchaser’s defined benefits pension plans for periods prior to the Closing Date, and (ii) waive, or cause its insurance carriers to waive, all limitations as to pre-existing and at-work conditions, if any, with respect to participation and coverage requirements applicable to the Affected Employees (to the extent such pre-existing or at-work conditions did not apply to the Affected Employees under the Benefit Plans in which such Affected Employees participated immediately prior to the Closing Date) under any Purchaser Benefit Plan providing medical, dental, pharmaceutical and/or vision benefits to Affected Employees.  Further as of January 1, 2004, Purchaser shall allow Kemper Retirees to enroll in Purchaser-sponsored plans providing post-retirement welfare benefits to its former employees.  Purchaser reserves the right to amend the terms and conditions of Kemper Retirees’ participation in its post-retirement welfare benefit plans, including the right to terminate the plans, at any time.

(aaaaaa)

Effective as of the Closing Date, the Affected Employees shall be considered terminated participants in accordance with the terms of the Zurich Savings Plan (the “Seller’s 401(k) Plan”).  The Affected Employees shall be 100% vested in their individual account balances under the Seller’s 401(k) Plan as of the Closing Date.  As soon as administratively practicable following the Closing Date, the Seller shall advise the Affected Employees who participate in the Seller’s 401(k) Plan of their right to elect to receive a distribution of their individual account balances from the Seller’s 401(k) Plan.  To the extent permitted by Applicable Law, the Seller and the Purchaser agree that such amounts so distributed may be transferred by the Affected Employees to a 401(k) plan maintained by the Purchaser in a direct rollover; < U>provided, however, that the Seller’s 401(k) Plan shall not be required to permit distributions or transfers by such Affected Employees to the extent such distributions would adversely affect the tax-qualified status of the Seller’s 401(k) Plan.  Seller shall use its best efforts to coordinate the distribution of Affected Employees’ balances from the Seller’s 401(k) Plan with the administrator of the Bank One Corporation Savings and Investment Plan (“Purchaser’s 401(k) Plan”) so as to assist in the rollover process.

(bbbbbb)

The Purchaser agrees to provide the Affected Employees with any notice required under the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”) in connection with any “qualifying event” occurring with respect to the Welfare Plans listed on Schedule 5.12(a) after the Special Coverage Period.  The Seller shall retain liability and administrative responsibility for providing any COBRA coverage (including the provision of COBRA notices) in connection with any qualifying event occurring with respect to Affected Employees and their “qualified beneficiaries” participating  in the Zurich Welfare Plans prior to end of the Special Coverage Period, provided that:  (i) Seller receives timely notice of the occurrence of any such qualifying event; (ii) such COBRA coverage shall be made available by Seller until December 31, 2003, and Purchaser shall be responsible for providing such COBRA coverage to Affected Employee and/or their qualified beneficiaries beginning on and after January 1, 2004; and (iii) Purchaser shall reimburse Seller for costs associated with providing such COBRA coverage on the same reimbursement basis set forth in paragraph 5.12(a) to the extent that such amounts owed to the Seller or its Affiliates exceed the COBRA premiums paid to Seller or its Affiliates by Affected Employees and/or their qualified beneficiaries.  The Seller shall retain liability and administrative responsibility for providing continued coverage to those individuals already participating in the Benefit Plans under COBRA immediately prior to the Closing Date.

(cccccc)

Except as otherwise provided in subsection (e) below, the Purchaser shall discharge all liabilities and claims with respect to the Affected Employees arising on or after the Closing Date, including, but not limited to, any claims arising under any of the Kemper Benefit Plans, and/or Purchaser Benefit Plans, severance and any workers’ compensation claims.  The Seller shall discharge all liabilities and claims with respect to the Affected Employees arising prior to the Closing Date, including, but not limited to, any claims arising under any of the Benefit Plans (excluding the Kemper Benefit Plans), severance and any workers’ compensation claims; and the Purchaser shall not assume nor shall the Subsidiaries be responsible for any liability with respect to such liabilities and claims.  For purposes of this Section 5.12(d) and Section 5.12(a), claims shall be deemed to have arisen (i) with respect to all death or dismemberment claims, on the actual date of death or dismemberment; (ii) with respect to all hospital, medical, drug or dental claims, on the date the service or supply was purchased or received by the claimant; (iii) with respect to workers’ compensation claims, (A) which are single accident specific on the date of the occurrence, and (B) which are not single accident specific on the date a claim for benefits is made; and (iv) with respect to disability claims, the date as of which the individual ceased active employment as a result of an illness or injury.

(dddddd)

Any amounts payable as a “change in control” bonus (solely as a result of the transactions contemplated hereunder) and any retention bonus or success fees payable under the Key Executive Retention Plan or the Success Incentive Plan shall remain a liability of the Seller.  The Seller shall also retain any liabilities and obligations to Affected Employees under the Key Executive Retention Plan with respect to the Zurich Financial Services Group Long-Term Performance Share Plan for Zurich Life (also referred to as the Zurich Life Long-Term Performance Share Plan) and the Zurich Life Short-Term Incentive Plan.  The Purchaser shall not assume the sponsorship of or any liabilities under these plans.

(eeeeee)

The Purchaser shall honor all severance pay liabilities under the Key Executive Retention Plan.

(ffffff)

With respect to any Affected Employee (other than an Affected Employee who is eligible to receive severance pay under the Key Executive Retention Plan) whose position is eliminated by the Purchaser on or after the Closing Date and before January 1, 2004, the Purchaser will provide severance pay and outplacement services equal to the amount of severance pay and outplacement services that Affected Employees would have received in accordance with the Seller’s severance practices, as described in Schedule 3.18(a).  In addition, to the extent that an Affected Employee whose job is eliminated on or prior to December 31, 2003 is participating in Zurich Welfare Plans, the Purchaser shall continue to reimburse the Seller for the cost of such coverage, in a manner consistent with that set forth in paragraph 5.12(a), for the period beginning on the Affected Emp loyee’s job elimination date and ending on the earlier of:  (i) the end of the last coverage period for which the Affected Employee pays his/her portion of the required premiums; and (ii) December 31, 2003.  Affected Employees shall not be eligible to participate in the Bank One Corporation Pay Continuation Plan for job elimination dates occurring during the period beginning on the Closing Date and ending on December 31, 2003.

(gggggg)

Beginning January 1, 2004, Affected Employees whose positions are eliminated by the Purchaser shall be eligible to receive benefits under the Bank One Corporation Pay Continuation Plan to the extent they satisfy the eligibility requirements for such plan (being given full credit for service with the Seller and any of the Subsidiaries as provided in Section 5.12(a) to the extent such service would be credited under Seller’s benefit plans and policies), which shall be applied to Affected Employees on the same basis as they are applied to Purchaser’s similarly situated employees.

(hhhhhh)

The Purchaser shall honor and pay when due all supplemental benefits accrued for but not yet paid to Affected Employees as of the Closing under the Federal Kemper Life Assurance Company Supplemental Profit Sharing Plan (the “Supplemental Plan”).  Subject to the preceding sentence and the terms of the Supplemental Plan, the Purchaser shall have no obligation to allow for continued accrual of benefits under the Supplemental Plan for any specific period of time after the Closing Date.

(iiiiii)

Effective as of the Closing Date, the Seller shall assign and transfer all of its rights in and to, and all of its obligations and duties under, the Kemper Corporation Employees’ 501(c)(9) Benefit Trust, dated as of January 1, 1990 and as thereafter amended (the “VEBA Trust”), to the Purchaser, and Purchaser agrees to and shall accept such assignment and assumption of all of the Seller’s rights in and to, and all of the Seller’s obligations and duties under, the VEBA Trust.  As soon as reasonably practicable after the date hereof, the Seller and the Purchaser shall use all reasonable efforts to obtain any necessary consents of third parties, including the trustee of the VEBA Trust, required to effect the assignment and transfer of the VEBA Trust provided for herein.  

(jjjjjj)

The Purchaser shall comply with all applicable requirements of the equal opportunity and affirmative action clauses set forth in Executive Order 11246 (applicable to subcontractors), as amended, in the regulations of the Department of Labor implementing the Vietnam Era Veterans Readjustment Act of 1974, and in the Rehabilitation Act of 1973, as amended, which, together with the implementing rules and regulations prescribed by the Secretary of Labor, are incorporated by reference.  Affected Employees shall be treated in accordance with Purchaser’s policy of maintaining a business environment free of all forms of discrimination, including sexual harassment, and Purchaser shall not discriminate against any Affected Employees because of age, race, color, religion, sex, gender identity, national origin, ancestry, disability, handicap or veteran  status or a ny other basis prohibited by applicable federal, state or local law.

Windy Point Sublease; Florida Lease and New York Lease.

(kkkkkk)

ZAIC is currently the tenant under that certain Office Lease dated May 6, 2000 (as amended by that certain First Amendment to Office Lease, dated as of July 14, 2000, that certain Second Amendment to Office Lease, dated as of August 4, 2000, that certain Third Amendment to Office Lease, dated as of January 25, 2001, and that certain Fourth Amendment dated as of July 10, 2001, collectively, the “Windy Point Lease”) with Windy Point as the landlord (the “Windy Point Lease Landlord”).  Subject to receipt of a satisfactory consent to the Windy Point Sublease, on the Closing Date, ZAIC shall sublease a portion of the Premises (as defined in the Windy Point Lease) to the Purchaser’s Designee and the Purchaser’s Designee shall sublease such Premises from ZAIC pursuant to the terms of a sublease agreement substantially in the form of Exhibit M hereto (the “Windy Point Sublease”).  On or prior to the Closing, the Seller shall obtain a consent agreement, in the form agreed to by Seller and Purchaser as of the date hereof, from the Windy Point Lease Landlord which contains approval of the Windy Point Sublease and an acknowledgement that Purchaser’s Designee will be acquired as of the Closing Date by the Purchaser (the “Windy Point Sublease Consent”).  On or prior to the Closing, the Seller shall use commercially reasonable efforts to obtain from the Windy Point Lease Landlord an estoppel certificate stating:  (a) that the Windy Point Lease is in full force and effect; (b) that neither ZAIC nor the Windy Lease Landlord is in default under the Windy Point Lease; (c) that the Windy Point Lease is unmodified (or if there have been modifications, identifying the modifications); and (d) the annual and monthly rental rates and the date to which rent has been paid (the “Wi ndy Point Estoppel Certificate”).  The Seller and the Purchaser shall cooperate in connection with obtaining the Windy Point Sublease Consent to consummate the Windy Point Sublease and upon reasonable advance notice, the Purchaser agrees to provide the Windy Point Landlord with all information and documentation reasonably required to obtain the Windy Point Sublease Consent and to effectuate the Windy Point Sublease including, without limitation, any materials, information and documentation necessary to satisfy the standards set forth in Section 14(B) of the Windy Point Lease or any other items reasonably requested by the Windy Point Lease Landlord.  All materials, information and documentation to be provided by the Purchaser pursuant to the prior sentence shall be promptly provided upon written request from time to time of the Seller or the Windy Point Lease Landlord (but shall in no event be provided by Purchaser later than three (3) Business Days after such request is made by the Seller or the Windy Point Lease Landlord, as applicable), the Purchaser acknowledging that the prompt delivery of such items is a material requirement in connection with the successful procurement of the Windy Point Sublease Consent.  The Seller and the Parent represent and warrant to the Purchaser and the Purchaser represents and warrants to the Seller and the Parent, that neither party knows of any brokers or other persons or entities who have been instrumental in arranging the sublease transaction contemplated by this Section 5.13(a).  

(llllll)

PMG Securities Corporation (“PMG”) is currently the tenant under that certain Office Lease Agreement dated February 27, 1996 (as amended by that certain First Amendment to Office Lease Agreement, dated as August 28, 1997, that certain Second Amendment to Office Lease Agreement, dated July 14, 2000, that certain Third Amendment to Office Lease, dated October 31, 2000 and that certain Fourth Amendment to Lease dated July 24, 2002, collectively, the “Florida Lease”) with Clear E, LLC and Clear T, LLC (successors in interest to UNUM Life Insurance Company of America) as the landlord (the “Florida Lease Landlord”).  It is the intention of the Seller and the Purchaser that effective as of the Closing Date, the Purchaser shall acquire all of the Seller’s outstanding Shares of PMG.  Pursuant to the terms of th e Florida Lease, such a conveyance could be deemed to be an assignment of PMG’s leasehold interest in the Florida Lease, which requires the prior written consent of the Florida Lease Landlord and a waiver of the Florida Lease Landlord’s right of recapture of the Premises (as defined in the Florida Lease).  On or prior to the Closing, the Seller shall use commercially reasonable efforts to obtain from the Florida Lease Landlord: (i)  a consent agreement which contains a written consent to the assignment of PMG’s leasehold interest in the Florida Lease and a waiver of its right of recapture of the Premises (the “Florida Consent Agreement”) and (ii) an estoppel certificate stating:  (a) that the Florida Lease is in full force and effect; (b) neither PMG nor the Florida Lease Landlord is in default under the Florida Lease; (c) that the Florida Lease is unmodified (or if there have been modifications, identifying the modifications); and (d) the annual and monthly ren tal rates and the date to which rent has been paid (the “Florida Estoppel Certificate”).  For the purposes of the immediately preceding sentence, “commercially reasonable efforts” shall mean sending a mutually acceptable draft consent agreement and a mutually acceptable draft estoppel certificate to the Florida Lease Landlord and diligently seeking to obtain an executed consent and an executed estoppel certificate.  To the extent any documentation is reasonably required to be delivered to the Florida Lease Landlord to effectuate the assignment contemplated herein, the Seller and the Purchaser shall cooperate and agree to provide such documentation to the Florida Lease Landlord.  In no event shall the receipt of the Florida Consent Agreement or the Florida Estoppel Certificate be deemed a condition to the Closing.

(mmmmmm)

PMG Marketing, Inc. (“PMG Marketing”) is currently the tenant under that certain Standard Form of Office Lease dated April 25, 2002 (the “New York Lease”) with 53rd Street Associates, L.L.C., as the landlord (the “New York Lease Landlord”).  It is the intention of the Seller and the Purchaser that effective as of the Closing Date, the Purchaser shall acquire all of the Seller’s outstanding Shares of PMG Marketing.  Pursuant to the terms of the New York Lease, such a conveyance could be deemed to be an assignment of PMG Marketing’s leasehold interest in the New York Lease, which requires the prior written consent of the New York Lease Landlord.  On or prior to the Closing, the Seller shall use commercially reasonable efforts to obtain from the New York Lease Landlord: (i) a consent agreement w hich contains a written consent to the assignment of PMG Marketing’s leasehold interest in the New York Lease (the “New York Consent Agreement”) and (ii) an estoppel certificate stating:  (a) that the New York Lease is in full force and effect; (b) neither PMG Marketing nor the New York Lease Landlord is in default under the New York Lease; (c) that the New York Lease is unmodified (or if there have been modifications, identifying the modifications); and (d) the annual and monthly rental rates and the date to which rent has been paid (the “New York Estoppel Certificate”).  For the purposes of the immediately preceding sentence, “commercially reasonable efforts” shall mean sending a mutually acceptable draft consent agreement and mutually acceptable draft estoppel certificate to the New York Lease Landlord and diligently seeking to obtain an executed consent and an executed estoppel certificate.  To the extent any documentation is reasonably requ ired to be delivered to the New York Lease Landlord to effectuate the assignment contemplated herein, the Seller and the Purchaser shall cooperate and agree to provide such documentation to the New York Lease Landlord.  In no event shall the receipt of the New York Consent Agreement or the New York Estoppel Certificate be deemed a condition to the Closing.  In the event that any transfer taxes are payable due to the assignment of the New York Lease, the Purchaser and the Seller shall each pay 50% of such amount to the appropriate authority at the Closing and both parties shall complete and execute any necessary transfer tax forms.

Reinsurance and Administration Agreement.  KILICO and the Purchaser’s Designee shall enter into the Coinsurance Agreement on the date of this Agreement.  The Coinsurance Agreement shall be conditioned on and delivered at the Closing and shall become effective on the Closing Date.

Transition Services Agreement.  The parties thereto shall enter into the Transition Services Agreement on the date of this Agreement.  The Transition Services Agreement shall be conditioned on and delivered at the Closing and shall become effective on the Closing Date.

Intentionally Omitted.

Non-Competition; Non-Solicitation of Employees.

(nnnnnn)

For a period of three (3) years following the Closing Date, neither the Parent nor the Seller shall, and shall not permit any of their Affiliates to, directly or indirectly (including without limitation, by sale or other disclosure of information to third parties), contact any of the owners of or insureds under the Insurance Contracts as of the Closing Date for the purpose of terminating, modifying, replacing or surrendering any of the Insurance Contracts; provided, however, such restriction is not intended to restrict (i) Producers from contacting owners of or insureds under Insurance Contracts without the assistance or at the direction of the Parent, the Seller or their Affiliates; (ii) any general marketing activities which do not specifically target owners or insureds under the Insurance Contracts as of the Closing Date for the purpose of inducing o r encouraging such Persons to terminate or surrender the Insurance Contracts; (iii) contacts by Zurich Benefit Finance LLC or its Affiliates solely with respect to supporting, administering, servicing, managing, modifying, or soliciting additional premiums under, but not terminating, replacing or surrendering, any “BOLI” or “COLI” policy issued by KILICO that is in force on the Closing Date; or (iv) activities otherwise permitted pursuant to subsection (e)(xiii) of this Section 5.17.

(oooooo)

The parties agree that the Purchaser is acquiring all Trade Secrets of the Subsidiaries and, with respect to and used in the KILICO Transferred Business, KILICO.  Accordingly, for a period of five (5) years following the Closing Date, neither the Parent nor the Seller shall, and shall not permit any of their Affiliates to, divulge or otherwise disclose to any third party any such Trade Secrets including, without limitation, current or former customer lists or lists of specifically identified, targeted prospective customers in existence as of the date hereof and other identifying information of such customers, for any purpose whatsoever, other than (i) as required by Applicable Law, (ii) to the extent such Trade Secrets or other confidential information relate to the Excluded Items or to the business of KILICO that is not a part of the KILICO Transferred Bus iness or (iii) to the extent necessary to comply with the terms of this Agreement or the Transaction Agreements.

(pppppp)

For a period of three (3) years following the Closing Date, neither the Parent nor the Seller shall, and shall not permit any of their Affiliates to, directly or indirectly (including, without limitation, by sale or other disclosure of information to third parties), undertake any marketing efforts specifically directed at any Persons who, as of the date hereof or as of the Closing Date, are agents, Producers, sales representatives, Kemper Broker/Dealers or registered representatives of the Subsidiaries or KILICO (to the extent any such Person’s services are related to the KILICO Transferred Business) who are associated with the placement or sale of any Insurance Contract as of the date hereof, for the purpose of (i) termination, modification (other than contacts by Zurich Benefit Finance LLC or its Affiliates for the purpose of supporting, administering, servici ng, managing, discussing modification of or soliciting additional premiums under any “BOLI” or “COLI” policy issued by KILICO and in force on the Closing Date), replacement or surrender of any Insurance Contract, or (ii) competing, directly or indirectly, with the Subsidiaries or KILICO in the business engaged by the Subsidiaries or conducted in connection with the KILICO Transferred Business as of the date hereof.

(qqqqqq)

Without the prior written consent of the Purchaser, for a period ending on the earlier of (i) the two (2) year anniversary of the Closing Date and (ii) the termination of such Person’s employment with the Subsidiaries, the Purchaser or any of their respective Affiliates (the “Restricted Period”), neither the Parent nor the Seller shall, and shall not permit any of their Affiliates to, solicit, offer employment to, employ or retain the services of any Affected Employees; provided, that the foregoing provision shall not prevent the Parent, the Seller or any of their respective Affiliates from employing or retaining during the Restricted Period any Affected Employee as a result of:  (i) general newspaper advertisements or other general circulation materials not specifically directed to Affected Employees; (ii) third party recr uiter contacts, provided such recruiters are not directed to contact the Affected Employees; or (iii) any Affected Employee contacting the Parent, the Seller or any of their respective Affiliates, as the case may be, on his or her own initiative without any prior direct or indirect solicitation by or encouragement of the Parent, the Seller or their respective Affiliates.

(rrrrrr)

For a period of three (3) years following the Closing Date, the Parent, Zurich Financial Services, the Seller and KILICO shall not, and shall not permit any of their Affiliates to, engage any place in the United States, either directly or indirectly, in (x) underwriting or issuing any insurance policies commonly known as “BOLI” or “COLI”, or (y) the sale, marketing or distribution of any “403(b)” or direct marketed term life insurance products (the “Restricted Business”).

The restrictions contained in this Section 5.17(e) shall not restrict or deemed to be breached as a result of:

(i)

the wholesaling or brokerage, asset management, stable-value-protection, life reinsurance, marketing, policy or plan administration, product development or similar operations of Zurich Benefit Finance LLC or any of its Affiliates or of Zurich Insurance Company, Bermuda Branch;

(ii)

the business conducted through the producers of Farmers Group Inc., Farmers Insurance Exchange, Fire Insurance Exchange or Truck Insurance Exchange as of the date hereof;

(iii)

the direct marketing of term life insurance as currently conducted by Universal Underwriters Group;

(iv)

any reinsurance business of Zurich Financial Services or its Affiliates relating to any Restricted Business;

(v)

sales or marketing efforts related to the Restricted Business to customers of the Parent, Zurich Financial Services, Farmers and its agents, KILICO (solely with respect to business or operations not included in the KILICO Transferred Business) or their respective Affiliates (other than Zurich Small Business);

(vi)

the acquisition (whether by merger, consolidation or otherwise) of an entity that is not principally engaged in a Restricted Business as long as that portion of the business of the acquired entity constituting a Restricted Business is, within six months of its acquisition, offered to be sold to the Purchaser or one of its designated Affiliates for fair market value and on such other terms as the parties may agree (it being agreed that if the parties fail to agree on such price and terms within 30 days after such offer is made, Zurich Financial Services and its Affiliates shall be free to own, operate or dispose of such business);

(vii)

endorsing, distributing, administering or marketing insurance products issued by insurance companies other than Zurich Financial Services or one of its Affiliates;

(viii)

any business or operations conducted on the date hereof by Zurich Financial Services, Farmers, the Parent, their respective Affiliates (other than the Subsidiaries), Farmers Insurance Exchange, Fire Insurance Exchange or Truck Insurance Exchange;

(ix)

any Person that is not currently an Affiliate of Zurich Financial Services, the Parent, the Seller, KILICO or their respective Affiliates, who acquires an interest in Zurich Financial Services, the Parent, the Seller, KILICO or their respective Affiliates subsequent to the Closing Date;

(x)

the Parent, Zurich Financial Services, the Seller, KILICO or any of their respective Affiliates from acquiring an interest or investing in an entity that engages in a Restricted Business, provided, that such interest or investment does not result in the Parent, Zurich Financial Services, the Seller, KILICO or their respective Affiliates having control over the operation or management of such entity;

(xi)

any of Zurich Financial Services, the Parent, the Seller, KILICO or their respective Affiliates from managing investment funds which make investments in the ordinary course of business in entities which engage in the Restricted Business;

(xii)

Zurich Financial Services from engaging or consummating with any Person which may be engaged in a Restricted Business a merger, consolidation, business combination, liquidation, dissolution, reorganization or share exchange, a sale of all or substantially all of its assets, or sale, transfer or other disposition or other change of ownership, directly or indirectly of more than 50% of its common stock;

(xiii)

the marketing and issuance by KILICO or Zurich Benefit Finance LLC or its Affiliates of any “BOLI” or “COLI” policies issued within one year after the Closing Date by KILICO to any Person with whom KILICO or Zurich Benefit Finance LLC or its Affiliates had been in negotiation or active discussion prior to the Closing Date with respect to the issuance of such policies (the “Pipeline Policies”); or

(xiv)

the Parent, the Seller, KILICO and their respective Affiliates from engaging in any transaction or activity contemplated by this Agreement or the Transaction Agreements.

provided, however, that for a period of three (3) years following the Closing Date, Parent, Zurich Financial Services, the Seller and KILICO shall not, and Zurich Financial Services shall cause its Affiliates not to, underwrite or market any “BOLI” or “COLI” policies to any Persons who are customers of KILICO with respect to “BOLI” or “COLI” business as of the date hereof or as of the Closing Date, other than any Post-Closing KILICO Policies and the Pipeline Policies; provided further that nothing in this Section 5.17(e) shall affect the obligations of Parent and the Seller pursuant to Sections 5.17(a), 5.17(b), 5.17(c) or 5.17(d) hereof.

KILICO Cooperation.  The Purchaser will not, and will direct its Affiliates not to, interfere in the operations or management by KILICO of the business which is not part of the KILICO Transferred Business, including refraining from taking any actions or directing intermediaries to take any actions designed to target and to cause policyholders or insureds under any policies issued by KILICO which are not part of the KILICO Transferred Business to terminate, modify, replace, surrender or strip assets from such policies for any reason whatsoever.  The Purchaser will consider in good faith taking, at KILICO’s sole expense, such actions as are reasonably requested by KILICO which are designed to reduce KILICO’s liabilities, obligations or risks under the policies that are not part of the KILICO Transferred Business, provided that such acti ons do not interfere with or increase the risks or liabilities associated with the KILICO Transferred Business or other businesses of the Subsidiary or the Purchaser.

KILICO Distributions.  For a period of four (4) years following the date hereof, KILICO shall not, and Parent and Seller shall cause KILICO not to, pay any dividend or to make any other distribution of capital or surplus, or redeem or repurchase any of its capital stock, or to enter into any loan to or investment in any assets or securities of any Affiliate of KILICO, other than loans and investments entered into on arm’s length terms and any reinsurance transactions involving substantial risk transfer entered into on arm’s length terms.  For a period of two (2) years following such four (4) year period KILICO shall not, and Parent and Seller shall cause KILICO not to, take any of the foregoing actions without the Purchaser’s prior written consent, which consent shall not be unreasonably withheld.

Post-Closing KILICO Policies.  Subject to the last sentence of this Section 5.20, commencing on the Closing Date and for a period of twelve (12) months thereafter, or such longer time period as KILICO may agree in its sole discretion, but only as Purchaser may request in writing, KILICO shall continue to issue insurance policies and annuity contracts of the same type as those included in the KILICO Transferred Business on the Closing Date (the “Post-Closing KILICO Policies”); provided, that KILICO shall not be required to issue any Post-Closing KILICO Policies for more than sixty (60) days after the Purchaser’s Designee has obtained insurance department approval of its own forms corresponding to the Post-Closing KILICO Policies in any state.  Any Post-Closing KILICO Policy issued by KILICO pursuant to this Section 5 .20 will be reinsured and administered by Purchaser’s Designee pursuant to the Coinsurance Agreement.  If and when requested in writing by the Purchaser from time to time within twelve (12) months, or such longer time period as KILICO may agree in its sole discretion after the Closing Date, KILICO will cease issuing the Post-Closing KILICO Policies specified by the Purchaser, and KILICO will use its commercially reasonable efforts (at the sole cost of the Purchaser) to assist the Insurance Subsidiaries to communicate to KILICO’s Producers what alternative insurance products are available at that time from one or more of the Insurance Subsidiaries.  The Purchaser shall indemnify and hold harmless KILICO from any liability resulting from any act or omission by KILICO pursuant to any such request.  Except to the extent required by Applicable Law, KILICO shall not withdraw or terminate any form of Insurance Contract (to the extent related to the KILICO Transferred Business) or Post-Closi ng KILICO Policies on file with any Government Entity without the Purchaser’s prior written consent, which consent shall not be unreasonably withheld.  As consideration for KILICO’s agreement to issue the Post-Closing KILICO Policies, the Purchaser’s Designee shall pay to KILICO a ceding commission specified in the Coinsurance Agreement.  Nothing in this Section 5.20 shall contravene, modify or limit any of the covenants contained in Section 5.18.

Additional Variable Authority and Product Approvals for FKLA.  After the date hereof and prior to Closing, the Parent and the Seller shall, at the Purchaser’s cost, use their commercially reasonable efforts to (i) amend FKLA’s certificates of authority in the fifty States and the District of Columbia to obtain authority for FKLA to issue variable insurance products in those jurisdictions where FKLA does not already have such authority, and (ii) as may be requested in writing by the Purchaser from time to time, make filings with and obtain approval from applicable Government Entities on behalf of FKLA of forms and rates for variable insurance products.

Resources.  The Purchaser shall continue to have, maintain or subcontract for sufficient expertise, trained personnel, resources, systems, controls and procedures (financial, legal accounting, administrative or otherwise) as may be necessary or appropriate to discharge their respective obligations under this Agreement and the Transaction Agreements.  Notwithstanding anything to the contrary contained in this Agreement, this covenant shall not terminate or expire until all KILICO Transferred Liabilities have been discharged or terminated in full.

Purchase Price; Purchaser Net Worth.  Bank One covenants and agrees to provide to the Purchaser, on or prior to the Closing Date, sufficient funds to pay the Purchase Price and all fees and expenses required to be paid by the Purchaser related to the transactions contemplated hereunder and under the Transaction Agreements.  Bank One covenants and agrees to maintain through the Closing Date shareholders’ equity of the Purchaser in an amount at least equal to $258,339,821.

Investment Guidelines.  The Purchaser shall deliver to the Seller, within 60 days after the date hereof, proposed investment guidelines (the “Investment Guidelines”) to be applicable from and after the Closing with respect to the investment assets to be delivered to the security trust (the “Trust”, and such assets, the “Trust Assets”) to be established under the terms of Section 9.4 of the Coinsurance Agreement.  The Investment Guidelines shall (i) represent prudent investment guidelines, within customary industry practice, for the nature of the risks being reinsured under the Coinsurance Agreement, (ii) establish targeted objectives with respect to duration of the relevant portfolio (consistent with the nature of the reinsured liabilities) and average credit quality, (iii) identify, generally, assets eligible for investment, which shall be dollar denominated, fixed income securities and collateral loan investments (notwithstanding this provision, as much as 10 percent of the Trust Assets may be foreign currency denominated, provided that the currency is swapped back into dollars), (iv) as respects fixed income securities, establish maximum limits with respect to concentration by issuer (including foreign issuers), credit quality (such limits to include not more than 40% of the fixed income securities portfolio in investments rated BBB+ or lower, provided further that not more than 10% of the fixed income securities portfolio will be in investments rated BB+ or lower and all below investment grade holdings will be rated no lower than BB- at time of purchase) and investment sector (such limits to include not more than 20% of the portfolio in CMBS/ABS securities of which no more than 5% of the portfolio may be rated lower than AA or be illiquid), (v) prohibit short selling and use of leverage, and (vi) as respects colla teral loans, establish maximum limits with respect to total portfolio investments in this category (such limit to be not more than 15% of the portfolio), concentration by issuer, underwriting standards and loan to value.  Further, such collateral loans may only be acquired at origination (i.e. no secondary transactions).  Further, to the extent the Trust Assets include collateral loans, the trust will be funded by additional investment assets in an amount in excess of the required trust balance, the Market Value of which additional investment assets shall be equal to (i) the Market Value of the collateral loans multiplied by (ii) the percentage that the Market Value of the collateral loans represents to the Market Value of the Trust Assets (e.g. if collateral loans represent 10% of the Market Value of Trust Assets, then the Trust must be funded with additional investment assets equal to 1% of Trust Assets).  The Purchaser shall provide the Seller a reasonable opportunity to discuss with the Pu rchaser the Investment Guidelines, it being understood that, subject to Section 8.8, the Investment Guidelines to be effective as of the Closing Date shall be established by the Purchaser.  After the Closing Date, Purchaser shall cause FKLA to provide KILICO with advanced notice of any changes in the Investment Guidelines proposed by FKLA, and shall provide KILICO an opportunity to meet and consult with FKLA on any proposed changes, provided that the Investment Guidelines to be effective after the Closing Date shall be established by FKLA.  In addition, after the Closing, Purchaser shall cause FKLA to establish investment guidelines for FKLA’s investments that shall represent prudent investment guidelines for the nature of the risks being insured by FKLA.  

Maintenance and Cooperation Concerning Certain Contracts.

(ssssss)

After the Closing Date, KILICO shall not without the Purchaser’s prior written consent, which consent shall not be unreasonably withheld, terminate or make any material amendment (if the impact of such amendment will be to reduce the revenue to KILICO thereunder) to any contract in effect as of the Closing Date pursuant to which KILICO receives revenue that would be “Separate Account Revenues” or “BOLI Revenues” as those terms are defined by the Coinsurance Agreement.

(b)

KILICO shall provide those consents or approvals, if any, as are required of it and that are within its power to provide in order to keep inforce upon the Closing, or to replace upon the Closing with substantially identical contracts, the contracts between KILICO and Investors Brokerage Services, Inc. (and any third parties thereto, if any) that are in effect as of the date hereof which would otherwise terminate upon the change of control of Investors Brokerage Services, Inc.

Supplements to Disclosure Schedules.  

(tttttt)

During the period prior to the Closing Date, the Seller will promptly advise the Purchaser in writing of (i) any lawsuit, claim, proceeding or investigation that has been or is threatened in writing to be, brought, asserted or commenced after the date hereof and before the Closing Date relating to the transactions contemplated hereby, (ii) any event or matter which becomes known to the Seller and would cause any representation or warranty contained in Article III to be untrue in any respect as of the Closing Date (or any date specified in any such representation and warranty, to the extent any such representation or warranty expressly relates to a specified date); (iii) any Litigation against any Subsidiary, with respect to the KILICO Transferred Business, KILICO, or to the Knowledge of Seller, FLA, that becomes pending after the date hereof and before the Closing Da te, (iv) any order, decrees or judgments by or with any Government Entity, which any Subsidiary, KILICO (with respect to the KILICO Transferred Business) or, to the Seller’s Knowledge, FLA is subject, which is entered after the date hereof and before the Closing Date; (v) any actions, suits, claims, arbitrations or legal, administrative or other proceedings or investigations by or before any Governmental Entity, which become pending or, to the Knowledge of Seller, threatened after the date hereof and before the Closing Date against any Subsidiary, KILICO (to the extent related to the KILICO Transferred Business) or, to the Knowledge of Seller, FLA, or their respective properties or assets; or (vi) any breach of a covenant of the Parent or the Seller, in each case, of which the Seller has Knowledge.

(uuuuuu)

During the period prior to the Closing Date, the Purchaser will promptly advise the Seller in writing of (i) any lawsuit, claim, proceeding or investigation that has been or is threatened in writing to be, brought, asserted or commenced relating to the transactions contemplated hereby, (ii) any event or matter which becomes known to the Purchaser and would cause any representation or warranty contained in Article IV to be untrue in any respect as of the Closing Date (or any date specified in any such representation and warranty, to the extent any such representation or warranty expressly relates to a specified date) or (iii) any material breach of a covenant of the Purchaser of which the Purchaser has Knowledge.

(vvvvvv)

The Seller and the Purchaser shall, no less than three days prior to the Closing Date, by written notice to the other party hereto, provide or supplement any schedule hereto to reflect any disclosure made pursuant to this Section 5.26; provided, that such supplemental schedules shall not be deemed to have been disclosed as of the date hereof, to constitute a part of, or an amendment or supplement to, such party’s disclosure schedules, or to cure any breach or inaccuracy of a representation or warranty, unless so agreed to in writing by the other party; and provided, further, that such supplemental or amended disclosures by such party shall not entitle the other party to refuse to consummate the transactions contemplated hereby unless such supplemental or amended disclosures, individually or in the aggregate, constitute a failure to satisfy t he conditions to Closing specified in Section 7.1 or Section 8.1 as applicable.

TAX MATTERS

Tax Returns.

(wwwwww)

The Parent shall prepare and file when due, or cause to be prepared and filed when due, (1) all Tax Returns required to be filed by or with respect to the Seller or any Subsidiary due on or prior to the Closing Date (taking into account all applicable extensions), and (2) all combined, consolidated or unitary Income Tax Returns under federal, state, local or foreign law that include the Seller or any Subsidiary for Tax years or periods ending on or prior to the Closing Date unless the only members of such combined, consolidated or unitary Income Tax Return are Subsidiaries.  The Purchaser shall prepare and file, or cause to be prepared and filed, all other Tax Returns required to be filed by or with respect to any of the Subsidiaries due after the Closing Date (taking into account all applicable extensions).  The Purchaser and the Parent and the Seller shal l reasonably cooperate with, and shall cause each of the Subsidiaries and their respective officers, employees and representatives to reasonably cooperate with, the Parent and the Seller or the Purchaser, as the case may be, with respect to the preparation and filing of all Tax Returns of the Subsidiaries, including all combined, consolidated or unitary Income Tax Returns under federal, state, local or foreign law that include any Subsidiary, for any Tax year or period ending on or prior to the Closing Date.  Upon reasonable written request, the Purchaser and the Parent shall share information with the other party, to the extent reasonably necessary to enable each party to satisfy its respective Tax filing requirements.  

(xxxxxx)

With respect to any Income Tax Return of any of the Subsidiaries which includes a Straddle Period, the Purchaser shall deliver to the Seller such Income Tax Return reasonably in advance of the filing of such Income Tax Return together with any schedules, statements and, to the extent requested by the Seller, supporting documentation, and shall make such revisions to such Income Tax Return as are reasonably requested by the Seller; provided, however, that in no event shall such requirement prevent the timely filing of such Income Tax Return.  Any dispute with respect to such revisions shall be resolved by the Independent Accounting Firm and the fees and disbursements of the Independent Accounting Firm shall be shared 50% by the Parent and 50% by the Purchaser.  The Purchaser shall prepare any Income Tax Return of any Subsidiary for a Straddle P eriod by applying elections and methods of accounting that are consistent with those made or used by the Subsidiary in prior taxable periods or such other elections and methods to which the Parent and the Seller consent, such consent not to be unreasonably withheld.  

(yyyyyy)

Without affecting the liability for Taxes described in Section 6.3, the Parent shall remit or caused to be remitted to the appropriate Taxing Authority when due all Income Taxes of any Subsidiary relating to a Pre-Closing Tax Period, including all Income Taxes relating to a Pre-Closing Tax Period due with respect to combined, consolidated or unitary Income Tax Returns filed under federal, state, local or foreign law that include any Subsidiary.  Without affecting the liability for Taxes described in Section 6.3, the Purchaser shall pay or cause the Subsidiaries to pay when due all Taxes relating to any Subsidiary relating to a Post-Closing Tax Period, including all Taxes relating to a Post-Closing Tax Period due with respect to combined, consolidated or unitary Income Tax Returns filed under federal, state, local or foreign law that include any Subsidiary.   ;

Section 338(h)(10) Election.

(zzzzzz)

The Parent and the Purchaser shall jointly make a Section 338(h)(10) Election in accordance with Applicable Law with respect to the Subsidiaries and under any comparable provision of state, local or foreign law for which a separate election is permissible.

(aaaaaaa)

In accordance with the procedure set forth below, a schedule (the “Allocation Schedule”) shall be prepared setting forth the determination of the “aggregate deemed sale price” and “adjusted grossed-up basis” (as defined under applicable Treasury Regulations under Section 338 of the Code) and allocation of such amounts among the Subsidiaries, the assets thereof, and other relevant items.  The Allocation Schedule shall be prepared in accordance with Section 338 of the Code and any applicable Treasury Regulations, and any comparable provisions of state, local or foreign law, as appropriate.  The Purchaser and the Parent shall cooperate in good faith in creating the Allocation Schedule.  The Purchaser shall create an initial draft of the Allocation Schedule as soon as practicable but in any event no later than thirty (3 0) days after the date of this Agreement.  The Parent shall have twenty-one (21) days from the date the Purchaser delivers the Allocation Schedule to the Parent to review the Allocation Schedule and provide written comments on such Allocation Schedule.  In the case of any written objection by the Parent with respect to the Allocation Schedule, such objection shall be in reasonable detail, and the Parent and the Purchaser agree to work in good faith for a period of seven (7) days to resolve their differences with respect to the Allocation Schedule.  If no agreement may be reached at the end of such period, such dispute shall be resolved by the Independent Accounting Firm with the Parent and the Purchaser acting in good faith to resolve such dispute as promptly as possible.  The fees and disbursements of the Independent Accounting Firm shall be shared 50% by the Parent and 50% by the Purchaser.

(bbbbbbb)

To the extent that the Purchase Price is adjusted by reason of any payment under this Agreement, (i) the “aggregate deemed sales price” and “adjusted grossed-up basis” as defined under applicable Treasury Regulations under Section 338 of the Code shall be adjusted as necessary to reflect such change, (ii) the procedure set forth in Section 6.2(b) shall be followed in redetermining the Allocation Schedule, and (iii) the Parent and the Purchaser will, to the extent required by Applicable Law, file amended Tax Returns consistent with such revised allocation.  Except as provided in the foregoing sentence, the Parent and the Purchaser (a) shall be bound by the Allocation Schedule, (b) shall prepare and file all Tax Returns, including any Section 338 Forms, in a manner consistent with the Allocation Schedule, and (c) shall take no position inconsis tent with the Allocation Schedule in any Tax Return, any Tax Proceeding before any Taxing Authority or otherwise.  In the event that the determination or allocations set forth in the Allocation Schedule is disputed by a Taxing Authority, the party receiving notice of such dispute shall promptly notify the other party hereto of such dispute.

(ccccccc)

The Purchaser shall be responsible for the preparation of all Section 338 Forms in accordance with (i) applicable Tax laws, (ii) the Allocation Schedule as defined in Section 6.2(b) and (iii) the terms of this Agreement and shall deliver such Section 338 Forms to the Parent for its review and comment.  The Parent shall cooperate in good faith with the Purchaser in the preparation and timely filing of all of the Section 338 Forms.  The Purchaser shall deliver to the Parent all Section 338 Forms for its review and comment within sixty (60) days after the Allocation Schedule is agreed to, but in no event later than sixty (60) days prior to the date any such Section 338 Form is required to be filed.  The Parent shall have fourteen (14) days from the date the Purchaser delivers any Section 338 Form to the Parent to review any such Section 338 Form and provi de reasonable written comments on such Section 338 Form.  In the case of any reasonable written objection by the Parent with respect to the Section 338 Form, such objection shall be in reasonable detail and the Parent and the Purchaser agree to work in good faith for a period of ten (10) days to resolve their differences with respect to the Section 338 Form.  If no agreement may be reached at the end of such period, such dispute shall be resolved by the Independent Accounting Firm with the Parent and the Purchaser acting in good faith to resolve such dispute as promptly as possible.  The fees and disbursements of the Independent Accounting Firm shall be shared 50% by the Parent and 50% by the Purchaser.  In no event shall any such dispute prevent the timely filing of the Section 338(h)(10) Election.  The Parent and the Purchaser shall each cause the Section 338 Forms to be duly executed by the proper authorized persons for executing such Section 338 Forms and shall duly and timely fi le, or have duly and timely filed, the Section 338 Forms in accordance with applicable Tax laws and the terms of this Agreement.

(ddddddd)

The Parent and the Purchaser shall, and shall cause each of the Subsidiaries to, as promptly as practicable, cooperate to take all actions necessary and appropriate (including filing such Tax Returns as may be required) to effect and preserve a timely Section 338(h)(10) Election in accordance with the applicable Treasury Regulations, and, if applicable, any comparable provisions of state, local or foreign tax law.  The Parent and the Purchaser shall report the sale and acquisition, respectively of the stock of the Subsidiaries pursuant to this Agreement consistent with the Section 338(h)(10) Election, and shall not take any position to the contrary in any Tax Return, any Tax Proceeding or otherwise unless required to do so by Applicable Law pursuant to a determination as defined in Section 1313 of the Code.  Notwithstanding the foregoing, in the event of a challenge by a Taxing Authority to any position taken by the parties with respect to the allocation of the “aggregate deemed sale price” and “adjusted grossed-up basis” in accordance with the Allocation Schedule, any party subject to such a challenge by a Taxing Authority shall have the right to settle or litigate such challenge to the allocation without the consent of, or liability to, the other party.  Neither the Parent nor the Purchaser shall, nor shall they permit any of their Affiliates, including, without limitation, any of the Subsidiaries, to take any action that would revoke or result in the revocation of any of the Section 338(h)(10) Elections or cause any of the Section 338(h)(10) Elections to be invalid or ineffective.  Notwithstanding anything to the contrary contained in this Agreement, if the Parent or the Purchaser breaches any provision of this Section 6.2 or otherwise takes any action that results in the revocation, invalidity or ineffectiveness of a Section 3 38(h)(10) Election, or fails to take any action which, if taken, would have prevented such revocation, invalidity or ineffectiveness, then the Parent or the Purchaser, as the case may be, shall indemnify the other for any costs, including any additional Tax liability arising as a result thereof.  Notwithstanding anything to the contrary contained in this Agreement, the provisions of this Section 6.2 shall survive the Closing Date indefinitely.

Indemnification for Taxes.

(eeeeeee)

The Parent and the Seller shall be liable for and pay, and agree to indemnify and hold harmless each Purchaser Indemnitee for (i) any Income Taxes imposed upon or assessed against any Subsidiary for any Pre-Closing Tax Period, including, without limitation, with respect to Straddle Periods, any Income Taxes imposed upon or assessed against any of the Subsidiaries that are allocable pursuant to Section 6.3(c) to the Pre-Closing Tax Period, (ii) with respect to the Section 338(h)(10) Election made pursuant to Section 6.2, any Taxes imposed upon or assessed against an “Old Target” as defined under Section 1.338-2(c)(17) of the Treasury Regulations with respect to the Section 338(h)(10) Election of the Subsidiaries directly attributable to the deemed sale of assets under Section 338 of the Code (or comparable state, local or foreign provisions) pursuant to the making of such Section 338(h)(10) Election; (iii) any Tax on actual or deemed distributions from the policyholders surplus account of any Subsidiary on or before the Closing Date, including any such Tax resulting from a Section 338(h)(10) Election; (iv) any Loss (as defined in Section 9.2(f) of this Agreement) in connection with or arising from any breach of any representations or warranties of the Parent, the Seller, or KILICO contained in Section 3.17 of this Agreement; and (v) any Loss of the Purchaser, its Affiliates or the Subsidiaries arising by reason of any breach by the Parent or the Seller of any representation or warranty contained in Section 3.31 hereof; provided, however, that neither the Parent nor the Seller shall have any obligation to indemnify any Purchaser Indemnitee for any Loss in respect of Taxes resulting from a breach by Purchaser of any provision in Section 6.2 or Section 6.3(d) or breach of a representation or warranty in Section 4.10 and provided further that except f or any Loss in respect of a Non-Income Tax resulting from a breach of a representation or warranty contained in Section 3.17(c)(v) or 3.17(c)(vi), neither the Parent nor the Seller shall have any obligation to indemnify any Purchaser Indemnitee pursuant to this Section 6.3(a) for any Non-Income Tax.  For the avoidance of doubt, a Purchaser Indemnitee’s Loss under Section 6.3(a)(iv) for a breach of representations or warranties contained in Sections 3.17(c)(v) or 3.17(c)(vi) of this Agreement includes, without limitation, the following items to the extent they arise from or are incurred in connection with any such breach:  (a) any liability for Taxes, and any liability for interest or penalties under the Code or other Applicable Law, regardless of whether such Taxes, interest and penalties relate to periods before or after the Closing Date; (b) amounts required to be paid to the IRS pursuant to a Cure obtained with respect to Identified Warranted Policies in the manner contemplated by Section 6 .6(b) of this Agreement; (c) the amount of any premium or other consideration required to be refunded or returned to policyholders in accordance with a Cure (as defined in Section 6.6(b) below) obtained with respect to Identified Warranted Policies in the manner contemplated by Section 6.6(b) of this Agreement; and (d) the increased GAAP liability, net of any increase of GAAP assets, that results to Purchaser Indemnitee from any increase in benefits required in accordance with a Cure obtained with respect to Identified Warranted Policies in the manner contemplated by Section 6.6(b) of this Agreement; provided, however, that for the avoidance of doubt (x) such items shall be appropriately reduced to the extent required to reflect the duty to mitigate Losses provided for in Section 9.2(h) of this Agreement and (y) in any case involving FLA such items shall not exceed the Purchaser Indemnitee’s Loss arising from any breach of any representation or warranty contained in Sections 3.17(c)(v) and 3.17(c)(vi) o f this Agreement.

(fffffff)

The Purchaser shall be liable for and pay, and agrees to indemnify and hold harmless, each Seller Indemnitee for (i) any Taxes imposed upon or assessed against the Subsidiaries, or the Parent or the Seller or an Affiliate of the Parent or the Seller with respect to any of the Subsidiaries, with respect to a Post-Closing Tax Period, including with respect to any Straddle Period, any Taxes imposed upon or assessed against any of the Subsidiaries, or the Parent, the Seller, or any Affiliate thereof with respect to any of the Subsidiaries, which are allocable pursuant to Section 6.3(c) to a Post-Closing Tax Period and (ii) any Loss of the Parent, the Seller, or any Affiliate thereof in connection with or arising by reason of any breach by the Purchaser of Section 6.3(d) or any representation or warranty contained in Section 4.10 hereof; provided, however, t hat the Purchaser shall have no obligation to indemnify any Seller Indemnitee for any Taxes resulting from a breach by the Parent or the Seller of any provision in Section 6.2 or breach of a representation or warranty in Section 3.31 and provided, further that Purchaser shall have no obligation to indemnify any Seller Indemnitee for any Loss in respect of Taxes resulting from a breach by the Parent, the Seller, or KILICO of a representation or warranty in Sections 3.17(c)(v) or 3.17(c)(vi) of this Agreement.  

(ggggggg)

Whenever it is necessary to determine the liability for Income Tax of any Subsidiary with respect to a Straddle Period, the portion of such Income Tax that is allocable to the Pre-Closing Tax Period shall be the amounts which would be payable if the taxable year ended or is treated as ending as of the close of the Closing Date, and the portion of such Income Tax that is allocable to the Post-Closing Tax Period shall be the amounts which would be payable if the taxable year began or is treated as beginning as of the start of the day following the Closing Date; provided, however, that exemptions, allowances or deductions that are calculated on an annual basis, such as the deduction for amortization, shall be apportioned between the Pre-Closing Tax Period and the Post-Closing Tax Period on a daily basis.

(hhhhhhh)

Without the prior written consent of the Parent and the Seller, the Purchaser shall not (i) file any amended Income Tax Return with respect to any Subsidiary relating to any Pre-Closing Tax Periods or file any claim for a refund of Income Taxes for any Subsidiary relating to a Pre-Closing Tax Period, and shall prevent each Subsidiary from filing such an amended Income Tax Return or claim for a refund of Income Taxes or (ii) otherwise make or cause to be made any election, where permitted by law, to carry back to a Pre-Closing Tax Period of any Subsidiary any net operating loss, net capital loss, or other similar item arising after the Closing Date and shall prevent each Subsidiary from making any such election.  If the Parent and the Seller consent pursuant to the first sentence of this Section 6.3(d) to any such amended Income Tax Return, claim for refund of In come Tax, or election to carry back a net operating loss, net capital loss, or similar item with respect to a Subsidiary, the Purchaser shall be liable for and pay, and agrees to indemnify and hold harmless, each Seller Indemnitee for any Losses (as defined in Section 9.2(f) of this Agreement) to the Seller Indemnitee arising from any such amended Income Tax Return, claim for refund of Income Tax, or election to carry back a net operating loss, net capital loss, or similar item.  If the Purchaser or any subsidiary files an amended Non-Income Tax Return with respect to any Subsidiary relating to a Pre-Closing Tax Period or files any claim for a refund of Non-Income Taxes for any Subsidiary relating to a Pre-Closing Tax Period, the Purchaser shall be liable for and pay, and agrees to indemnify and hold harmless, each Seller Indemnitee for any Losses (as defined in Section 9.2(f) of this Agreement) to the Seller Indemnitee arising from such amended Non-Income Tax Return or claim for refund of Non-Income Ta xes, including any Losses relating to deficiencies assessed with respect to Non-Income Tax of the Parent, the Seller, or a Subsidiary for any Pre-Closing Tax Period; provided, however, that the foregoing indemnity obligation shall not apply to any amended Tax Return in connection with the resolution of a claim that represented a breach of a representation or warranty in Section 3.7

(iiiiiii)

If the Parent or the Seller’s indemnification obligation under this Article VI arises in respect of an adjustment which makes allowable to the Purchaser, any of its Affiliates or, effective upon the Closing any of the Subsidiaries, any deduction, amortization, exclusion from income or other allowance (a “Tax Allowance”) which would not, but for such adjustment, be allowable, then within thirty (30) days after the filing of the applicable Tax Return for the tax period in which such Tax Allowance is realized, the Purchaser shall pay to the Parent or the Seller the excess, if any, of (i) the amount of Taxes that would have been payable by any of the Subsidiaries, the Purchaser or any Affiliate of the Purchaser in the absence of such Tax Allowance over (ii) the amount of Taxes actually paid.  For purposes of this Section 6.3(e), in the cas e of a carryover to a future Tax year or period of a loss or other item arising from a Tax Allowance, for each Tax year or period to which such loss or other item is carried over the Purchaser shall (x) pay to the Parent or the Seller within thirty (30) days after the filing of the applicable Tax Return in which such loss or other item is utilized the excess, if any of the amount of Taxes that would have been payable by any of the Subsidiaries, the Purchaser or any Affiliate of the Purchaser in the absence of such loss carryover over the amount of Taxes actually paid and (y) send to the Parent and the Seller within thirty (30) days after the date of the filing of the applicable Tax Return for each such Tax year or period, until the carryover has been fully utilized (or expires), a certification signed by the chief financial officer of the Purchaser setting forth, in reasonable detail, the facts concerning the Purchaser’s (or its Affiliate’s, including a Subsidiary’s) use of such carryover, and the extent to which such carryover has not been utilized.

(jjjjjjj)

If a Seller Indemnitee or Purchaser Indemnitee, as the case may be, has a claim under Article VI of this Agreement, in order to receive payment with respect to such claim the Seller Indemnitee or Purchaser Indemnitee, as applicable, must provide a written notice of such claim to the Purchaser or the Parent or the Seller, as applicable, prior to ninety (90) days after the expiration of the applicable Tax statute of limitation with respect to the relevant Tax year or period (including all periods of extension); provided, however, that with respect to a claim under Section 6.3(a)(iv) for any Loss in connection with or arising from any breach of any representations or warranties of the Parent, the Seller, or KILICO contained in Section 3.17(c)(v) or 3.17(c)(vi) of this Agreement, a Purchaser Indemnitee must provide written notice of such claim prior to the later of (i) ninety (90) days after the expiration of the applicable Tax statute of limitation with respect to the relevant Tax year or period (including all periods of extension) or (ii) six (6) months after the making of the underlying payment by the Purchaser Indemnitee from which such claim arises.  Such written notice must state the amount and nature of the claim under this Article VI in reasonable detail.  The Parent or the Seller or the Purchaser, as applicable, shall discharge any obligation to indemnify with respect to such claim not later than thirty (30) days after receipt by the Parent or the Seller or the Purchaser, as applicable, of such written notice.

(kkkkkkk)

To the extent any determination of Tax liability of any of the Subsidiaries, whether as the result of an audit or examination, a claim for refund, the filing of an amended return or otherwise, results in any refund of Tax attributable to any Pre-Closing Tax Period that is received by the Purchaser or the Subsidiaries, the Purchaser shall notify the Parent and the Seller of such refund and any refund of Income Tax or portion of such refund of Income Tax attributable to the Pre-Closing Tax Period, together with the interest paid on such amount or portion, shall belong to the Parent and any refund of Non-Income Tax shall belong to the Purchaser.  The Purchaser shall promptly pay to the Parent, upon receipt and as directed by the Parent, any such refund of Income Tax and the interest actually received thereon (including by credit against Income Tax liability of the Purchaser or the P urchaser’s Affiliate).  To the extent any determination of Income Tax liability of any of the Subsidiaries, whether as the result of an audit or examination, a claim for refund, the filing of an amended return or otherwise, results in any refund of Income Tax attributable to the Post-Closing Tax Period and is received by the Parent or the Seller, the Parent or the Seller shall notify the Purchaser of such refund and any such refund or portion of such refund attributable to the Post-Closing Period, together with the interest paid on such amount or portion, shall belong to the Purchaser.  The Parent or the Seller shall promptly pay to the Purchaser, upon receipt and as directed by the Purchaser, any such refund and the interest actually received thereon.

(lllllll)

The Parent and the Seller shall not be liable under this Section 6.3 with respect to any Tax resulting from a claim or demand the defense of which the Parent or the Seller was not offered the opportunity to assume as provided under Section 6.6 to the extent the  Parent or the Seller’s liability under this Section 6.3 is actually adversely affected as a result thereof.  

(mmmmmmm)

Any claim of any Seller Indemnitee (other than the Seller) or any Purchaser Indemnitee (other than the Purchaser) under this Section 6.3 may be made and enforced by the Parent, the Seller or the Purchaser, as the case may be, on behalf of the Seller Indemnitee or the Purchaser Indemnitee, subject to the other provisions of this Section 6.3.

(nnnnnnn)

Notwithstanding any other provision in this Agreement, the indemnification provided for in this Article VI is the sole remedy for any breach of a representation, warranty, or agreement relating to Taxes; except with respect to the limitations imposed by Section 9.2(h) (which is specifically made applicable for purposes of this Article VI), Section 9.6, and the incorporation of certain provisions of Article IX by Section 6.6(d), the indemnification provisions provided in Article IX shall have no application.  

Termination of Tax Sharing Agreements.  As of the Closing Date, the Seller shall cause all Tax Sharing Arrangements involving any Subsidiary, on the one hand, and the Seller and/or any Affiliate of the Seller, on the other hand (other than this Agreement), to be extinguished and terminated with respect to any of the Subsidiaries, and after the Closing Date neither any of the Subsidiaries nor the Seller shall have any right or obligation under any such agreement or arrangement.

Adjustment to Purchase Price.  The Parent, the Seller, the Purchaser, the Subsidiaries and their Affiliates shall treat and report any and all payments paid to a Purchaser Indemnitee or Seller Indemnitee, as the case may be, under Section 2.2(c), 2.4 or 2.5 or Article VI or Article IX as an adjustment to the Purchase Price for all Tax purposes.  

Contest Rights.

(ooooooo)

The Purchaser will promptly notify the Parent and the Seller of the assertion or commencement of any Tax Proceeding (as defined below) which could be deemed to be within the ambit of this Article VI (the Purchaser specifying with reasonable particularity the basis thereof) and will give the Parent and the Seller such information with respect thereto as the Parent and the Seller may reasonably request.  The Parent or the Seller may, at the Parent or the Seller’s sole option and at its own expense, control the conduct of such Tax Proceeding relating to Taxes for which the Parent or the Seller may be liable (including all aspects of the strategy, defense and settlement of such Tax Proceeding), provided, however, that (a) the Parent or the Seller shall consult with the Purchaser upon the Purchaser’s reasonable request for such consultation fr om time to time with respect to such Tax Proceeding, (b) the Purchaser may at its option and at its own expense participate, through representatives and counsel of its own choosing, in the conduct of any Tax Proceeding for which the Tax in controversy relates to a Post-Closing Tax Period, and (c) the Parent or the Seller shall not, without the Purchaser’s consent, which consent is not to be unreasonably withheld or delayed, agree to any settlement with respect to any Tax Proceeding if such settlement could reasonably be expected to adversely affect the material Tax liability of the Purchaser or any of its Affiliates (including the Subsidiaries) for Post-Closing Tax Periods, provided further, that in the case of any Tax Proceeding arising from a breach of any representation or warranty in Sections 3.17(c)(v) or 3.17(c)(vi) of this Agreement, the standard for consent by the Purchaser shall be that the Parent or the Seller shall not, without the Purchaser’s consent, which consent shall not be unreason ably withheld or delayed, agree to any settlement with respect to such Tax Proceeding.  The Purchaser agrees to fully cooperate with the Parent and the Seller and to cause the Subsidiaries to fully cooperate with the Parent and the Seller in connection with any Tax Proceeding.  The Parent or the Seller shall notify the Purchaser if the Parent or the Seller decides at its sole option not to participate in the defense of any such Tax Proceeding relating to Taxes for which the Parent or the Seller may be liable and the Purchaser thereupon shall be permitted (at its own expense), but not required, to defend such Tax Proceeding.  In the event the Purchaser elects to defend such Tax Proceeding, the Parent and the Seller agree to fully cooperate with the Purchaser, provided, however, that (x) the Purchaser shall consult with the Parent and the Seller upon the Parent or the Seller’s reasonable request for such consultation from time to time with respect to such Tax Proceeding and (y ) no settlement shall be made without the prior written consent of the Parent and the Seller, such consent not to be unreasonably withheld or delayed.  A “Tax Proceeding” shall include any claim, examination, or other proposed change or adjustment by any Taxing Authority, any suit, action, proceeding, as well as any notice of assessment or any notice or demand for payment, in respect of which indemnity may be sought from, or for which a refund may be available to, the Parent or the Seller, under Article VI or otherwise.  The provisions of this Section 6.6(a) shall not apply to matters specifically governed by Sections 6.6(b), 6.6(c), 6.6(d), 6.6(e) and 6.6(f).

(ppppppp)

(1)

If, after the Closing Date, the Purchaser reasonably determines that: (i) particular Warranted Policies issued by the Subsidiaries, KILICO, or FLA on or before the Closing Date do not comply with Sections 72, 101(f), 817, 817A, 7702 or 7702A of the Code, (ii) it is appropriate to approach the IRS in an effort to obtain a ruling, a closing agreement or other relief that would bring such Warranted Policies into compliance with the aforementioned Sections of the Code (a “Cure”), and (iii) the Purchaser is entitled to assert a claim against the Parent, the Seller or KILICO as a result of such failure to comply, or will be entitled to assert such a claim if a Cure is obtained in the manner contemplated by this Section 6.6(b), then the Purchaser shall promptly provide notice of such determination to the Parent and the Seller, identifying the particular War ranted Policies in question (the “Identified Warranted Policies”) and the reason or reasons for the failure of the Warranted Policies to comply with the foregoing Sections of the Code.  Following receipt by the Parent or the Seller of such notice, the Parent, the Seller and the Purchaser shall consult in good faith as to the basis for the Purchaser’s determination and the appropriate steps to be taken to address any such failure to comply.  As promptly as possible but in any event no later than thirty (30) days following receipt of such notice from the Purchaser, the Parent and the Seller shall notify the Purchaser as to whether the Parent or the Seller will approach the IRS for the purpose of obtaining a Cure with respect to the Identified Warranted Policies.  Approaching the IRS to obtain a Cure pursuant to this Section 6.6(b)(1) does not constitute a waiver by the Parent or the Seller of their rights to contest a claim of a breach of the representations or warranties u nder Section 3.17(c)(v) or Section 3.17(c)(vi) of this Agreement or a waiver of their rights to claim the absence of any Loss resulting therefrom with respect to Identified Warranted Policies.

(1)

If the Parent or the Seller disagrees with the Purchaser’s determination that the Identified Warranted Policies do not comply with Sections 72, 101(f), 817, 817A, 7702 or 7702A of the Code, the Parent or the Seller shall so notify the Purchaser in writing within thirty (30) days of receipt of the Purchaser’s notice under Section 6.6(b)(1).  Such dispute shall be settled by a Warranted Policy Arbitrator (defined below in Section 6.6(b)(8)).  The Warranted Policy Arbitrator shall determine whether such Identified Warranted Policies comply with Sections 72, 101(f), 817, 817A, 7702 or 7702A of the Code and if there is non-compliance, the reason or reasons for such failure to comply with the foregoing Sections of the Code.  The parties shall be bound by the determination of the Warranted Policy Arbitrator for purposes of this Agreement, except tha t the determination shall not be binding in any case in which (i) the IRS determines that a Warranted Policy does not comply with such Sections of the Code and neither the Purchaser, the Parent, the Seller, nor any of their Affiliates initiated the IRS’ examination of such Warranted Policy or (ii) the failure of a Warranted Policy to comply with the foregoing Sections of the Code becomes known to the IRS in the course of seeking to obtain a Cure pursuant to Section 6.6(b) in respect of one or more other failures to comply that were upheld or not considered by the Warranted Policy Arbitrator.  If the Warranted Policy Arbitrator determines that the Identified Warranted Policies are not in compliance with Sections 72, 101(f), 817, 817A, 7702 or 7702A of the Code, the Parent and the Seller shall provide the Purchaser as soon as practical but no later than ten (10) days following the date of such determination written notice of whether the Parent or the Seller will approach the IRS for purposes of obtai ning a Cure with respect to the Identified Warranted Policies.  Approaching the IRS to obtain a Cure pursuant to this Section 6.6(b)(2) does not constitute a waiver by the Parent or the Seller of their rights to contest a claim of a breach of the representations or warranties under Section 3.17(c)(v) or Section 3.17(c)(vi) of this Agreement or a waiver of their rights to claim the absence of any Loss resulting therefrom with respect to Identified Warranted Policies.

(2)

If the Parent or the Seller has notified the Purchaser pursuant to Section 6.6(b)(1) or Section 6.6(b)(2) that the Parent or the Seller intends to approach the IRS to attempt to obtain a Cure with respect to the Identified Warranted Policies, the Parent or the Seller shall do so as soon as reasonably practicable.  In such a case, the Parent and the Seller shall use commercially reasonable efforts in good faith to obtain a Cure from the IRS with respect to the Identified Warranted Policies.  The Parent and the Seller, at their own expense, shall have the right to control the conduct of the proceedings before the IRS seeking a Cure for the Identified Warranted Policies (including all aspects of the strategy and the terms of the Cure); provided that the Purchaser may at its option and at its own expense participate in the conduct of the proceedings through rep resentatives and counsel of its own choosing.  The Purchaser will reasonably cooperate with the Parent and the Seller, and will cause the Subsidiaries to reasonably cooperate with the Parent and the Seller in connection with such proceedings.  The Parent and the Seller shall consult with the Purchaser upon the Purchaser’s reasonable request for such consultation from time to time with respect to such proceedings, and the Purchaser shall have the right to monitor such proceedings (including the receipt, reasonably in advance, of all submissions made to the IRS, and the right to provide comments thereon which the Parent and the Seller shall consider in good faith); provided, however, that such participation, including the costs and expenses of the Purchaser’s legal representatives, shall be at the Purchaser’s sole cost and expense.  Neither the Parent nor the Seller shall, without the Purchaser’s prior written consent, which consent is not to be unreasonably withheld or delay ed, agree to any Cure or other agreement or settlement with the IRS with respect to Identified Warranted Policies.

(3)

(i)  If the Parent and the Seller notify the Purchaser pursuant to either Section 6.6(b)(1) or Section 6.6(b)(2) that the Parent and the Seller decline to approach the IRS to attempt to obtain a Cure with respect to the Identified Warranted Policies, the Purchaser may at its discretion do so.  In such a case, the Purchaser shall have the right to control the conduct of the proceedings before the IRS seeking a Cure for the Identified Warranted Policies (including all aspects of the strategy and settlement of such proceedings); provided that the Parent and the Seller may at their option and at their own expense participate in the conduct of the proceedings through representatives and counsel of their own choosing.  The Parent and the Seller will reasonably cooperate with the Purchaser and the Subsidiaries in connection with such proceedings.  The Pu rchaser shall consult with the Parent and the Seller upon the Parent’s or the Seller’s reasonable request for such consultation from time to time with respect to such proceedings, and the Parent and the Seller shall have the right to monitor such proceedings (including the receipt, reasonably in advance, of all submissions made to the IRS, and the right to provide comments thereon which the Purchaser shall consider in good faith).  The Purchaser’s right to indemnification under this Agreement shall not be limited by the fact that it approaches the IRS pursuant to this Section 6.6(b)(4), provided that the Purchaser follows the procedures set forth in this Section 6.6(b)(4) before doing so.  The Purchaser shall not, without the Parent’s and the Seller’s prior written consent, which consent is not to be unreasonably withheld or delayed, agree to any Cure or other agreement or settlement with the IRS with respect to Identified Warranted Policies.  

(4)

If the Parent or the Seller has elected to approach the IRS to attempt to obtain a Cure with respect to Identified Warranted Policies but the Purchaser reasonably determines in good faith that the Parent or the Seller, as the case may be, is not proceeding in good faith in a commercially reasonably manner to obtain such a Cure, the Purchaser may, at its discretion, notify the Parent or the Seller, as the case may be, in writing, of the Purchaser’s determination.  Such notification shall set forth in reasonable detail:  (i) the basis for the Purchaser’s determination; and (ii) the changes to the Parent or the Seller’s conduct, strategy or submissions, or other relevant adjustments, that the Purchaser in good faith reasonably believes must be made by the Parent or the Seller to cure the Purchaser’s claim that the Parent or the Seller, as t he case may be, is not acting in good faith in a commercially reasonably manner to obtain a Cure from the IRS with respect to the Identified Warranted Policies.  For a period of thirty (30) days from the date that the Parent or the Seller, as the case may be, receives such notification, the Purchaser shall in good faith provide the Parent or the Seller an opportunity to cure such claim by the Purchaser.  If, after the end of such period, the Purchaser reasonably determines that the Parent or the Seller, as the case may be, has not reasonably responded to cure the items set forth in the Purchaser’s notification and notifies the Parent and the Seller in writing of such determination (such notification setting forth in reasonable detail the basis for such determination by Purchaser), the Purchaser may approach the IRS to attempt to obtain a Cure for the Identified Warranted Policies in question.  If the Purchaser approaches the IRS in this manner, the provisions of Section 6.6(b)(4) shall th ereafter apply to the Purchaser, the Parent and the Seller with respect to the proceedings before the IRS in which the Purchaser attempts to obtain such a Cure.  The Purchaser’s right to indemnification under this Agreement shall not be limited by the fact that it approaches the IRS pursuant to this Section 6.6(b)(5), provided that the Purchaser follows the procedures set forth in this Section 6.6(b)(5) before doing so.

(5)

If the Parent or the Seller refuses or fails, within a reasonable period of time, to consent to a proposed Cure under Section 6.6(b)(4) or Section 6.6(b)(5) of this Agreement, the Purchaser shall have the right to request that the Warranted Policy Arbitrator (as defined in Section 6.6(b)(8) below) resolve such dispute by determining (x) the terms of a reasonable Cure, of the Identified Warranted Policies; and (y) the extent to which the costs of the Cure obtained by Purchaser should under Section 6.3 be apportioned to the Parent and the Seller by reason of their breach of Section 3.17(c)(v) or Section 3.17(c)(vi).  In rendering its determination, the Warranted Policy Arbitrator shall take into account: (a) the extent to which a reasonable third party business person issuing similar non-complying policies or contracts would have entered into a Cure on similar ter ms and (b) whether the Purchaser acted reasonably and in good faith with respect to the requirements set forth in Sections 6.6(b)(4), 6.6(b)(5) or 6.6(b)(7), as applicable.  The parties shall be bound by the conclusions of the Warranted Policy Arbitrator.

(6)

If the Purchaser deems it impractical to obtain the determination of the Warranted Policy Arbitrator in sufficient time to permit it to obtain a Cure from the IRS on terms and conditions that the Purchaser regards as the most favorable that can be achieved in the circumstances, then the Purchaser shall have the right to agree to the Cure on such terms.  In that event, the amount to which the Purchaser shall be entitled to recover from the Parent and the Seller as a result thereof shall be determined under the provisions of Section 6.6(b)(6) above.

(7)

The “Warranted Policy Arbitrator” shall consist of three representatives knowledgeable in U.S. taxation of life insurance companies and products, with one representative chosen by the Purchaser, one representative chosen by the Parent and the Seller, and one representative agreed to by the foregoing representatives.  The fees and disbursements of the Warranted Policy Arbitrator shall be shared 50% by the Parent and 50% by the Purchaser; provided, however, that to the extent the Warranted Policy Arbitrator determines that the party that does not prevail with respect to such dispute acted unreasonably, the Warranted Policy Arbitrator shall have the discretion to assign to such party (a) all or a more than 50% portion of fees and disbursements of the Warranted Policy Arbitrator and (b) any costs directly incurred by the prevailing party with respec t to the settlement by the Warranted Policy Arbitrator, including legal fees.

(8)

Any proceeding by a Warranted Policy Arbitrator under Section 6.6( b) shall be administered by the American Arbitration Association in accordance with its domestic commercial dispute resolution rules; provided that the scope of authority of the Warranted Policy Arbitrator shall be limited to the determinations set forth in Section 6.6(b).  In the event that the Purchaser or the Parent and the Seller fail to choose an arbitrator or the arbitrators chosen by the Purchaser and the Parent and the Seller fail to agree on the third arbitrator, the American Arbitration Association shall select such arbitrator, who shall serve as chairman of the arbitration tribunal.  The place of arbitration shall be Chicago, Illinois.  Any determination by the Warranted Policy Arbitrator pursuant to Section 6.6(b)(2) or Section 6.6(b)(6) shall be in writing.  Any determ ination by the Warranted Policy Arbitrator under Section 6.6(b)(6) shall be Final and Binding on the parties.  In any arbitration proceeding pursuant to this Section 6.6(b), the preliminary hearing, if any, shall be held within sixty (60) days of the Parent, the Seller or the Purchaser’s request for arbitration, the hearing shall be held within ninety (90) days of such request for arbitration, and the decision shall be issued within thirty (30) days following the hearing.

(9)

The Parent, the Seller and the Purchaser will fully cooperate with one another in connection with their respective efforts under Section 6.6(b) to obtain a Cure from the IRS with respect to the Identified Warranted Policies.

(10)

This Section 6.6(b)(11) applies in any case in which both (a) the IRS determines that a Warranted Policy does not comply with Sections 72, 101(f), 817, 817A, 7702 or 7702A of the Code, and (b) neither the Parent, the Seller, the Purchaser nor any of their Affiliates initiated the IRS’ examination of such Warranted Policy.  The Purchaser shall notify the Parent and the Seller of any such Warranted Policy promptly after being advised by the IRS of its determination.  If the Purchaser also notifies the Parent and the Seller that it has determined it is appropriate to seek a Cure with respect to such a Warranted Policy in accordance with Section 6.6(b), such Warranted Policy shall be treated as an Identified Warranted Policy subject to the provisions of this Section 6.6(b), except that: (x) appropriate adjustments shall be made for the fact that the IRS is already aware that the Warranted Policy may not comply with Sections 72, 101(f), 817, 817A, 7702 or 7702A of the Code; and (y) the arbitration procedure in Section 6.6(b)(2) shall not apply.  

(qqqqqqq)

Notwithstanding any other provision of this Agreement, including Section 6.6(b), prior to the Closing, the Parent, the Seller and their Affiliates will be the sole parties entitled to contact the IRS or other Taxing Authority and such parties shall alone be entitled prior to the Closing Date to direct and control any proceedings regarding contracts and policies issued by KILICO, the Subsidiaries or FLA including those that do not or may not comply with Sections 72, 101(f), 817, 817A, 7702 or 7702A of the Code.  

(rrrrrrr)

Section 6.6(a) and Section 6.3(h) shall not apply with respect to any claim, suit, action or proceeding, other than a Tax Proceeding to which a Taxing Authority is a party, in respect of which indemnity may be sought under Section 6.3(a)(iv) for any Loss in connection with or arising from any breach of any representation or warranty contained in Section 3.17(c)(v) or Section 3.17(c)(vi) of this Agreement.  Instead, any such claim, suit, action or proceeding shall be subject to Sections 9.3 and 9.4 of this Agreement.  

(sssssss)

This Section 6.6(e) applies if the obligation of the Purchaser’s Designee to perform administrative services under the Coinsurance Agreement with respect to Warranted Policies issued on or before the Closing Date by KILICO terminates at any time after the Closing Date.  In such a case, the Parent and the Seller shall monitor, or cause their delegee to monitor, to assure compliance with Sections 72, 101(f), 817, 817A, 7702 and 7702A of the Code, any Warranted Policies issued by KILICO on or before the Closing Date as to which liability continues to be reinsured by the Purchaser’s Designee under the Coinsurance Agreement after such termination.  The Parent and the Seller shall promptly notify the Purchaser if they or their delegee determine that any such Warranted Policies do not or may not comply with such Sections of the Code.  Any Warranted Policies identified by the Parent or the Seller in this manner that do not comply with Sections 72, 101(f), 817, 817A, 7702 or 7702A of the Code shall be treated as Identified Warranted Policies, and shall be subject to the procedures of this Section 6.6 applicable to Identified Warranted Policies.

(ttttttt)

Notwithstanding any other provision of this Agreement, a Purchaser Indemnitee may reasonably respond to a direct inquiry from the IRS or other Taxing Authorities as to whether Warranted Policies issued on or before the Closing Date do not comply with Sections 72, 101(f), 817, 817A, 7702 or 7702A of the Code without limiting its rights to indemnity under this Agreement, provided, however, that the Purchaser Indemnitee shall have given advance notice of such inquiry to the Seller and the Parent, and shall have considered in good faith any comments of the Seller and the Parent regarding the response to be made to the IRS or other Taxing Authority.  

Access to Tax Records.  After the Closing Date, the Purchaser shall provide to the Parent or the Seller at the Purchaser’s own expense and the Parent or the Seller shall provide to the Purchaser at the Parent or the Seller’s own expense, as the case may be, timely access and reasonable assistance and cooperation during normal business hours in making Tax Returns and other relevant business records with respect to Pre-Closing Tax Periods with respect to the Subsidiaries and copies thereof available to the Parent or the Seller and its agents or the Purchaser and its agents, as the case may be.  Additionally, the Parent or the Seller and the Purchaser, at its own expense shall (i) cooperate fully in preparing for and conducting any audits of, or disputes with Taxing Authorities regarding, any Tax Returns of any Subsidiary, (ii) make avai lable to the other party and to any Taxing Authority, as reasonably requested, all records, documents, accounting data and other information relating to Taxes of any of the Subsidiaries, and (iii) furnish the other party with copies of all correspondence received from any Taxing Authority in connection with any tax audit or information request with respect to any such taxable period for which the other party may have a liability.  All pertinent existing Tax Returns and Tax records shall be retained by the Parent or the Seller, the Purchaser, and the Subsidiaries until ninety (90) days after the later of the expiration of the applicable statute of limitations or the final settlement of any proceeding or audit relating to such Tax Returns or Tax records.  

FIRPTA.  The Seller shall deliver to the Purchaser, on or before (but not more than twenty (20) days prior to) the Closing Date, a statement in accordance with Treasury Regulation Sections 1.1445-2(c)(3) and 1.897-2(h) certifying that none of the Subsidiaries is, or has been, a “United States real property holding corporation” for purposes of Sections 897 and 1445 of the Code, and the Purchaser shall have no actual knowledge that such statement is false or receive a notice that the statement is false pursuant to Treasury Regulation Section 1.1445-4.  In addition, the Seller shall deliver to the Purchaser on the Closing Date the notification to the Internal Revenue Service, in accordance with the requirements pursuant to Treasury Regulation Section 1.897-2(h)(2), of delivery of the statement referred to in the preceding sentence , signed by a responsible corporate officer of the Seller.  The Seller acknowledges that the Purchaser may cause the Seller to file such notification with the Internal Revenue Service on or after the Closing Date.

CONDITIONS PRECEDENT TO THE OBLIGATION OF THE PURCHASER TO CLOSE

The obligations of the Purchaser under this Agreement are subject to the satisfaction on or prior to the Closing of the following conditions, any one or more of which may be waived by it entirely or partially to the extent permitted by Applicable Law:

Representations and Warranties.  The representations and warranties of the Seller, the Parent and KILICO contained in Article III of this Agreement shall be true and correct in all respects in each case on the date hereof and as of the Closing Date, except that any such representations and warranties that expressly relate to a specified date shall be true and correct only as of such date, and except where the failure to be so true and correct in all respects (without giving effect to any limitation or qualification as to “materiality” or “Material Adverse Effect”) would not, individually or in the aggregate, have a Material Adverse Effect.  The Seller, the Parent and KILICO shall have delivered to the Purchaser a certificate to the foregoing effect, dated the Closing Date and signed by a senior executive officer of th e Seller listed on Exhibit I-1 hereto.

Compliance with Covenants.  The Seller, the Parent and KILICO shall have complied in all material respects with, or performed in accordance with the terms of, their covenants contained in this Agreement to be complied with or performed prior to the Closing Date.  The Seller, Parent and KILICO shall have delivered to the Purchaser a certificate to the foregoing effect, dated the Closing Date and signed by senior executive officers of the Seller, Parent and KILICO listed on Exhibit I-1 hereto.

Other Agreements.  All Transaction Agreements, and any additional agreements and instruments contemplated hereby to which the Seller, the Parent or KILICO is a party, shall have been executed by the parties thereto and shall have been delivered by the Seller, the Parent or KILICO on or prior to the Closing Date and each of such agreements, documents and instruments shall be in full force and effect on the Closing Date.

Governmental and Regulatory Consents and Approvals.  (a) The waiting period under the HSR Act and any applicable insurance laws shall have expired or been terminated, (b) the Insurance Regulatory Approvals shall have been obtained and (c) each of the Purchaser and the Seller, the Parent and KILICO and the Subsidiaries shall have made such other filings, and obtained such other permits, authorizations, consents or approvals required by Government Entities (the “Other Government Consents”) to consummate the transactions contemplated hereby (other than Other Government Consents the failure of which to expire, to terminate, or to be obtained or made is not reasonably likely to result, individually or in the aggregate, in a material interruption or limitation on the businesses of Bank One, the Purchaser, the Subsidiaries or the KI LICO Transferred Business after the Closing or in the imposition on the Purchaser or Bank One of a criminal penalty or material civil penalties) provided, however, that any Insurance Regulatory Approvals or Other Government Consents shall not require the Purchaser, Bank One, or the Subsidiaries to (i) sell or hold separate or agree to sell, divest, discontinue or limit any material assets, businesses or interest in any material assets or businesses of the Subsidiaries or the KILICO Transferred Business (or consent to do any of the foregoing); (ii) agree to any conditions on, or changes or restrictions in, the capitalization or dividend policies of the Subsidiaries, Bank One or the Purchaser, that are materially more burdensome than the conditions, changes or restrictions expressly set forth in applicable insurance statutes, rules or regulations; or (iii) agree to any material conditions on, or material changes or restrictions in, the operations, assets or businesses of the Subsidiaries, Ba nk One, the Purchaser or the KILICO Transferred Business that substantially impact the ability of Bank One, the Purchaser or Subsidiaries to operate their businesses or the KILICO Transferred Business in the manner that such businesses were conducted prior to the Closing, other than conditions, changes or restrictions expressly set forth in applicable insurance statutes, rules or regulations.  

Injunction.  There shall not be in effect any judgment, order, injunction or decree of any court or Government Entity of competent jurisdiction enjoining the consummation of the transactions contemplated hereby.

Third Party Consents.  The Seller shall have delivered to the Purchaser the consents of any third parties that are set forth on Schedule 7.6 hereto, which consents shall permit the assignee to use the services and licenses provided pursuant to the contracts listed on such schedule to provide services for the benefit of the Subsidiaries and, to the extent applicable, to provide administrative services to KILICO pursuant to the terms of the Coinsurance Agreement and the Transition Services Agreement.

Transfer of Excluded Items.  The Seller shall have delivered to Purchaser documents evidencing the transfer of the Excluded Items and the assumption of the related liabilities.

Intercompany Accounts.  The Purchaser shall have received a certificate from an officer of the Seller certifying that, except as set forth on Schedule 5.9, all intercompany accounts (including the Intercompany Loans) between the Subsidiaries or FLA, on the one hand, and the Seller or any of its Affiliates (other than the Subsidiaries or FLA), on the other hand, shall be paid and satisfied in full on or prior to the Closing Date without any remaining liability of the Subsidiaries or FLA.

Resignations.  The directors of any Subsidiary (other than ZLICONY) and the directors of FLA and ZLICONY who are also officers of FKLA or ZLICONY, respectively, in each case who are specified in a notice delivered by the Purchaser to the Seller at least ten (10) Business Days prior to the Closing Date shall have submitted their resignations from the boards of directors of the Subsidiaries and FLA, effective as of the Closing Date.

KILICO’s Capital.  As of the Closing Date, KILICO’s capital and surplus, determined in accordance with SAP, shall be at least $185,000,000.

Updated Schedules.  Three days prior to the Closing Date, the Seller shall have delivered to the Purchaser updated schedules, subject, in any event, to Section 5.25.

No Material Adverse Effect.  No acts, events, changes, occurrences or conditions shall have occurred after the date hereof which has had or would reasonably be expected to have individually or in the aggregate a Material Adverse Effect.

CONDITIONS PRECEDENT TO THE OBLIGATION OF THE PARENT AND THE SELLER TO CLOSE

The obligations of the Parent and the Seller under this Agreement are subject to the satisfaction on or prior to the Closing of the following conditions, any one or more of which may be waived by them entirely or partially to the extent permitted by Applicable Law:

Representations and Warranties.  The representations and warranties of the Purchaser contained in Article IV of this Agreement shall be true and correct in all respects in each case on the date hereof and as of the Closing Date, except that any such representations and warranties that expressly relate to a specified date shall be true and correct only as of such date, and except where the failure to be so true and correct in all respects (without giving effect to any limitation or qualification as to “materiality” or “Purchaser Material Adverse Effect”) would not, individually or in the aggregate, have a Purchaser Material Adverse Effect.  The Purchaser shall have delivered to the Seller a certificate to the foregoing effect, dated the Closing Date and signed by a senior executive officer of the Purchaser listed on Exhibit I-2 hereto.

Compliance with Covenants.  The Purchaser shall have complied in all material respects with, or performed in accordance with the terms of, its covenants contained in this Agreement to be complied with or performed prior to the Closing Date.  The Purchaser shall have delivered to the Seller a certificate to the foregoing effect, dated the Closing Date and signed by a senior executive officer of the Purchaser listed on Exhibit I-2 hereto.

Other Agreements.  All Transaction Agreements, and any additional agreements and instruments contemplated hereby to which the Purchaser is a party, shall have been executed by the parties thereto and shall have been delivered by the Purchaser on or prior to the Closing Date, and each of such agreements and instruments shall be in full force and effect with respect to the Purchaser on the Closing Date.

Governmental and Regulatory Consents and Approvals.  (a) The waiting period under the HSR Act and any applicable insurance laws shall have expired or been terminated, (b) the Insurance Regulatory Approvals shall have been obtained and (c) each of Other Government Consents necessary to consummate the transactions contemplated hereby (other than Other Government Consents the failure of which to expire, to terminate, or to be obtained or made is not reasonably likely to result, individually or in the aggregate, in a material interruption in the businesses of the Parent, the Seller or the KILICO Retained Business after the Closing or in the imposition on Parent, the Seller or KILICO of a criminal penalty or material civil penalties); provided, however, that any Insurance Regulatory Approvals or Other Government Consents shall not re quire the Parent, the Seller or KILICO to (i) sell or hold separate or agree to sell, divest, discontinue or limit any material assets, businesses or interest in any material assets or businesses of the Parent, the Seller or KILICO (or consent to do any of the foregoing); (ii) agree to any conditions on, or changes or restrictions in, the capitalization or dividend policies of the Parent, the Seller or KILICO, that are materially more burdensome than the conditions, changes or restrictions expressly set forth in applicable insurance statutes, rules or regulations; or (iii) agree to any material conditions on, or material changes or restrictions in, the operations, assets or businesses of Parent, Seller or KILICO that substantially impact the ability of Parent or Seller to operate their businesses, or of KILICO to operate its business other than the KILICO Transferred Business, in the manner that such businesses were conducted prior to the Closing Date, other than conditions, changes or restrictions expr essly set forth in applicable insurance statutes, rules or regulations.

Purchase Price.  The Purchaser shall have paid to the Seller the Estimated Purchase Price at Closing.

Injunction.  There shall not be in effect any judgment, order, injunction or decree of any court or Government Entity of competent jurisdiction enjoining the consummation of the transactions contemplated hereby.

Purchaser Material Adverse Effect.  No acts, events, changes, occurrences or conditions shall have occurred after the date hereof which has had or could reasonably expected to have individually or in the aggregate a Purchaser Material Adverse Effect.

Investment Guidelines.  The Purchaser shall have delivered to the Seller Investment Guidelines conforming to the requirements of Section 5.24.

SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION

Survival of Representations and Warranties.  All representations and warranties of the parties hereto contained in this Agreement shall survive the Closing Date, for a period of twenty-four months following the Closing Date, and shall expire at the end of such period, but, except as provided in Section 10.2 hereof, shall not survive any termination of this Agreement; provided, however, that the representations and warranties of the parties contained in Sections 3.1, 3.2, 3.20 (regarding Hazardous Material and Environmental Laws), 3.22, 3.28, 4.1, 4.2 and 4.9 shall survive indefinitely.  None of the limitations or requirements in this Article IX shall apply to the parties’ tax indemnity obligations under Article VI.  The parties agree that, except as provided in this Article IX, no claims or causes of action m ay be brought against the Seller, the Purchaser, KILICO or any of their directors, officers, employees, Affiliates, successors, permitted assigns, agents, or representatives based upon, directly or indirectly, any of the representations or warranties contained in this Agreement following the Closing Date or, except otherwise as provided in Section 10.2 hereof, any termination of this Agreement.  This Section 9.1 shall not limit any covenant or agreement of the parties which contemplates performance after the Closing.  Nothing set forth in this Article IX shall be deemed to prohibit or limit any party’s right at any time on or after the Closing Date to seek injunctive or equitable relief for the failure of any other party to perform any covenant or agreement contained herein or to seek any other relief based upon fraud or intentional misrepresentation.

Obligation to Indemnify.  

(uuuuuuu)

Subject to the limitations set forth in this Article IX, from and after the Closing Date, the Parent and the Seller agree to indemnify, defend and hold harmless, without duplication, the Purchaser, its respective Affiliates and the Subsidiaries, and their respective stockholders, directors, officers, employees, successors, permitted assigns, agents and representatives (collectively, the “Purchaser Indemnitees”) from and against all Losses (as hereinafter defined), in connection with or arising from:  

(i)

any breach of any representations or warranties of the Parent, the Seller or KILICO contained in this Agreement or in any of the Transaction Agreements, without regard to any materiality or Material Adverse Effect qualifications (provided, that materiality or Material Adverse Effect qualifications shall not be disregarded with respect to the Specified Representations and Warranties);

(ii)

any breach of or failure to perform any of the covenants or agreements of the Parent, the Seller or KILICO contained in this Agreement or in any of the Transaction Agreements;

(iii)

the Excluded Items;

(iv)

the KILICO Retained Investments and the KILICO Retained Liabilities; and

(v)

any Subsidiary’s ownership at any time of a fee interest in real property, which real property is found to be in violation of any Applicable Law or requires remedial action, removal action or any other action with respect to actual or alleged environmental damage or injury to property or public health.

(vvvvvvv)

Subject to the limitations set forth in this Article IX, from and after the Closing Date, KILICO agrees to indemnify, defend and hold harmless, without duplication, the Purchaser Indemnitees from and against all Losses in connection with or arising from:

(i)

any breach of any representations or warranties which relate solely to KILICO or a KILICO Subsidiary, without regard to any materiality or Material Adverse Effect qualifications (provided, that materiality or Material Adverse Effect qualifications shall not be disregarded with respect to the Specified Representations and Warranties);

(ii)

any breach or failure to perform any of the covenants or agreements of KILICO or a KILICO Subsidiary contained in this Agreement or in any of the Transaction Agreements; and

(iii)

the KILICO Retained Investments and the KILICO Retained Liabilities.

(wwwwwww)

Subject to the limitations set forth in this Article IX, from and after the Closing Date, the Purchaser agrees to indemnify, defend and hold harmless, without duplication, the Parent, the Seller, KILICO and their respective Affiliates and their respective stockholders, directors, officers, employees, successors, permitted assigns, agents and representatives (collectively, the “Seller Indemnitees”) from and against all Losses in connection with or arising from:

(i)

any breach of any representations and warranties of the Purchaser contained in this Agreement or in any of the Transaction Agreements, without regard to any materiality or Material Adverse Effect qualifications;

(ii)

any breach of or failure to perform any of the covenants and agreements of the Purchaser contained in this Agreement or in any of the Transaction Agreements;

(iii)

the KILICO Transferred Assets, to the extent the Loss arises out of actions of the Purchaser or its Affiliates after the Closing Date;

(iv)

the KILICO Transferred Liabilities, to the extent the Loss arises out of actions of the Purchaser or its Affiliates after the Closing Date; and

(v)

any fines, penalties or other costs (including attorneys fees) incurred by the Parent, the Seller or their respective Affiliates in connection with any action brought by any state or federal agency as a result of participation by Affected Employees in the Zurich Welfare Plans during the Special Coverage Period described in Section 5.12(a).  This obligation to indemnify shall not extend to fines, penalties or other costs incurred as a result of actions taken by the Seller, the Parent or the respective Affiliates in administering the Zurich Welfare Plans or responding to claims for benefits made by Affected  Employees, other than as provided under Section 5.12.

(xxxxxxx)

The Parent and the Seller agree to indemnify, defend and hold harmless, without duplication, the Purchaser Indemnitees from and after the Closing Date from and against any Loss in connection with or arising from any Litigation pending on the Closing Date, and any Litigation overtly threatened in writing as of the Closing Date to be brought imminently, against any Subsidiary or KILICO (with respect to the KILICO Transferred Business) as follows: (i) with respect to any Litigation that is one of the matters set forth on Schedule 9.2(d) (the “Special Items”), such indemnity shall be equal to ninety percent (90%) of Losses in connection with or arising out of such Special Items; and (ii) with respect to any Litigation that is not a Special Item, the Parent and Seller shall indemnify the Purchaser Indemnitees only to the extent that the aggregate L osses in connection with such non-Special Item Litigation exceeds $500,000 (the “Routine Litigation Deductible”), and in such event indemnification shall first be made for fifty percent (50%) of such Losses in excess of the Routine Litigation Deductible but less than or equal to the sum of the Routine Litigation Deductible plus $800,000, and then shall be made for ninety percent (90%) of such Losses in excess of the sum of the Routine Litigation Deductible plus $800,000.  As used in this Section 9.2(d), the term “Litigation” shall not include any Litigation that relates to disputes arising under or in connection with this Agreement or any other Transaction Agreement.

(yyyyyyy)

The aggregate amount for which the Parent, the Seller and KILICO, except with respect to Sections 9.2(a)(iii), (iv) and (v), Section 9.2(b)(iii) and Section 9.2(d), shall be liable in the aggregate, shall in no event exceed $496,000,000.00 (the “Cap”).  Also, the aggregate amount for which the Purchaser, except with respect to Section 9.2(c)(iii) and (iv), shall be liable in the aggregate, shall in no event exceed the Cap.  The Parent, the Seller and KILICO shall be required to indemnify the Purchaser Indemnitees pursuant to Section 9.2(a)(i) and Section 9.2(b)(i), and the Purchaser shall be required to indemnify the Seller Indemnitees pursuant to Section 9.2(c)(i), only to the extent that the aggregate Losses incurred by the Purchaser Indemnitees or Seller Indemnitees, as applicable, in connection with such clauses exceeds $10,000,000.00 ( the “Deductible”); in such event, indemnification shall be made by the Seller, the Parent or KILICO, on the one hand, and the Purchaser, on the other hand, for all Losses in excess of the Deductible; provided, however that no breach of any representation or warranty shall be deemed to have occurred for purposes of this Article IX unless the Losses incurred as a result thereof, together with all Losses as a result thereof arising out of the same or a related breach of such representation or warranty, are in excess of $5,000.

(zzzzzzz)

As used in this Article IX, “Loss” and/or “Losses” shall mean any and all actual and direct losses, liabilities, damages, settlement payments, judgments, costs and expenses (including reasonable attorneys’ fees) when and as paid.  The amount of any Losses sustained by a Purchaser Indemnitee or a Seller Indemnitee shall be reduced by any amount received by such Purchaser Indemnitee or Seller Indemnitee with respect thereto under any insurance coverage or from any other party alleged to be responsible therefor, and by the amount of any Tax benefits realized with respect to the Loss.  The Purchaser Indemnitees and the Seller Indemnitees shall use commercially reasonable efforts (which shall not require the institution of Litigation) to collect any amounts available under such insurance coverage and from such other party alleged to have res ponsibility and to realize any Tax benefit with respect to the Loss.  If a Purchaser Indemnitee or Seller Indemnitee realizes a Tax benefit or receives an amount under insurance coverage or from such other party with respect to Losses sustained at any time subsequent to any indemnification provided pursuant to this Section 9.2, then such Purchaser Indemnitee or Seller Indemnitee shall promptly reimburse the applicable Indemnifying Party (as defined below) for any payment made or expense incurred by such Indemnifying Party in connection with providing such indemnification up to such amount realized or received by the Purchaser Indemnitee or Seller Indemnitee, as applicable.

(aaaaaaaa)

The Indemnifying Party’s obligation to indemnify the Indemnified Party (as such terms are defined below) pursuant to this Article IX shall survive indefinitely; provided, however, that the Indemnifying Party’s obligation with respect to claims made pursuant to Sections 9.2(a)(i), 9.2(b)(i) and 9.2(c)(i) shall be limited to Losses as to which the Indemnified Party has given the Indemnifying Party written notice prior to twenty-four months following the Closing; provided, further, claims based on Sections 3.1, 3.2, 3.20, 3.22, 3.28, 4.1, 4.2 and 4.9 shall survive indefinitely.

(bbbbbbbb)

Each Indemnified Party shall be obligated to use its commercially reasonable efforts to mitigate any Loss for which it is entitled to seek indemnification hereunder, and the Indemnifying Party shall not be required to make any payment to an Indemnified Party in respect of such Loss to the extent such Indemnified Party has failed to comply with the foregoing obligation.

(cccccccc)

Upon making any indemnification payment, the Indemnifying Party will, to the extent of such payment, be subrogated to all rights of the Indemnified Party against any third party in respect of the Loss to which the payment relates; provided, however, that until the Indemnified Party recovers full payment of its Loss, any and all claims of the Indemnifying Party against any such third party on account of said payment are hereby made expressly subordinated and subjected in right of payment to the Indemnified Party’s rights against such third party.  Without limiting the generality of any other provision hereof, each such Indemnified Party and Indemnifying Party will duly execute upon request all instruments reasonably necessary to evidence and perfect the above-described subrogation and subordination rights.

(dddddddd)

Neither the Seller nor the Purchaser, shall have any right to set-off any Losses against any payments to be made by such party or parties pursuant to this Agreement or any other agreement between the parties.

Claims Notice.  In the event that either a Purchaser Indemnitee or a Seller Indemnitee wishes to assert a claim for indemnification hereunder, such party seeking indemnification (the “Indemnified Party”) shall deliver written notice (a “Claims Notice”) to the other party (the “Indemnifying Party”) no later than thirty (30) days after such claim becomes known to the Indemnified Party, specifying the facts constituting the basis for, and the amount (if known) of the claim asserted.  Failure to deliver a Claims Notice with respect to a claim in a timely manner as specified in the preceding sentence shall not be deemed a waiver of the Indemnified Party’s right to indemnification hereunder for Losses in connection with such claim, but the amount of reimbursement to which the Indem nified Party is entitled shall be reduced by the amount, if any, by which the Indemnified Party’s Losses would have been less had such Claims Notice been timely delivered.

Right to Contest Claims of Third Parties.  

(eeeeeeee)

If an Indemnified Party asserts, or may in the future seek to assert, a claim for indemnification hereunder because of a claim or demand made, or an action, proceeding or investigation instituted, by any Person not a party to this Agreement (a “Third Party Claimant”) that may result in a Loss with respect to which the Indemnified Party would be entitled to indemnification pursuant to this Article IX (an “Asserted Liability”), the Indemnified Party shall deliver to the Indemnifying Party a Claims Notice with respect thereto, which Claims Notice shall be delivered as promptly as practicable and in any event no later than twenty (20) days after such Asserted Liability is actually known to the Indemnified Party.  Failure to deliver a Claims Notice with respect to a claim in a timely manner as specified in the preceding sentence shal l not be deemed a waiver of the Indemnified Party’s right to indemnification hereunder for Losses in connection with such claim, provided, that the amount of reimbursement to which the Indemnified Party is entitled shall be reduced by the amount, if any, by which the Indemnified Party’s Losses would have been less had such Claims Notice been timely delivered.  

(ffffffff)

The Indemnifying Party shall have the right, upon written notice to the Indemnified Party, to investigate, contest, defend or settle any Asserted Liability that may result in a Loss with respect to which the Indemnified Party is entitled to indemnification pursuant to this Article IX; provided that the Indemnified Party may, at its option and at its own expense, participate in the investigation, contesting, defense or settlement of any such Asserted Liability through representatives and counsel of its own choosing; and, provided further that the Indemnifying Party shall not settle any Asserted Liability unless (i) such settlement is on exclusively monetary terms or (ii) the Indemnified Party shall have consented to the terms of such settlement, which consent shall not unreasonably be withheld. If reasonably requested by the Indemnifying Part y, the Indemnified Party will, at the sole cost and expense of the Indemnifying Party, cooperate with the Indemnifying Party and its counsel in contesting any Asserted Liability or, if appropriate and related to the Asserted Liability in question, in making any counterclaim against the Third Party Claimant, or any cross-complaint against any Person (other than the Indemnified Party or its Affiliates).  Unless and until the Indemnifying Party elects to defend the Asserted Liability, the Indemnified Party shall have the right, at its option and at the Indemnifying Party’s expense, to do so in such manner as it deems appropriate; provided, however, that the Indemnified Party shall not settle, compromise or pay any Asserted Liability for which it seeks indemnification hereunder without the prior written consent of the Indemnifying Party (which shall not be unreasonably withheld).

(gggggggg)

The Indemnifying Party shall be entitled to participate in (but not to control) the defense of any Asserted Liability which it has not elected to defend with its own counsel and at its own expense.

(hhhhhhhh)

The Purchaser and the Seller shall make mutually available to each other all relevant information in their possession relating to any Asserted Liability (except to the extent that such action would result in a loss of attorney-client privilege) and shall cooperate with each other in the defense thereof.

Indemnification Payments.  Any payment hereunder shall be made by wire transfer of immediately available funds to such account or accounts as the Indemnified Party shall designate to the Indemnifying Party in writing.

Exclusivity.  Following the Closing, except with respect to any fraud, intentional misrepresentation or any injunctive or provisional relief, the indemnities provided for in Section 9.2 and Article VI hereof shall be the exclusive remedies of the parties hereto and their respective officers, directors, employees, Affiliates, agents, representatives, successors and assigns for any breach of or inaccuracy in any representation or warranty or any breach, nonfulfillment or default in the performance of any of the covenants or agreements contained in this Agreement (but not any such covenants or agreements to the extent they are by their terms to be performed after the Closing Date), and the parties shall not be entitled to a rescission of this Agreement or to any further indemnification rights or claims of any nature whatsoever in respect thereof , all of which the parties hereto hereby waive.  Nothing set forth in this Article IX shall be deemed to prohibit or limit any party’s right at any time on or after the Closing Date, to seek injunctive or equitable relief for the failure of any other party to perform any covenant or agreement contained herein or to seek any other relief based upon fraud or intentional misrepresentation.

TERMINATION PRIOR TO CLOSING

Termination of Agreement.  This Agreement may be terminated at any time prior to the Closing:

(iiiiiiii)

by the Purchaser or the Seller in writing, if (i) there shall be any order, writ, injunction or decree of any court or Government Entity binding on the Purchaser, on the one hand, and/or the Seller, the Parent or KILICO, collectively or individually on the other hand, which prohibits or restrains the Purchaser and/or the Seller, the Parent or KILICO from consummating the transactions contemplated hereby; provided, however, that the Purchaser, and/or the Seller, the Parent or KILICO, as the case may be, shall have used its or their reasonable best efforts to have any such order, writ, injunction or decree lifted, or (ii) any law or regulation makes consummation of the transactions contemplated by the Transaction Agreements illegal or otherwise prohibited;

(jjjjjjjj)

by the Purchaser or the Seller in writing, if any Insurance Regulatory Approval or any Other Government Consent, the lack of which would result in the failure to satisfy the condition set forth in Section 7.4 or Section 8.4, has been denied and the applicable party has no opportunity to cure the fault giving rise to such denial, including through reapplication or appeal;

(kkkkkkkk)

by the Purchaser in writing, in the event of a breach or default in the performance by the Seller, the Parent or KILICO, or by the Seller in writing, in the event of a breach or default in the performance by the Purchaser, of any representation, warranty, covenant or agreement of the other party, which breach or default, (i) individually or in the aggregate with all other uncured breaches or defaults of such other party, constitute grounds for the conditions set forth in Articles VII or VIII, respectively, not to be satisfied as of the Closing Date and (ii) has not been, or cannot be, cured within thirty (30) days after written notice, describing such breach or default in reasonable detail, is given by the terminating party to the breaching or defaulting party; and

(llllllll)

by the Purchaser or the Seller in writing, if the Closing has not occurred on or prior to February 29, 2004 (the “Termination Date”); provided that no party hereto may terminate this Agreement pursuant to this Section 10.1(d) if such party is in material breach of this Agreement; provided, further, that the Termination Date may be extended by not more than sixty (60) days by either party by written notice to the other party if the Closing shall not have occurred as a direct result of the conditions set forth in Sections 7.4 or 8.4 failing to have been satisfied and the extending party reasonably believes that the relevant approvals will be obtained during such extension period; or

(mmmmmmmm)

at any time on or prior to the Closing Date, by mutual written consent of the Seller and the Purchaser.

Survival.  If this Agreement is terminated and the transactions contemplated hereby are not consummated as described above, this Agreement shall become null and void and of no further force and effect, and there shall be no liability or obligation hereunder on the part of the Seller, the Parent or KILICO or the Purchaser, or any of their respective directors, officers, employees, Affiliates, agents, representatives, successors or assigns except (a) for the provisions of this Agreement and, subject to Section 11.5, the Confidentiality Agreement relating to the obligations of the parties hereto to keep confidential and not to use certain information and data obtained from the other parties hereto, (b) for the provisions of Sections 5.7, 11.1, 11.2, 11.4, 11.5(a), 11.8(a), 11.9 and this Section 10.2, which shall survive any such termination and (c) for any willful breach by any party to this Agreement of one or more of the provisions of this Agreement.

MISCELLANEOUS

Publicity.  Prior to the Closing, no release or public announcement concerning this Agreement or the transactions contemplated hereby shall be made by either party hereto without the prior review and written approval of the other party hereto which approval shall be deemed to be granted if not timely provided, except as and to the extent such party shall be so obligated by Applicable Law (including, without limitation, pursuant to any federal or state securities laws or insurance laws or the rules of any stock exchange or self-regulatory organization or pursuant to any legal, regulatory or legislative proceedings).  The parties hereto shall cooperate with each other in making any release or announcement.

Confidentiality.

(nnnnnnnn)

The parties agree that, other than as agreed or as required to implement the transactions contemplated hereby, the parties will keep confidential the terms and conditions of this Agreement and the Transaction Agreements, including, without limitation, the Exhibits and Schedules hereto and thereto, except as otherwise required by Applicable Law (including, without limitation, pursuant to any federal or state securities laws or insurance laws or the rules of any stock exchange or self-regulatory organization or pursuant to any legal, regulatory or legislative proceedings).

(oooooooo)

Each party hereto (with the Parent, the Seller and KILICO, on the one hand, and the Purchaser, on the other hand, considered to be one party for purposes of this Section 11.2) will, and will cause its Affiliates to, and will use commercially reasonable efforts to cause its and their representatives to, hold in strict confidence, not disclose to any other Person (other than such party’s officers, directors, employees or advisors) or use for any purpose not contemplated by this Agreement or the Transaction Agreements, all Confidential Information of the other party, unless (i) required by Applicable Law or (ii) required to be disclosed in an action or proceeding brought by a party hereto in pursuit of its rights or in the exercise of its remedies hereunder; provided, however, that following the Closing, the foregoing restrictions will not apply to the Purchaser’s use of information concerning the Subsidiaries or, with respect to the KILICO Transferred Business, KILICO, furnished to the Purchaser or its Affiliates pursuant to this Agreement or the Transaction Agreements.

(pppppppp)

For purposes of this Agreement, “Confidential Information” means all information concerning a party or any of its Affiliates furnished before or after execution of this Agreement by such party or such party’s representatives in connection with this Agreement or the Transaction Agreements, the due diligence related thereto or the transactions contemplated hereby; provided, however, after the Closing, all Trade Secrets and other Confidential Information with respect to the Subsidiaries or, with respect to and to the extent used in the KILICO Transferred Business, KILICO, shall be deemed to be Confidential Information of the Purchaser and all Trade Secrets and other Confidential Information with respect to the Excluded Items or the business conducted by KILICO and the KILICO Subsidiaries that is not transferred to the Purchaser or its Affiliates hereunder shall be deemed to be Confidential Information of KILICO and the Seller (unless in each case, and only to the extent, one of the following exception applies on a post-Closing basis); provided further, Confidential Information shall not include information that (a) is or becomes generally available to the public other than as a result of a disclosure by the receiving party or its representatives in breach of this Agreement, (b) was available to the receiving party from another source on a non-confidential basis prior to its disclosure to the receiving party, (c) becomes available to the receiving party on a non-confidential basis from a Person who is not otherwise bound by a confidentiality obligation with respect to the information, or is not otherwise prohibited from transmitting the information to the receiving party, or (d) is or was independently developed by the receiving party without reliance on or reference to the applicable Confidential Information.

(qqqqqqqq)

In the event the transactions contemplated hereby are not consummated, upon the request of the other party, each party hereto will, and will cause its Affiliates and their respective representatives to, promptly return all copies of Confidential Information furnished by the other party in connection with this Agreement or the Transaction Agreements or the transactions contemplated hereby and thereby and destroy all copies, reproductions, summaries, analyses or extracts related thereto or based thereon prepared by the party furnished such Confidential Information or its representatives.

(rrrrrrrr)

Notwithstanding anything to the contrary, nothing in this Agreement shall prohibit the disclosure of the tax treatment and tax structure, each as defined in Treasury Regulations Section 1.6011-4, of the transactions contemplated by this Agreement (the “Transactions”) (but no other details about the matters covered by this Agreement) and all materials of any kind (including opinions or other tax analyses) relating to such tax treatment or tax structure; provided, however, that such disclosure may not be made (a) until the earlier of (i) the date of the public announcement of discussions relating to the Transactions, (ii) the date of the public announcement of the Transactions, or (iii) the date of the execution of the agreement to enter into the Transactions (with or without conditions); (b) to the extent required to be kept confidential to comply with any applicable securities laws; or (c) that identifies the parties to the Transactions or confidential commercial information regarding the Transactions.  Each party shall have the unlimited ability to consult with any tax advisor (including a tax advisor independent from all other entities involved in the Transactions) regarding the tax treatment of tax structure of the Transactions.  This Section 11.2 is not intended to authorize any waiver of the attorney-client privilege.

Notices.  Any notice or other communication required or permitted hereunder shall be in writing and shall be hand delivered or sent by telegraph, telex, facsimile transmission or overnight courier (other than the U.S. Postal Service), postage prepaid and return receipt requested. Any notice sent by hand shall be deemed given when so delivered personally; notices sent by telegraph, telex or facsimile transmission shall be deemed given when electronically confirmed; and notices sent by overnight courier shall be deemed to have been given when received.

Any party may, by notice given in accordance with this Section 11.3 to the other parties, designate another address or person for receipt of notices hereunder provided that notice of such a change shall be effective upon receipt.

Governing Law.  THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.  Each of the parties hereto agrees that any legal action or proceeding with respect to this Agreement may be brought in the Courts of the State of Illinois, County of Cook or the United States District Court for the Northern District of Illinois and, by execution and delivery of this Agreement, each party hereto irrevocably submits itself in respect of its property, generally and unconditionally to the non-exclusive jurisdiction of the aforesaid courts in any legal action or proceeding arising out of this Agreement.  Each of the parties hereto hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement brought in the courts referred to in the preceding sentence.  Each party hereby consents to process being served in any such action or proceeding by the mailing of a copy thereof to the address set forth in Section 11.3 hereof and agrees that such service upon receipt shall constitute good and sufficient service of process or notice thereof.  Nothing in this Section 11.4 shall affect or eliminate any right to serve process in any other matter permitted by law.

Entire Agreement.  

(ssssssss)

This Agreement (including any additional agreements contemplated hereby and the Exhibits and the Schedules hereto) contains the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto, other than the Confidentiality Agreement, which shall survive and remain in full force and effect according to its terms until the Closing (at which time it shall be of no further force or effect, except to the extent the provisions thereof relate to ZHCA and its Affiliates, which portions shall survive the Closing until the expiration of the Confidentiality Agreement pursuant to the terms thereof).

(tttttttt)

Any disclosure in any Schedule of any contract, document, liability, default, breach, violation, limitation, impediment or other matter, although the provision for such disclosure may require such disclosure only if such contract, document, liability, default, breach, violation, limitation, impediment or other matter be “material,” shall not be construed against the Seller as an assertion by the Seller that any such contract, document, liability, default, breach, violation, limitation, impediment or other matter is, in fact, material.

Waivers and Amendments; Non-Contractual Remedies; Preservation of Remedies.  This Agreement may be amended, superseded, canceled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by each of the parties hereto or, in the case of a waiver, by the  party waiving compliance.  Except as provided in Article IX hereof, no delay on the part of any party on exercising any right, power or privilege hereunder shall operate as a waiver thereof, or shall any waiver on the part of any party of any right, power or privilege, or any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any other such right, power or privilege. The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies that any party may otherwise have at law or in equity.

Binding Effect; Assignment.  This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, permitted assigns and legal representatives.  Neither this Agreement, nor any right hereunder, may be assigned, by operation of law or otherwise, by any party (in whole or in part) without the prior written consent of Parent or Purchaser, as applicable.