<PAGE> 1
DEAR KILICO POLICY OWNER:
- ------------------------------------------
GENERAL ECONOMIC OVERVIEW
We have just completed a period of some discomfort for bond and stock market
traders. Concerns about rising interest rates, the possibility of higher price
inflation and Federal Reserve tightening of credit contributed to considerable
market volatility. But while the professional investors tend to fret over every
economic release, individuals who invest in variable annuities for the long term
were wise to stay the course -- at least until the direction of the economy
became clearer. Indeed, several recent economic measures are quite reassuring
and argue in favor of a continued healthy economy with low inflation.
The economy expanded at a 4.2% annual rate in the second quarter, the fastest
pace since the second quarter of 1994. This robust growth is welcome in general
but has tended to roil markets, which fear strong growth will lead to
overheating and inflationary pressures. So far, however, such fears have been
largely unwarranted. With the exception of food prices, whose increases were
weather-related, there have been no significant signs of inflationary pressures.
The economy, as it has done so recently, is in the process of slowing itself
down. While the Federal Reserve Board stands ready to attempt to moderate
economic growth with either interest rate cuts or increases, such intervention
can run the risk of going too far in one direction. It appears that our economy
today is self-regulating.
MARKET OUTLOOK
Based on these snapshots of the economy, we look for a relatively calmer second
half of 1996. Our forecast calls for growth to slow down in the third and fourth
quarters, resulting in an advance of about 2.5% for the entire year. Assuming
that bond and stock market investors concur that there is no chance of an
overheating economy or significantly rising interest rates, the markets should
also relax.
The market volatility that we experienced in May, June and July was caused by
investors who were nervous about the broad economy, and some disappointing
earnings reports which made them pessimistic. Yet, the markets performed the way
that history suggests they should: an overall correction in the stock market was
accentuated in technology and small capitalization stocks--the industry sectors
which performance tends to be the most volatile. Once the stock market
corrected, the bond market rallied. Finally, while not producing spectacular
results, international markets provided a stabilizing influence when compared to
U.S. markets.
Our market forecast eight months into the year is not much different from what
we forecasted in January. The bond market, which is climbing back from a decline
this year, may provide a 5% total return in 1996. The stock market, after the
correction is completed, may advance 5% to 10% for the year. However, future
market conditions can not be predicted with assurance.
In addition, we are projecting that long-term (30-year) interest rates will
hover in the 6.5% to 7.5% range, while short-term interest rates may drop below
their current levels. Finally, we would be surprised if the Federal Reserve
Board moved to adjust interest rates more than 25 basis points either way for
the remainder of the year.
Given the economic environment, we do not look for an upset in the upcoming
presidential election. Much more interesting will be which party wins the most
congressional seats. If the Democrats regain control of Congress, a bond market
selloff could be expected.
While U.S. markets are expected to provide modest returns, we continue to
advocate the benefits of diversification into alternate markets. Many overseas
markets are forecasted to grow at a rate well above our 2.5% growth expectation
for the U.S., and there are many equity and fixed-income opportunities abroad.
The value of the U.S. dollar, always a concern to international investors, will
probably not strengthen much against other currencies for the foreseeable
future.
1
<PAGE> 2
We would like to direct your attention to the performance of the separate
account divisions, which are investment options available through your annuity
product. Please take a moment to review the market summaries prepared by the
portfolio managers.
<TABLE>
<CAPTION>
KEMPER TOTAL RETURN FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
- ----------------------------------------------------------
<S> <C>
Six Months Ended 6/30/96 4.77%
- ----------------------------------------------------------
</TABLE>
The first six months of 1996 were characterized by volatility in the stock
market and depressed performance from an apprehensive bond market. Concerns
about the direction of interest rates, the pace of economic growth and the
return of price inflation dominated during the period. In response, we took
advantage of the significant flexibility afforded by Kemper Total Return Fund's
investment strategy and made several adjustments.
Within the equity portion, weakness in the technology sector and mixed
performance in capital goods companies negatively impacted the overall results.
During this period, we maintained a commitment to the technology sector. Still
believers in the earnings potential of technology providers, we have reoriented
the Fund's exposure toward companies that provide technology services, as well
as buying selected component providers at depressed prices.
In the fixed-income sector, only high yield bonds showed strength. Early in the
year, we increased the Fund's exposure to high yield and high-grade corporate
bonds while reducing its U.S. Treasuries holdings.
We continue to expect high quality technology companies to do well.
Additionally, we look for the Fund's interest rate-sensitive and consumer
nondurable stocks to enhance performance in what we expect to be a weakening
economy. The bond market should react well to a slowdown.
Gary Langbaum
Portfolio Manager June 30, 1996
<TABLE>
<CAPTION>
KEMPER GROWTH FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
- ----------------------------------------------------------
<S> <C>
Six Months Ended 6/30/96 8.94%
- ----------------------------------------------------------
</TABLE>
In late 1995, we had broadened the Fund to include exposure to more
economically-sensitive issues such as retail, oil, housing-related stocks and
selected industrial cyclical issues. These are sectors one would expect to
outperform in a period of strong economic growth and our positions did
contribute positive returns. In March we added a small "basket" of international
stocks that are managed with the help of Zurich Kemper's international
investment team based in London. In light of accelerating growth in foreign
economies, we believe the international markets offer potential for good
relative performance going forward.
More recently, we've seen increased concerns about a slowdown in earnings growth
and the potential for a general market correction. In this environment, the
challenge is to recognize where the new opportunities are, and our research and
valuation models have been effective in doing that.
Looking ahead, we see an upward bias for the market as a whole. Gains will
probably be achieved with additional sector rotation and a much greater level of
volatility than we saw last year. Shareholders can expect more rotation of the
Fund based on where our research suggests the new opportunities will be.
Overall, we see good potential for growth stocks, which aren't as dependent on
prevailing economic conditions to maintain and expand earnings.
Steven H. Reynolds
Portfolio Manager,
Chief Investment Officer--Equities June 30, 1996
<TABLE>
<CAPTION>
KEMPER INCOME AND
CAPITAL PRESERVATION FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
- ----------------------------------------------------------
<S> <C>
Six Months Ended 6/30/96 (3.63)%
- ----------------------------------------------------------
</TABLE>
The last six months was a difficult period for bonds. After slow economic growth
and declining interest rates in 1995, the economic environment began to
2
<PAGE> 3
change in January. Federal budget negotiations stalled, and an impasse
developed, which effectively eliminated the chances for a balanced budget in the
first half of 1996. In addition, economic data released throughout the period
showed stronger than anticipated economic growth and strong employment figures.
These events caused a sell-off in the market, which resulted in higher market
yields. The high grade corporate bond market struggled through most of the
period, but rallied late in June as indicators of inflation remained tame and
technical conditions improved. Although positive, the rally occurred too late to
make a material impact in the Fund's performance.
Going forward, we plan to concentrate on finding value in the market--bond
issues with cash flow growth and debt reduction potential that may be
undervalued today. We expect to maintain a neutral to defensive duration until
interest rates stabilize and the economy's direction becomes more clear.
Robert Cessine
Portfolio Manager June 30, 1996
<TABLE>
<CAPTION>
KEMPER MONEY MARKET FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
- ----------------------------------------------------------
<S> <C>
Six Months Ended 6/30/96 2.05%
- ----------------------------------------------------------
</TABLE>
In the last six-months the economy and expectations have completely shifted. The
period began with sluggish economic growth and a moderate decrease in the
Federal Funds Rate by the Federal Reserve (Fed). However, the strong first
quarter Gross Domestic Product number surprised many given the obstacles faced
at the end of 1995 and beginning of 1996, including a temporary government
shutdown, brutal weather in the East and the General Motors strike. Now, at the
end of June with strong economic growth, it appears that it's just a matter of
time before the Fed increases rates.
Along with the market's swift change, we have switched from extending to
shortening the Money Market Fund's average maturity. This should allow us to
benefit from any rise in interest rates.
Frank Rachwalski
Portfolio Manager June 30, 1996
<TABLE>
<CAPTION>
KEMPER HIGH YIELD FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
- ----------------------------------------------------------
<S> <C>
Six Months Ended 6/30/96 3.74%
- ----------------------------------------------------------
</TABLE>
High yield bonds performed positively despite a turbulent six months for the
overall bond market. During the period, economic growth began gaining momentum.
Although this upturn in the economy hurt returns in the government and high
grade corporate markets, it did not have the same impact in the high yield bond
market. When the economy is growing, credit quality becomes less of a concern to
investors in high yield corporate bonds. A stronger economy assumes that more
growth in corporate earnings will occur. Solid earnings are essential for
companies to continue paying the interest on their outstanding bond issues.
Over the past six months, we maintained an even balance between "cyclical" and
"defensive" investments. During this time, our "cyclical" investments included
issues from the energy sector and "gaming" industry, while we purchased media
investments to fulfill our "defensive" position.
The Fund experienced relatively few credit concerns and the quality of issues
remained relatively stable. Lower B-rated bonds represented approximately
two-thirds of the investments, while higher quality BB-rated bonds comprised
about one quarter. This positioning provided a good level of income for the
Fund, while mitigating some potential risk. As Treasuries and higher quality
bonds rallied late in June this positioning inhibited the Fund's performance
slightly.
We look for more positive high yield market performance. However, we don't
anticipate that corporate earnings will keep pace with their 1994 and 1995
levels. Our investment focus will continue to be on healthy companies that are
positioned to perform well in the current moderate growth economy.
Michael McNamara
Harry Resis
Portfolio Co-Managers June 30, 1996
3
<PAGE> 4
<TABLE>
<CAPTION>
KEMPER DIVERSIFIED INCOME FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
- ----------------------------------------------------------
<S> <C>
Six Months Ended 6/30/96 .32%
- ----------------------------------------------------------
</TABLE>
The last six months were a difficult period for bonds. After slow economic
growth and declining interest rates in 1995, the economic environment began to
change in January. Federal budget negotiations stalled, and an impasse
developed, which effectively eliminated the chances for a balanced budget in the
first half of 1996. In addition, economic data released throughout the period
showed stronger than anticipated economic growth and strong employment figures.
These events caused a sell-off in the market, which resulted in higher market
yields. The high grade corporate bond market struggled through most of the
period, but rallied late in June as indicators of inflation remained tame and
technical conditions improved. Although positive, the rally occurred too late to
make a material impact in the Fund's six-month period performance.
At the start of the year, the Fund was positioned with a longer than average
duration to take advantage of the then slow growth, declining interest rate
environment. Duration is a measurement of a Fund's sensitivity to interest
rates. The longer the duration, the more sensitive it is to interest rate
changes. As rates rose unexpectedly, the Fund's longer duration hurt
performance. We shortened duration accordingly by reducing exposure to the
government market and adding to high yield and foreign currency bond
investments. Even with a shortened duration and change in the Fund's
composition, the poor overall performance of the market continued to inhibit the
Fund's performance until late in the period.
We remain cautiously optimistic about the prospects for fixed-income
investments. Until the direction of the economy becomes more clear, we plan to
maintain a somewhat neutral duration stance.
Robert Cessine
Gordon Johns
Michael McNamara
Harry Resis
Jonathan Trutter
Richard Vandenberg
Portfolio Management Team June 30, 1996
<TABLE>
<CAPTION>
KEMPER U.S. GOVERNMENT
SECURITIES FUND PERCENT CHANGE IN
SEPARATE ACCOUNT DIVISION ACCUMULATION UNIT VALUE+
- ----------------------------------------------------------
<S> <C>
Six Months Ended 6/30/96 (2.53)%
- ----------------------------------------------------------
</TABLE>
The last six months was a difficult period for the government market. After
1995's slow economic growth and declining interest rates, the economic
environment began to change in January. Federal budget negotiations stalled, and
an impasse developed, which effectively eliminated the chances for a balanced
budget in the first half of 1996. In addition, economic data released throughout
the period showed stronger than anticipated economic growth and strong
employment figures.
These events caused a sell-off in the market, which resulted in higher market
yields. It wasn't until late in June that the market rallied as indicators of
inflation remained tame and technical conditions improved. Although positive,
the rally occurred too late to make a material impact in the Fund's six-month
performance.
At the start of the year, the Fund was positioned with a longer than average
duration to take advantage of the then declining interest rate environment.
Duration is a measurement of a fund's sensitivity to interest rates. The longer
the duration, the more sensitive it is to interest rate changes. As rates rose
unexpectedly, the Fund's longer duration hurt performance. We shortened duration
to a defensive position and added mortgage-backed investments to the Fund.
Mortgage-backed investments were added because they tend to outperform
Treasuries as interest rates rise.
4
<PAGE> 5
The poor overall performance of the market, however, continued to inhibit
performance until June, when the government market and Treasuries in particular,
rallied. We plan to maintain the Fund's defensive position until interest rates
stabilize and the direction of the economy becomes more clear.
J. Patrick Beimford, Chief
Investment Officer--Fixed Income
Richard Vandenberg
Portfolio Co-Managers June 30, 1996
We appreciate the opportunity to serve your Insurance needs.
Sincerely,
<TABLE>
<S> <C>
John B. Scott Stephen B. Timbers
John B. Scott Stephen B. Timbers
President President
Chief Executive Chief Investment and
Officer Executive Officer
Kemper Investors Life Zurich Kemper
Insurance Company Investments, Inc.
Scott Photo Timber Photo
August 2, 1996
</TABLE>
+ 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
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE ANNUITY ACCOUNT C
COMBINED STATEMENT OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
JUNE 30, 1996 (UNAUDITED)
(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......... $ 27,834 9,146 6,722 1,229 6,326 2,282
Dividends and other receivables....... 4 1 1 -- 1 1
-------- ------ ------ ------ ------- ------
Total assets.................... 27,838 9,147 6,723 1,229 6,327 2,283
-------- ------ ------ ------ ------- ------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk
charges........................... 6 1 -- -- 5 --
Other............................... 22 7 6 1 5 2
-------- ------ ------ ------ ------- ------
Total liabilities............... 28 8 6 1 10 2
-------- ------ ------ ------ ------- ------
Contract owners' equity............... $ 27,810 9,139 6,717 1,228 6,317 2,281
======== ====== ====== ====== ======= ======
ANALYSIS OF CONTRACT OWNERS' EQUITY
Deficiency of payments for units
redeemed over proceeds from units
sold................................ $(58,405) (6,854) (4,538) (2,258) (37,095) (3,198)
Accumulated net investment income..... 81,050 13,015 8,665 3,372 43,412 5,419
Accumulated net realized gain (loss)
on sales of investments............. 1,220 952 726 101 -- (40)
Unrealized appreciation (depreciation)
of investments...................... 3,945 2,026 1,864 13 -- 100
-------- ------ ------ ------ ------- ------
Contract owners' equity............... $ 27,810 9,139 6,717 1,228 6,317 2,281
======== ====== ====== ====== ======= ======
<CAPTION>
Kemper Kemper U.S.
Diversified Government
Income Securities
Fund Fund
Division Division
----------- -----------
<S> <C> <C>
ASSETS
Investments, at current value......... 216 1,913
Dividends and other receivables....... -- --
----- ------
Total assets.................... 216 1,913
----- ------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Mortality and expense risk
charges........................... -- --
Other............................... -- 1
----- ------
Total liabilities............... -- 1
----- ------
Contract owners' equity............... 216 1,912
===== ======
ANALYSIS OF CONTRACT OWNERS' EQUITY
Deficiency of payments for units
redeemed over proceeds from units
sold................................ (412) (4,050)
Accumulated net investment income..... 1,396 5,771
Accumulated net realized gain (loss)
on sales of investments............. (739) 220
Unrealized appreciation (depreciation)
of investments...................... (29) (29)
----- ------
Contract owners' equity............... 216 1,912
===== ======
</TABLE>
See accompanying notes to combined financial statements.
6
<PAGE> 7
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE ANNUITY ACCOUNT C
COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
(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......................... $ 471 111 -- 45 157 89
Mortality and expense risk charges...... 131 45 32 6 27 10
------ --- --- ---- --- ---
Net investment income (loss)............ 340 66 (32) 39 130 79
------ --- --- ---- --- ---
Net realized and unrealized gain (loss)
on investments:
Net realized gain (loss) on sales of
investments......................... 362 124 200 19 -- 22
Change in unrealized appreciation
(depreciation) of investments....... 398 232 401 (108) -- (17)
------ --- --- ---- --- ---
Net realized and unrealized gain (loss)
on investments........................ 760 356 601 (89) -- 5
------ --- --- ---- --- ---
Net increase (decrease) in contract
owners' equity resulting from
operations............................ $1,100 422 569 (50) 130 84
====== === === ==== === ===
<CAPTION>
Kemper Kemper U.S.
Diversified Government
Income Securities
Fund Fund
Division Division
----------- -------------
<S> <C> <C>
Dividends and capital gains
distributions......................... 8 61
Mortality and expense risk charges...... 1 10
-- ----
Net investment income (loss)............ 7 51
-- ----
Net realized and unrealized gain (loss)
on investments:
Net realized gain (loss) on sales of
investments......................... (3) --
Change in unrealized appreciation
(depreciation) of investments....... (3) (107)
-- ----
Net realized and unrealized gain (loss)
on investments........................ (6) (107)
-- ----
Net increase (decrease) in contract
owners' equity resulting from
operations............................ 1 (56)
== ====
</TABLE>
See accompanying notes to combined financial statements.
7
<PAGE> 8
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE ANNUITY ACCOUNT C
COMBINED STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
AND FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Kemper Total Return Kemper Growth
Combined Fund Division Fund Division
----------------------- ----------------------- -----------------------
Six Six Six
Months Months Months
Ended Year Ended Ended Year Ended Ended Year Ended
June 30, December 31, June 30, December 31, June 30, December 31,
1996 1995 1996 1995 1996 1995
-------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss)...................... $ 340 2,010 66 605 (32) 610
Net realized gain (loss) on sales of
investments..................................... 362 621 124 249 200 377
Change in unrealized appreciation (depreciation)
of investments.................................. 398 2,435 232 1,160 401 732
------- ------ ----- ------ ----- ------
Net increase (decrease) in contract owners'
equity resulting from operations.............. 1,100 5,066 422 2,014 569 1,719
------- ------ ----- ------ ----- ------
Account unit transactions:
Proceeds from units sold.......................... 272 603 63 101 80 114
Net transfers (to) from affiliate or divisions.... (116) (241) 15 (299) (180) (70)
Payments for units redeemed....................... (1,586) (6,952) (390) (2,120) (335) (1,500)
------- ------ ----- ------ ----- ------
Net decrease in contract owners' equity from
account unit transactions..................... (1,430) (6,590) (312) (2,318) (435) (1,456)
------- ------ ----- ------ ----- ------
Total increase (decrease) in contract owners'
equity............................................ (330) (1,524) 110 (304) 134 263
Contract owners' equity:
Beginning of period............................... 28,140 29,664 9,029 9,333 6,583 6,320
------- ------ ----- ------ ----- ------
End of period..................................... $27,810 28,140 9,139 9,029 6,717 6,583
======= ====== ===== ====== ===== ======
</TABLE>
See accompanying notes to combined financial statements.
8
<PAGE> 9
<TABLE>
<CAPTION>
Kemper Income
and Capital Kemper Kemper Kemper
Preservation Money Market High Yield Diversified Income
Fund Division Fund Division Fund Division Fund Division
------------------------- ------------------------- ------------------------- -------------------------
Six Six Six Six
Months Months Months Months
Ended Year Ended Ended Year Ended Ended Year Ended Ended Year Ended
June 30, December 31, June 30, December 31, June 30, December 31, June 30, December 31,
1996 1995 1996 1995 1996 1995 1996 1995
-------- ------------ -------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
39 95 130 325 79 217 7 21
19 (9) -- -- 22 15 (3) (9)
(108) 192 -- -- (17) 114 (3) 30
----- ----- ----- ----- ----- ----- ---- ----
(50) 278 130 325 84 346 1 42
----- ----- ----- ----- ----- ----- ---- ----
9 13 41 311 26 36 5 5
1 32 74 (164) 93 140 -- (6)
(239) (421) (225) (2,110) (199) (435) (24) (38)
----- ----- ----- ----- ----- ----- ---- ----
(229) (376) (110) (1,963) (80) (259) (19) (39)
----- ----- ----- ----- ----- ----- ---- ----
(279) (98) 20 (1,638) 4 87 (18) 3
1,507 1,605 6,297 7,935 2,277 2,190 234 231
----- ----- ----- ----- ----- ----- ---- ----
1,228 1,507 6,317 6,297 2,281 2,277 216 234
===== ===== ===== ===== ===== ===== ==== ====
<CAPTION>
Kemper U.S.
Government Securities
Fund Division
---------------------------
Six
Months
Ended Year Ended
June 30, December 31,
1996 1995
-------- ------------
<S> <C>
51 137
-- (2)
(107) 207
----- -----
(56) 342
----- -----
48 23
(119) 126
(174) (328)
----- -----
(245) (179)
----- -----
(301) 163
2,213 2,050
----- -----
1,912 2,213
===== =====
</TABLE>
9
<PAGE> 10
KEMPER INVESTORS LIFE INSURANCE COMPANY
VARIABLE ANNUITY ACCOUNT C
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(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 June 30, 1996.
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.
10
<PAGE> 11
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
(2) SUMMARY OF INVESTMENTS
Investments, at cost, at June 30, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
Shares
Owned Cost
----- -------
<S> <C> <C>
INVESTMENTS
Kemper Total Return Fund......................................................................... 859 $ 7,120
Kemper Growth Fund............................................................................... 410 4,858
Kemper Income and Capital Preservation Fund...................................................... 148 1,216
Kemper Money Market Fund......................................................................... 6,326 6,326
Kemper High Yield Fund........................................................................... 284 2,182
Kemper Diversified Income Fund................................................................... 37 245
Kemper U.S. Government Securities Fund........................................................... 223 1,942
-------
TOTAL INVESTMENTS.......................................................................... $23,889
=======
</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.
11
<PAGE> 12
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)--(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 six months ended June
30, 1996, KILICO received contingent deferred sales charges of approximately
$700.
Zurich Kemper Investments, Inc. ("ZKI"), an affiliated company, is the
investment manager of the funds which serve as the underlying investments of the
Separate Account.
(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.
12
<PAGE> 13
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
Contract owners' equity at June 30, 1996, 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 1,788 $5.085 $ 9,093
Nonqualified 9 5.089 46
-------
9,139
-------
Kemper Growth Fund.................. Qualified 1,048 6.347 6,654
Nonqualified 10 6.331 63
-------
6,717
-------
Kemper Income and Capital
Preservation Fund................. Qualified 285 4.304 1,228
-------
Kemper Money Market Fund............ Qualified 2,150 2.827 6,079
Nonqualified 84 2.827 238
-------
6,317
-------
Kemper High Yield Fund.............. Qualified 419 5.185 2,174
Nonqualified 20 5.321 107
-------
2,281
-------
Kemper Diversified Income Fund...... Qualified 74 2.933 216
-------
216
-------
Kemper U.S. Government Securities
Fund.............................. Qualified 474 3.852 1,826
Nonqualified 21 4.003 86
-------
1,912
-------
TOTAL CONTRACT OWNERS' EQUITY........................................................................... $27,810
=======
</TABLE>
13
<PAGE> 14
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14
<PAGE> 15
SEMI-ANNUAL
REPORT
Kemper
Advantage
Individual Variable Annuity Contracts
Kemper Investors Life Insurance Company
Variable Annuity Account C
Period ended [ZURICH KEMPER LIFE LOGO]
June 30, 1996
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] PRINTED ON RECYCLED PAPER
