<PAGE> 1
DEAR KILICO POLICY OWNER:
- ---------------------------------------
GENERAL ECONOMIC OVERVIEW
Investors enjoyed very positive performance in both the fixed income and stock
markets in 1995. The returns of most leading securities markets worldwide were
significantly higher than they were in 1994.
After several quarters of robust growth, the United States economy seems to be
growing at a pace that investors find comfortable, creating an excellent
environment for financial assets. Contrary to isolated reports that caused some
observers to become concerned, we believe the economy is in no jeopardy of
recession. Its health was confirmed with the news that the economy grew (as
measured by real gross domestic product [GDP]) at an annual rate of 4.2 percent
in the third quarter. This follows much lower growth in the first two quarters,
as the economy was adjusting to the Federal Reserve Board's series of interest
rate increases. The slowdown, in fact, was acknowledged by the Fed when it eased
short-term rates by a small but symbolic 25 basis points in July. Now we know
that the economy was rebounding from July through September.
Growth without a corresponding increase in inflation is very encouraging.
Although we are well along in the economic cycle and at a point when prices
often start hiking up, inflationary pressures have actually been reduced
somewhat.
The Fed reduced rates again in December and January 1996, this time
acknowledging discussions underway to reduce the federal budget deficit. Even
with such reduction's by the Fed, our forecast calls for lower growth ranging
between 2 percent to 3 percent for the
next few quarters, with the momentum likely to come from exports and
nonresidential construction.
MARKET OUTLOOK
Slow growth and low inflation is the optimal combination for investors in the
fixed income markets, and we expect them to continue to perform well.
We believe that the opportunities for common stock investors will be
increasingly concentrated in higher quality investments. After hitting new highs
and showing considerable strength for most of the year, the stock market has
shown some vulnerability and then gone on to set records. However, it's
inevitable the current bull market will come to an end some day. In fact, some
sectors may be overextended today.
As we view the new year, companies cannot necessarily count on the economy to
provide above-average earnings support. Rather, stocks that have proven
themselves with a pattern of consistent earnings are likely to attract investor
support. Specifically, sectors that produce more consistent earnings, such as
health care, consumer nondurables, selected technology and selected capital
goods can be expected to do well. Picking the right sectors to invest in will be
the key challenge for equity investors during the next few quarters.
International investing continues to be quite complex. After sinking to its
post-World War II low last year, the value of the U.S. dollar has gained
strength against most foreign currencies. While a stronger dollar favors the
U.S. economy because it reduces the cost of American imports and attracts
foreign capital, a strong dollar in relation to a local currency has the effect
of devaluing a foreign investment. The value of the dollar and the
attractiveness of U.S. investments to foreign investors will be key factors in
the next few months.
1
<PAGE> 2
ECONOMIC GUIDEPOSTS
Economic activity is a key influence on investment performance and shareholder
decision-making. Periods of recession or boom, inflation or deflation, credit
expansion or credit crunch have a significant impact on the Fund's performance.
The following are some significant economic guideposts and their investment
rationale that may help your investment decision-making. The 10-year Treasury
rate and the prime rate are prevailing interest rates. The other data report
year-to-year percentage changes.
<TABLE>
<CAPTION>
NOW (1/31/96) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-YEAR TREASURY RATE(1) 5.65 6.49 7.47 5.97
PRIME RATE(2) 8.50 8.75 9.00 6.00
INFLATION RATE(3) 2.60 2.90 2.87 2.52
THE U.S. DOLLAR(4) -0.57 -4.11 -5.54 -0.07
CAPITAL GOODS ORDERS(5)* 11.63 7.10 23.00 15.48
INDUSTRIAL PRODUCTION(6) 0.07 3.17 5.41 4.21
EMPLOYMENT GROWTH(7) 1.18 2.03 3.15 2.49
</TABLE>
1 Falling interest rates in recent years have been a big plus for financial
assets.
2 The interest rate that commercial lenders charge their best borrowers.
3 Inflation reduces an investor's real return. In the last five years, inflation
has been as high as 6%. The low, moderate inflation of the last few years has
meant high real returns.
4 Changes in the exchange value of the dollar impact U.S. exporters and the
value of U.S. firms' foreign profits.
5 These influence corporate profits and equity performance.
6 An influence on corporate profits and equity performance.
7 An influence on family income and retail sales.
* Data as of November 30, 1995
** Data as of October 31, 1995
SOURCE: ECONOMICS DEPARTMENT, KEMPER FINANCIAL SERVICES, INC.
We are in the midst of a global recovery, and the same fundamentals that have
driven markets higher in the U.S. can be found in many foreign countries
currently. However, leading international economies continue to lag the U.S. For
example, Japan and Germany, whose economies typically follow U.S. growth, are
not as robust as in past cycles. Moreover, conditions in emerging market
countries underline the importance of careful research and experience in
understanding how these markets work.
Political leadership also has some bearing on the progress of the economy and
the state of the financial markets. In the months preceding a presidential
election year, it has been common for incumbents to attempt to stimulate growth.
Given our Republican Congress and Democratic President, however, we do not
consider this as likely this time.
With the rest of the country, we are closely following political initiatives to
produce a balanced federal budget. This is a political wild card, but we would
expect both the stock and fixed-income markets to react with enthusiasm if
progress can be made.
We would like now to direct your attention to the performance of the
subaccounts, which are investment options available through your annuity
contact. Please take a moment to review the market and performance summaries
prepared by the portfolio managers.
2
<PAGE> 3
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
<S> <C>
- ---------------------------------------------------------
For The Year Ended 12/31/95 24.56%
- ---------------------------------------------------------
</TABLE>
U.S. stock and bond market strength in the third and fourth quarter of 1995
enabled Kemper Total Return Fund to produce its second best year in 10 years.
The fixed-income portion of the Fund served as a "risk limiter" as investing in
bonds reduces the overall risk of the Fund and enables us to aggressively manage
the Fund's stock holdings for capital appreciation. The Fund's income comes from
both the stocks and bonds within the Fund.
Our confidence about the economy throughout the year prompted us to maintain
relatively longer maturities in the government bond portion of the Fund, which
provided superior returns. In addition, our larger commitments to favored stocks
in preferred industry sectors were instrumental in boosting the Fund's
participation in the 1995 technology rally.
As 1995 drew to a close, we reduced the Fund's technology exposure while
increasing its investment in interest rate-sensitive stocks. We look for modest
growth in the economy throughout 1996. For the near term, at least, we expect
U.S. markets to offer more attractive opportunities than international markets.
Gary A. Langbaum,
Portfolio Manager February 1, 1996
<TABLE>
<CAPTION>
KEMPER GROWTH FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
<S> <C>
- ---------------------------------------------------------
For The Year Ended 12/31/95 30.61%
- ---------------------------------------------------------
</TABLE>
NOTE: C. Beth Cotner, portfolio manager of the Growth Fund, resigned in early
September to pursue other opportunities. Until a successor is named, the
portfolio is being managed by Steven H. Reynolds, chief investment officer for
equities.
The Growth Fund posted solid gains for the year ended December 31, 1995, despite
increasing market volatility. Concerns about the longevity of the technology
sector's bull run and the outlook for corporate earnings growth prompted some
profit taking during the fourth quarter, resulting in a series of modest market
corrections. Technology stocks were particularly hard hit at year-end, following
some disappointing earnings announcements and reports of rising inventories in
the telecommunications and semiconductor arenas.
Through the fourth quarter, we focused on reducing the Fund's exposure to
technology, health care and consumer non-durable stocks which had enjoyed strong
gains earlier in the year. In addition, we've eliminated several positions that
proved too small to make a meaningful contribution to performance. With
expectations for the economy to strengthen modestly during the first half of
1996, we deployed some of those assets into energy (Enron, Schlumberger, Union
Texas Petroleum) and communications/media (Viacom, Cox Communications, AirTouch)
sectors. Selected housing-related stocks (Armstrong, Shaw Industries, Home
Depot) were also added to the Fund. Following a strong increase in mortgage loan
applications in recent months, we believe these stocks may benefit from
increased activity during the coming months.
Going forward, our outlook remains positive. While relatively low interest rates
and low inflation should favor growth stocks, we think it's going to be a stock
picker's market in 1996. In this environment, we believe our strong research and
analytical capabilities can help to give us an edge.
Steven H. Reynolds
Portfolio Manager February 1, 1996
<TABLE>
<CAPTION>
KEMPER INCOME AND
CAPITAL PRESERVATION FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
<S> <C>
- ---------------------------------------------------------
For The Year Ended 12/31/95 20.16%
- ---------------------------------------------------------
</TABLE>
Last year was a good one for bonds. The Fed's tightening led to a soft landing
for the economy-- slow economic growth and low inflation. And, as growth slowed,
interest rates began to fall and the performance of fixed-income investments
improved. Bond prices increased throughout 1995.
The Fund's average duration was critical to the Fund's strong performance.
Duration is a measurement of a portfolio's sensitivity to interest rates. The
longer the duration, the more sensitive it is to interest rate changes. In
February 1995, indicators revealed that economic growth had begun to slow. At
that point, the Fund's average duration was extended as it was anticipated that
interest rates would move lower. This
3
<PAGE> 4
adjustment enabled the Fund to benefit from a bond market rally that began early
in the second quarter, heightened in May and continued throughout the rest of
the year.
Corporate bonds were the Fund's strongest performers during the year and a high
level of investment in these bonds was maintained throughout the year. Another
contributing factor to performance was the decision to favor U.S. Treasuries
over mortgages for much of the year. In April, mortgages represented 12 percent
of the Fund. But by May all mortgage holdings were sold to invest in U.S.
Treasuries, which outperformed as interest rates fell. This portfolio adjustment
was extremely beneficial in terms of total return.
We anticipate continued slow to moderate economic growth, a benign level of
inflation and interest rates that should continue to fall. These factors should
be positive for the Fund's investments.
Robert S. Cessine
Portfolio Manager February 1, 1996
<TABLE>
<CAPTION>
KEMPER MONEY MARKET FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
<S> <C>
- ---------------------------------------------------------
For The Year Ended 12/31/95 4.67%
- ---------------------------------------------------------
</TABLE>
1995 started with the Federal Reserve increasing interest rates a half
percentage point in February and ending with rates decreasing a quarter
percentage in December.
The market generally viewed this second move as a step in the process of
gradually moving away from restrictive monetary conditions toward a more neutral
monetary policy stance, given the economy's moderate growth pace. However, an
extended trend toward lower interest rate levels is not expected at this time.
We believe that there is continuing potential for long-term growth. With
long-term rates at current levels, housing and auto sales should continue to be
stimulated. These and other factors cause us to believe that the economy should
exhibit improved growth as the year progresses.
In the meantime, the Money Market Fund currently has a longer than usual average
maturity because of our outlook for stable to slightly lower rates for the next
several months.
Frank J. Rachwalski, Jr.
Portfolio Manager February 1, 1996
<TABLE>
<CAPTION>
KEMPER HIGH YIELD FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
<S> <C>
- ---------------------------------------------------------
For The Year Ended 12/31/95 16.30%
- ---------------------------------------------------------
</TABLE>
Corporate high yield bonds posted solid gains in 1995. Healthy corporate
earnings, slow economic growth and declining interest rates created a positive
environment for lower-rated and non-rated securities.
1995 was a good year. The High Yield Fund generated a strong total return, which
outweighed its few credit concerns. The corporate sector benefited from
favorable levels of supply and demand. Demand for the higher income offered by
high yield corporate bonds was stimulated by a decline in yields in the U.S.
Treasury and investment grade sectors.
At the same time, there was a decrease in new issues, which also helped high
yield prices. The Fund's exposure to BB-rated bonds, in particular, contributed
to performance. BB-rated bonds are the highest quality tier of high yield bonds,
and their price movement tends to be more closely correlated to U.S. Treasuries
than lower quality bonds. This was positive for the Fund as the U.S. Treasury
market rallied throughout most of the year.
Looking ahead, we anticipate continued slow economic growth, a benign rate of
inflation and the possibility of further interest rate cuts. We also anticipate
a favorable supply and demand balance. Together, these factors should be
positive for the Fund and the high yield market overall.
Michael A. McNamara
Harry E. Resis, Jr.
Co-Portfolio Managers February 1, 1996
<TABLE>
<CAPTION>
KEMPER DIVERSIFIED INCOME FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
<S> <C>
- ---------------------------------------------------------
For The Year Ended 12/31/95 18.50%
- ---------------------------------------------------------
</TABLE>
Last year was a very positive one for the bond market and the Fund as well.
Interest rates moved lower, economic growth continued but at a slower rate, and
4
<PAGE> 5
inflation remained low -- creating an excellent environment for the Fund's
investments.
We adopted an investment strategy that favored long term bonds, which helped the
Fund's performance as interest rates fell during the year. Foreign currency
bonds, U.S. government securities and high yield bonds all contributed to the
strong performance of the Fund. Emerging market investments underperformed
during the first quarter but by the close of the year, this sector posted gains
for the Fund.
Our economic outlook for 1996 is positive. We anticipate continued slow to
moderate economic growth, a benign level of inflation and interest rates that
should continue to fall. Further contributing to this scenario is the likelihood
that a meaningful balanced federal budget agreement will be reached. If that
happens, it is possible that interest rates may move even lower. All of these
factors would contribute to a positive environment for the Fund's fixed-income
investments.
Michael A. McNamara
Harry E. Resis, Jr.
Co-Portfolio Managers February 1, 1996
<TABLE>
<CAPTION>
KEMPER U.S. GOVERNMENT
SECURITIES FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
<S> <C>
- ---------------------------------------------------------
For The Year Ended 12/31/95 17.21%
- ---------------------------------------------------------
</TABLE>
The government market posted impressive gains in 1995 as slower economic growth
quelled investors' concerns about inflation. The government market experienced
bouts of market volatility during the year as investors questioned the depth of
the inventory correction, the underlying strength of the economy and the
possibility of a federal budget deficit accord. By the end of the year, the
yield on the two year Treasury note fell below 5.25 percent and the yield on the
30 year long bond pierced 6.0 percent for the first time in two years.
The excellent total return performance of the Fund was due to our decision to
maintain a long duration and to favor U.S. Treasuries over mortgages for much of
the year. Early in the second quarter, the portfolio's U.S. Treasury holdings
were increased and U.S. Treasuries outperformed mortgages for most of the period
as volatility and prepayment fears caused mortgages to underperform their
U.S. Treasury counterparts.
We anticipate continued economic growth at a non-inflationary pace, and a steady
to somewhat lower interest rate environment. If a meaningful balanced federal
budget agreement is ironed out, the potential for further interest rate declines
would be enhanced. The environment for fixed-income investments should remain
positive.
J. Patrick Beimford
Portfolio Manager February 1, 1996
We appreciate your support as a Kemper policy owner and look forward to
continuing to serve your insurance needs.
Sincerely,
John B. Scott Stephen B. Timbers
John B. Scott Stephen B. Timbers
President President
Chief Executive Officer Chief Executive Officer
Kemper Investors Life Chief Investment Officer
Insurance Company Kemper Financial Services, Inc.
[PHOTO] [PHOTO]
+ The percent change in accumulation unit value is net of mortality and
expense risk charges. No adjustment has been made for the annual $25 records
maintenance charge or surrender charges. No withdrawals are assumed. The
returns are based upon historical results and are not representative of
future results. For the Money Market Fund, there can be no assurance that
the Fund will be able to maintain a stable net asset value of $1.00 per
share and the Fund is not insured or guaranteed by the U.S. Government. For
the High Yield Fund, investment in lower-rated and non-rated securities
present greater risk of loss to principal and interest than higher-rated
securities.
5
<PAGE> 6
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THIS PAGE INTENTIONALLY
LEFT BLANK
----------------
6
<PAGE> 7
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
KEMPER INVESTORS LIFE INSURANCE COMPANY:
We have audited the accompanying combined statement of assets and liabilities
and contract owners' equity of Kemper Investors Life Insurance Company Variable
Annuity Account C as of December 31, 1995, and the related combined statement of
operations for the year then ended, and the combined statements of changes in
contract owners' equity for the years ended December 31, 1995 and 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Kemper
Investors Life Insurance Company Variable Annuity Account C as of December 31,
1995, and the combined results of its operations for the year then ended, and
the combined changes in its contract owners' equity for the years ended December
31, 1995 and 1994, in conformity with generally accepted accounting principles.
Chicago, Illinois
February 16, 1996
7
<PAGE> 8
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE ANNUITY ACCOUNT C
COMBINED STATEMENT OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Kemper
Kemper Income Kemper Kemper
Total Kemper and Capital Money High
Return Growth Preservation Market Yield
Fund Fund Fund Fund Fund
Combined Division Division Division Division Division
-------- -------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, at current value......... $ 28,153 9,042 6,590 1,509 6,316 2,263
Dividends and other receivables....... 40 1 4 -- -- 18
-------- ------- ------- ------ ------- -------
Total assets.................... 28,193 9,043 6,594 1,509 6,316 2,281
-------- ------- ------- ------ ------- -------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk
charges........................... 24 8 6 1 5 2
Other............................... 29 6 5 1 14 2
-------- ------- ------- ------ ------- -------
Total liabilities............... 53 14 11 2 19 4
-------- ------- ------- ------ ------- -------
Contract owners' equity............... $ 28,140 9,029 6,583 1,507 6,297 2,277
======== ======= ======= ====== ======= =======
ANALYSIS OF CONTRACT OWNERS' EQUITY
Deficiency of payments for units
redeemed over proceeds from units
sold................................ $(56,975) (6,542) (4,103) (2,029) (36,985) (3,118)
Accumulated net investment income..... 80,710 12,949 8,697 3,333 43,282 5,340
Accumulated net realized gain (loss)
on sales of investments............. 858 828 526 82 -- (62)
Unrealized appreciation (depreciation)
of investments...................... 3,547 1,794 1,463 121 -- 117
-------- ------- ------- ------ ------- -------
Contract owners' equity............... $ 28,140 9,029 6,583 1,507 6,297 2,277
======== ======= ======= ====== ======= =======
<CAPTION>
Kemper Kemper U.S.
Diversified Government
Income Securities
Fund Fund
Division Division
----------- -----------
<S> <C> <C>
ASSETS
Investments, at current value......... 230 2,203
Dividends and other receivables....... 4 13
----- ------
Total assets.................... 234 2,216
----- ------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk
charges........................... -- 2
Other............................... -- 1
----- ------
Total liabilities............... -- 3
----- ------
Contract owners' equity............... 234 2,213
===== ======
ANALYSIS OF CONTRACT OWNERS' EQUITY
Deficiency of payments for units
redeemed over proceeds from units
sold................................ (393) (3,805)
Accumulated net investment income..... 1,389 5,720
Accumulated net realized gain (loss)
on sales of investments............. (736) 220
Unrealized appreciation (depreciation)
of investments...................... (26) 78
----- ------
Contract owners' equity............... 234 2,213
===== ======
</TABLE>
See accompanying notes to combined financial statements.
8
<PAGE> 9
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE ANNUITY ACCOUNT C
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Kemper
Kemper Income Kemper Kemper
Total Kemper and Capital Money High
Return Growth Preservation Market Yield
Fund Fund Fund Fund Fund
Combined Division Division Division Division Division
-------- -------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dividends and capital gains
distributions......................... $2,312 702 676 111 400 241
Expenses:
Mortality and expense risk charges.... 285 92 63 15 69 23
Maintenance fee....................... 17 5 3 1 6 1
------- ------- ------- --- --- ---
Total expenses...................... 302 97 66 16 75 24
------- ------- ------- --- --- ---
Net investment income................... 2,010 605 610 95 325 217
------- ------- ------- --- --- ---
Net realized and unrealized gain (loss)
on investments:
Net realized gain (loss) on sales of
investments......................... 621 249 377 (9) -- 15
Change in unrealized appreciation of
investments......................... 2,435 1,160 732 192 -- 114
------- ------- ------- --- --- ---
Net realized and unrealized gain on
investments........................... 3,056 1,409 1,109 183 -- 129
------- ------- ------- --- --- ---
Net increase in contract owners' equity
resulting from operations............. $5,066 2,014 1,719 278 325 346
======= ======= ======= === === ===
<CAPTION>
Kemper Kemper U.S.
Diversified Government
Income Securities
Fund Fund
Division Division
----------- -------------
<S> <C> <C>
Dividends and capital gains
distributions......................... 23 159
Expenses:
Mortality and expense risk charges.... 2 21
Maintenance fee....................... -- 1
-- ---
Total expenses...................... 2 22
-- ---
Net investment income................... 21 137
-- ---
Net realized and unrealized gain (loss)
on investments:
Net realized gain (loss) on sales of
investments......................... (9) (2)
Change in unrealized appreciation of
investments......................... 30 207
-- ---
Net realized and unrealized gain on
investments........................... 21 205
-- ---
Net increase in contract owners' equity
resulting from operations............. 42 342
== ===
</TABLE>
See accompanying notes to combined financial statements.
9
<PAGE> 10
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE ANNUITY ACCOUNT C
COMBINED STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
Kemper Total
Return Kemper Growth
Combined Fund Division Fund Division
----------------- ---------------- ----------------
1995 1994 1995 1994 1995 1994
------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income............................................. $ 2,010 963 605 154 610 20
Net realized gain (loss) on sales of investments.................. 621 68 249 20 377 156
Change in unrealized appreciation (depreciation) of investments... 2,435 (2,773) 1,160 (1,418) 732 (628)
------- ------ ------ ------ ------ ------
Net increase (decrease) in contract owners' equity resulting
from operations............................................... 5,066 (1,742) 2,014 (1,244) 1,719 (452)
------- ------ ------ ------ ------ ------
Account unit transactions:
Proceeds from units sold.......................................... 603 559 101 184 114 169
Net transfers (to) from affiliate or divisions.................... (241) (451) (299) (885) (70) 451
Payments for units redeemed....................................... (6,952) (6,902) (2,120) (1,710) (1,500) (1,631)
------- ------ ------ ------ ------ ------
Net decrease in contract owners' equity from account unit
transactions.................................................. (6,590) (6,794) (2,318) (2,411) (1,456) (1,011)
------- ------ ------ ------ ------ ------
Total increase (decrease) in contract owners' equity................ (1,524) (8,536) (304) (3,655) 263 (1,463)
Contract owners' equity:
Beginning of year................................................. 29,664 38,200 9,333 12,988 6,320 7,783
------- ------ ------ ------ ------ ------
End of year....................................................... $28,140 29,664 9,029 9,333 6,583 6,320
======= ====== ====== ====== ====== ======
</TABLE>
See accompanying notes to combined financial statements.
10
<PAGE> 11
<TABLE>
<CAPTION>
Kemper
Kemper Income Diversified
and Capital Kemper Kemper Income
Preservation Money Market High Yield Fund
Fund Division Fund Division Fund Division Division
----------------------------- ----------------------------- ----------------------------- ------------
1995 1994 1995 1994 1995 1994 1995
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
95 116 325 261 217 217 21
(9) (11) -- -- 15 (62) (9)
192 (191) -- -- 114 (250) 30
----- ----- ------ ------ ----- ------ ---
278 (86) 325 261 346 (95) 42
----- ----- ------ ------ ----- ------ ---
13 18 311 116 36 42 5
32 (222) (164) 1,049 140 (568) (6)
(421) (174) (2,110) (2,186) (435) (667) (38)
----- ----- ------ ------ ----- ------ ---
(376) (378) (1,963) (1,021) (259) (1,193) (39)
----- ----- ------ ------ ----- ------ ---
(98) (464) (1,638) (760) 87 (1,288) 3
1,605 2,069 7,935 8,695 2,190 3,478 231
----- ----- ------ ------ ----- ------ ---
1,507 1,605 6,297 7,935 2,277 2,190 234
===== ===== ====== ====== ===== ====== ===
<CAPTION>
Kemper
Diversified
Income Kemper U.S.
Fund Government Securities
Division Fund Division
------------ -----------------------------
1994 1995 1994
------------ ------------ ------------
<S> <C> <C>
19 137 176
(17) (2) (18)
(17) 207 (269)
--- ----- -----
(15) 342 (111)
--- ----- -----
7 23 23
33 126 (309)
(54) (328) (480)
--- ----- -----
(14) (179) (766)
--- ----- -----
(29) 163 (877)
260 2,050 2,927
--- ----- -----
231 2,213 2,050
=== ===== =====
</TABLE>
11
<PAGE> 12
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE ANNUITY ACCOUNT C
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Kemper Investors Life Insurance Company Variable Annuity Account C (the
"Separate Account") is a unit investment trust registered under the Investment
Company Act of 1940, as amended, established by Kemper Investors Life Insurance
Company ("KILICO"). KILICO is owned by Kemper Corporation which was acquired by
an investor group led by Zurich Insurance Company ("Zurich") on January 4, 1996.
The Separate Account is divided into seven subaccounts and each subaccount
invests exclusively in a corresponding Kemper Fund. Each fund is an open-end
diversified management investment company.
SECURITY VALUATION
The investments are stated at current value which is based on the closing bid
price, net asset value, at December 31, 1995.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on the trade date (the date the order to
buy or sell is executed). Dividends and capital gains distributions are recorded
as income on the ex-dividend date. Realized gains and losses from security
transactions are reported on an identified cost basis.
ACCUMULATION UNIT VALUATION
On each day the New York Stock Exchange (the "Exchange") is open for trading,
the accumulation unit value is determined as of the earlier of 3:00 p.m.
(Chicago time) or the close of the Exchange by dividing the total value of each
Division's investments and other assets, less liabilities, by the number of
accumulation units outstanding in the respective Division.
FEDERAL INCOME TAXES
Under Revenue Ruling 81-225, the contract owner is treated as the owner of the
underlying fund shares with respect to purchase payments made after December 31,
1980, except in the case of Individual Retirement Annuities, tax sheltered
403(b) annuities and annuities under a qualified 403(a) retirement plan issued
before September 22, 1981 ("Qualified Contracts").
With respect to purchase payments made before January 1, 1981, and Qualified
Contracts, KILICO is treated as the owner of the underlying fund shares and the
contract owner is treated as the owner of an annuity contract for all Federal
income tax purposes. Under current law, dividends and realized gains
attributable to fund shares considered owned by KILICO are not currently taxed
to the extent they are applied to liabilities under the contract.
The Tax Reform Act of 1984 authorized the Secretary of the Treasury to prescribe
diversification requirements for the investments underlying a variable annuity
contract. The final regulation issued March 1, 1989, provided that such
diversification requirements do not apply to Qualified Contracts or purchase
payments before January 1, 1981.
12
<PAGE> 13
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF INVESTMENTS
Investments, at cost, at December 31, 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
Shares
Owned Cost
----- --------
<S> <C> <C>
INVESTMENTS
Kemper Total Return Fund......................................................................... 883 $ 7,248
Kemper Growth Fund............................................................................... 440 5,127
Kemper Income and Capital Preservation Fund...................................................... 170 1,388
Kemper Money Market Fund......................................................................... 6,316 6,316
Kemper High Yield Fund........................................................................... 283 2,146
Kemper Diversified Income Fund................................................................... 38 256
Kemper U.S. Government Securities Fund........................................................... 244 2,125
--------
TOTAL INVESTMENTS.......................................................................... $ 24,606
========
</TABLE>
The underlying investments of the Funds are summarized below.
KEMPER TOTAL RETURN FUND: This Fund invests in fixed-income securities (bonds
and other debt securities) and equity securities (stocks). The Fund also may
invest a small portion of its assets in put and call options, purchase and sell
financial futures contracts and options thereon, invest in foreign securities,
engage in related foreign currency transactions and lend its securities.
KEMPER GROWTH FUND: This Fund invests primarily in common stocks but can invest
in any security with potential for capital growth. The Fund may also invest a
small portion of its assets in put and call options, purchase and sell financial
futures contracts and options thereon, invest in foreign securities, engage in
foreign currency transactions and lend its securities.
KEMPER INCOME AND CAPITAL PRESERVATION FUND: This Fund invests primarily in
investment grade debt securities including corporate bonds, United States or
Canadian Government securities, commercial paper and money market instruments.
The Fund may also purchase and sell put and call options and financial futures
and options thereon, invest in foreign securities and engage in related foreign
currency transactions.
KEMPER MONEY MARKET FUND: This Fund invests primarily in short-term obligations
of major banks and corporations.
KEMPER HIGH YIELD FUND: This Fund invests in fixed-income securities. The Fund
may also sell put and call options and financial futures contracts and options
thereon, invest in foreign securities and engage in related foreign currency
transactions. The Fund invests a substantial portion of its net assets in high
yielding fixed-income securities. These securities will ordinarily be in the
lower rating categories of recognized rating agencies or will be non-rated, and
generally will involve more risk than securities in the higher rating
categories.
KEMPER DIVERSIFIED INCOME FUND: This Fund invests primarily in fixed-income
securities and dividend paying common stocks and by writing options. The Fund
invests a substantial portion of its assets in high yield bonds. These bonds
ordinarily are in the lower rating categories of recognized rating agencies or
are non-rated, and thus involve more risk than higher rated bonds. The Fund may
also invest a small portion of its assets in put and call options, purchase and
sell financial futures contracts and options thereon, invest in foreign
securities, engage in foreign currency and delayed delivery transactions and
lend its securities.
KEMPER U.S. GOVERNMENT SECURITIES FUND: This Fund invests in obligations issued
or guaranteed by the U.S. Government or its agencies.
13
<PAGE> 14
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(3) TRANSACTIONS WITH AFFILIATES
KILICO assumes the mortality risks associated with the annuity contracts and
incurs all expenses involved in administering the contracts. In return, KILICO
assesses a daily charge based on assets for mortality and expense risk which
amounts to an aggregate of one percent (1.00%) per annum. Additionally, KILICO
assesses against each contract participating in the Separate Account a records
maintenance charge of $25 on December 31st of each calendar year whether or not
any purchase payments have been made during the year.
Proceeds payable on the redemption of units are reduced by the amount of any
applicable contingent deferred sales charge. During the year ended December 31,
1995, KILICO received contingent deferred sales charges of approximately
$12,300.
Kemper Financial Services, Inc. ("KFS"), an affiliated company, is the
investment manager of the funds which serve as the underlying investments of the
Separate Account. In connection with the acquisition of Kemper Corporation on
January 4, 1996, Zurich also acquired 100% of KFS.
(4) NET TRANSFERS (TO) FROM AFFILIATE OR DIVISIONS
Net transfers (to) from affiliate or divisions include transfers of all or part
of the contract owner's interest to or from another Division or to the general
account of KILICO.
(5) CONTRACT OWNERS' EQUITY
The contract owners' equity is affected by the investment results of each fund
and contract charges. The accompanying combined financial statements include
only contract owners' payments pertaining to the variable portions of their
contracts and exclude any payments for the fixed portion, the latter being
included in the general account of KILICO. Contract owners may elect to
annuitize the contract under one of several annuity options, as specified in the
prospectus.
14
<PAGE> 15
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Contract owners' equity at December 31, 1995, is as follows (in thousands,
except unit value; differences are due to rounding):
<TABLE>
<CAPTION>
Contract
Number Unit Owners'
of Units Value Equity
---------------- ------ ----------------
<S> <C> <C> <C> <C>
SEPARATE ACCOUNT DIVISION
Kemper Total Return Fund............ Qualified 1,851 $ 4.854 $ 8,985
Nonqualified 9 4.857 44
--------
9,029
--------
Kemper Growth Fund.................. Qualified 1,120 5.826 6,525
Nonqualified 10 5.811 58
--------
6,583
--------
Kemper Income and Capital
Preservation Fund................. Qualified 338 4.466 1,507
--------
Kemper Money Market Fund............ Qualified 2,187 2.770 6,058
Nonqualified 86 2.770 239
--------
6,297
--------
Kemper High Yield Fund.............. Qualified 426 4.998 2,129
Nonqualified 29 5.128 148
--------
2,277
--------
Kemper Diversified Income Fund...... Qualified 80 2.924 234
--------
234
--------
Kemper U.S. Government Securities
Fund.............................. Qualified 538 3.952 2,126
Nonqualified 21 4.107 87
--------
2,213
--------
TOTAL CONTRACT OWNERS' EQUITY........................................................................... $ 28,140
=======
</TABLE>
15
<PAGE> 16
ANNUAL
REPORT
Kemper
Advantage
Individual Variable Annuity Contracts
Kemper Investors Life Insurance Company
Variable Annuity Account C
Period ended [ZURICH KEMPER LIFE LOGO]
December 31, 1995
This publication may be distributed to the public only if preceded or
accompanied by a prospectus.
Distributed by
Investors Brokerage Services, Inc.
Kemper Investors Life Insurance Company
[ZURICH KEMPER LIFE LOGO] 1 Kemper Drive
Long Grove, IL 60049
Policy form series
L-5672, L-5454 & L-5797 L-5759(2/96)1042
[RECYCLED PAPER LOGO]
1012110
