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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Commission File Number 033-43462

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

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

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

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  þ Yes  o No

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

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

     Documents incorporated by reference: None.

KEMPER INVESTORS LIFE INSURANCE COMPANY

FORM 10-Q

PART I. FINANCIAL STATEMENTS

PART II. OTHER INFORMATION

PART 1. FINANCIAL STATEMENTS

ITEM 1. Interim Financial Statements

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

        See accompanying notes to consolidated financial statements.

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

        See accompanying notes to consolidated financial statements.

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

        See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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

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

 Forward-looking statements 

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

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

Critical Accounting Policies 

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

Business Description 

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

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

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

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

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

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

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

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

Non-GAAP Financial Measures 

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

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

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

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

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RESULTS OF OPERATIONS

Net income (loss)  

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

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

REVENUE

Net Investment Income 

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

Net Realized Investment Gains 

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

Net realized investment gains

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

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Premium Income 

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

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

Separate Account Fees and Charges 

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

Separate account fees and charges

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

Broker-dealer Commission Revenue 

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

Modified Coinsurance Income — Related Party 

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

Other Income 

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

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BENEFITS AND EXPENSES

Interest credited to policyholders  

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

Claims Incurred and Other Benefits 

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

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

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

Policyholder surrenders, withdrawals and death benefits

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

Reconciliation of
Claims incurred and other policyholder benefits to
Policyholder surrenders, withdrawals and death benefits

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 Taxes, Licenses and Fees 

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

Commissions and Broker-Dealer Commissions  

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

Operating Expenses 

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

Deferral of Insurance Acquisition Costs 

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

Amortization of Insurance Acquisition Costs 

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

Amortization of Value of Business Acquired 

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

Amortization of Other Intangibles 

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

Income Tax Expense 

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

Cumulative Effect of Accounting Change, Net of Tax 

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

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

ASSETS UNDER MANAGEMENT

The following table reflects our assets under management:

Assets under management

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

Investments 

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

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

Invested Assets and Cash

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Fixed Maturity Securities 

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

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

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

Nonaccrual Loans 

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

Derivative Instruments 

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

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

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

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Future Policy Benefits 

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

Future Policy Benefits

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

Other Policyholder Benefits and Funds Payable

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

Stockholder’s Equity 

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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Ratings

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

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

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

General

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

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

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

Market Risk

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

Interest Rate Risk

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

Equity Price Risk

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

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

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

        The GMDB and GRIB benefit is the greatest of:

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

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

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

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

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

ITEM 4.  Controls and Procedures

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

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

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

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PART II.    OTHER INFORMATION

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

        (a)     EXHIBITS.

        (b)     REPORTS ON FORM 8-K.

                  None.

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

_________________

SIGNATURES

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

Kemper Investors Life Insurance Company (Registrant)

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