1
EXHIBIT 14
--------------------------------------------------------------------------------
Dear Participant:
--------------------------------------------------------------------------------
Separate Account (B) ended the year with an Accumulated Unit Value increase
of 25.10% while the dividend-adjusted Standard and Poor's Composite Index of 500
stocks (S&P 500) increased by 33.36%. The Wall Street Journal reported that the
average return for diversified U.S. stock funds was 24.36%.
1997 was an unprecedented third consecutive year of strong double digit
growth for the stock market, with large capitalization stocks again
outperforming small capitalization stocks. The three-year S&P 500 returns for
1995-1997 of 37.53%, 22.96% and 33.36% were the highest consecutive returns for
any three year period during the measured period dating from 1926. The previous
high three-year period was 1954-1956 with returns of 52.60%, 31.60% and 6.60%,
respectively.
The strong stock market in 1997 reflected the positives that have been
driving the market for the past three years. Corporate profitability continued
strong, particularly considering we were experiencing the seventh consecutive
year of economic expansion. Although wage rates began to edge up, productivity
advancements and relatively low interest rates apparently were able to offset
most of the pressures on margins. Inflation remained under control which kept
the Federal Reserve at bay during 1997. The only increase of the Fed Funds rate
was a moderate 1/4 of 1% to 5.50% on March 25, 1997. Although the Federal
Reserve gave additional signals that they might raise interest rates again prior
to year end, the turmoil in Asia discouraged any such action.
The March increase in the Fed Funds rate precipitated a market correction of
approximately 9%. When there was no additional rate hike at the next Federal
Reserve Board meeting in April, the market took off and rallied strongly into
August. From April 15 to August 1, the S&P 500 increased by over 25%, 115% on an
annualized basis. As the Asian crisis continued to deepen into the fourth
quarter, stock prices went on hold and then took a one day plunge on October 27.
The S&P 500 fell 64.66 points, or 6.87% and the Dow Xxxxx Industrial Average
fell 554.26 points, or 7.18%. Fortunately, the next day saw a partial bounce
back with the S&P 500 increasing 44.87 points and the Dow Xxxxx Industrials
recovering 337.17 points. Although the S&P 500 recovered enough so that by early
December a new high was hit at 983.79, this was barely above the previous high
of 983.12 reached on October 7 and only 2% above August highs. The Dow Xxxxx
Industrials actually hit its 1997 high on August 6.
Separate Account (B) has no investments in Asian companies. The portfolio was
negatively affected, however, as were world stock markets, by the potential
slowdown of growth in Asia. Not only will demand for our export products be
reduced, but Asian currency devaluations will make imports more attractive.
Also, several of your portfolio companies are multi-national with operations in
Asia. Companies such as Applied Materials, Citicorp, Molex and United
Technologies have direct exposure to the Asian markets. Our oil service
companies had a rough fourth quarter stock-wise as oil prices dropped in
anticipation of reduced Asian demand for petroleum. Earnings still look strong,
however, for Schlumberger, Camco and Santa Fe International, the portfolio
holdings in Separate Account (B).
We've previously commented on the success of our options writing program.
During 1997 we generated $986 thousand of call premium writing covered calls on
stocks held in our portfolio. This compares to $897 thousand received as call
premium in 1996. We intend to judiciously use this strategy to enhance income
generation in 1998.
1998 could be a difficult year for the stock market. Historically the average
return for the stock market has been about 12.5%, well below the average of the
last three years. The S&P 500 earnings multiple at 22 times trailing earnings
looks aggressive and leaves little room for earnings disappointments. On the
positive side, inflation should continue to be subdued and therefore interest
rates should not be a problem during at least the first half of 1998. The market
has been essentially unchanged for the last five months, but with increased
volatility. We believe there is still a possibility for a correction of at least
10% although low interest rates should keep our economy growing enough to
prevent a full scale bear market.
Management will continue to closely monitor market conditions and make
portfolio changes that we believe will enhance relative returns. Thank you for
your continued support and participation.
Cordially,
/s/ Xxxxxxx X. XxXxxx
Xxxxxxx X. XxXxxx
Chairman of the Committee
--------------------------------------------------------------------------------
1
2
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
(PER ACCUMULATION UNIT OUTSTANDING DURING THE PERIOD) 1997 1996 1995 1994 1993
----------------------------------------------------------------------------------------------------------------------------
Value at beginning of period $14.14 $11.74 $ 8.85 8.91 $7.70
----- ----- --- --- ---
Investment income .23 .19 .19 .19 .15
Fees .13 .10 .09 .07 .07
----- ----- --- --- ---
INVESTMENT INCOME--NET .10 .09 .10 .12 .08
Net gain (loss) on investments 3.45 2.31 2.79 (.18) 1.13
----- ----- --- --- ---
NET INCREASE (DECREASE) IN PARTICIPANTS' EQUITY
RESULTING FROM OPERATIONS 3.55 2.40 2.89 (.06) 1.21
----- ----- --- --- ---
VALUE AT END OF PERIOD $17.69 $14.14 $11.74 $8.85 $8.91
===== ===== ===== === ===
Ratio of investment income--
net to average participants' equity 0.6% 0.7% 1.0% 1.3% 1.0%
Ratio of fees to average participants' equity .83% .83% .83% .83% .83%
Portfolio turnover rate 45% 53% 46% 52% 69%
Number of accumulation units outstanding
at end of period 8,612,630 8,502,140 8,763,186 9,298,777 9,385,475
--------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
--------------------------------------------------------------------------------
COMMITTEE FOR SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
MEMBERS
--------------------------------------------------------------------------------
Xxxxxxx X. XxXxxx, Chairman
Vice President
Continental Assurance Company
Xxxxxxx X. Xxxxxxxx
Vice President and
Portfolio Manager
Continental Assurance Company
Xxxxxxx X. Xxx
Financial Consultant
Xxxxxxx X. Tongue
Professor of Economics
and Finance, Emeritus
University of Illinois at Chicago
Xxxxx X. Xxxxx
President
Xxxxxx Technology, Inc.
--------------------------------------------------------------------------------
SECRETARY
Xxxxx Xxxxxxxxx
Vice President and
Associate General Counsel
Continental Assurance Company
AUDITORS
Deloitte & Touche LLP
Chicago, Illinois
CUSTODIAN
Chase Manhattan Trust Company
of Illinois
Chicago, Illinois
--------------------------------------------------------------------------------
This report has been prepared for the information of participants in
Continental Assurance Company Separate Account (B) and is not authorized
for distribution to prospective investors unless preceded or accompanied by an
effective prospectus that includes information regarding Separate Account
(B)'s objectives, policies, management, records, sales commissions and other
information.
--------------------------------------------------------------------------------
2
3
--------------------------------------------------------------------------------
RECORD OF ACCUMULATION UNIT VALUES RECORD OF ANNUITY UNIT VALUES
--------------------------------------------------------------------------------
UNIT
VALUATION MARKET
DATE VALUE
-------------------------
1997 December 31 $17.69
1996 December 31 14.14
1995 December 31 11.74
1994 December 31 8.85
1993 December 31 8.91
1992 December 31 7.70
1991 December 31 7.29
1990 December 31 5.45
1989 December 31 5.31
1988 December 31 4.56
The Annuity Unit Values shown at
the right are based on the monthly
increases or decreases in the
accumulation unit values in excess of
an assumed annualized rate of 3 1/2%
and rounded to the nearest cent.
UNIT
VALUATION MARKET
DATE VALUE
-----------------------
1998 January 1 $6.05
1997 January 1 4.88
1996 January 1 4.36
1995 January 1 3.35
1994 January 1 3.39
1993 January 1 3.14
1992 January 1 2.71
1991 January 1 2.36
1990 January 1 2.40
1989 January 1 2.08
--------------------------------------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT IN ONE ACCUMULATION UNIT
--------------------------------------------------------------------------------
Separate Account (B) does not make distributions of investment income and
realized capital gains; therefore, the unit values include
investment income and capital gains. This chart displays the unit value at
December 31 for the past ten years. This period was one of mixed
common stock prices. The values shown should not be considered representations
of values which may be achieved in the future.
Unit Value Bar Graph
================================================================================
ALLOCATION OF EQUITY INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
DECEMBER 31 1997 1996
-----------------------------------------------------------------------------------
Consumer Staples 23.9% 18.2%
Technological 23.0 23.4
Financial Services 14.2 13.5
Consumer Services 11.3 13.2
Capital Goods 8.8 9.8
Energy 8.7 10.3
Basic Industries 3.6 5.6
Utilities 3.6 --
--------------------------------------------------------------------------------
DECEMBER 31 1997 1996
-----------------------------------------------------------------------------------
Transportation 1.6 2.3
Consumer Cyclicals 1.3 3.7
---- ----
100% 100%
---- ----
--------------------------------------------------------------------------------
3
4
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
DECEMBER 31, 1997
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES VALUE
-----------------------------------------------------------------------------------------------
COMMON STOCKS:
AEROSPACE-(3.3%)
Raytheon Company 45,000 $ 2,272,500
United Technologies Corporation 38,200 2,781,438
------------
5,053,938
------------
BEVERAGES-(3.2%)
The Xxxxxx Mondavi Corporation* 49,000 2,388,750
PepsiCo, Inc. 67,000 2,441,313
------------
4,830,063
------------
BROADCASTING-(2.1%)
Tele-comm Liberty Media Gr-A* 88,875 3,221,719
------------
CHEMICAL-(1.8%)
Monsanto Company 65,000 2,730,000
------------
COMPUTER SYSTEMS-(3.1%)
Cisco Systems, Inc.* 45,000 2,508,750
XXX Xxxxxxxxxxx* 80,000 2,195,000
------------
4,703,750
------------
COMPUTER TECHNOLOGY-(4.0%)
First Data Corp. 80,000 2,340,000
Hewlett-Packard Company 59,000 3,687,500
------------
6,027,500
------------
CONTAINER-(1.6%)
Crown Cork & Seal Company, Inc. 50,000 2,506,250
------------
COSMETICS-(2.8%)
Xxx Xxxxxxxx Xxxxxxx 42,000 4,218,375
------------
DIVERSIFIED-(2.7%)
American Standard Companies, Inc.* 55,000 2,107,188
Corning Inc. 52,700 1,956,488
------------
4,063,676
------------
ELECTRONIC COMPONENTS-(6.0%)
Honeywell, Inc. 35,000 2,397,500
Molex Incorporated/Class A 145,995 4,197,356
Motorola, Inc. 44,000 2,510,750
------------
9,105,606
------------
ELECTRICAL EQUIPMENT-(2.2%)
General Electric Company 45,000 3,301,875
------------
ENERGY-(2.2%)
Enron Corp. 80,000 3,325,000
------------
FINANCIAL SERVICES-(2.1%)
American Express Company 35,000 3,123,750
------------
See accompanying Notes to Financial Statements.
--------------------------------------------------------------------------------
4
5
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
DECEMBER 31, 1997
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES VALUE
-----------------------------------------------------------------------------------------------
COMMON STOCKS:
FINANCIAL SERVICES (BANK)-(11.5%)
Banc One Corporation 54,500 $ 2,960,031
Bank United Corp. 70,000 3,425,625
Citicorp 35,500 4,488,531
Nationsbank Corporation 52,200 3,174,413
Norwest Corporation 90,000 3,476,250
------------
17,524,850
------------
FOODS-(2.0%)
C P C International Inc.** 28,800 3,103,200
------------
HEALTH CARE-(6.8%)
Cardinal Health, Inc. 49,750 3,737,469
Healthsouth Corp.* 128,000 3,552,000
Medtronic, Inc. 60,000 3,138,750
------------
10,428,219
------------
HOUSEHOLD PRODUCTS-(2.0%)
Procter & Xxxxxx Co. 38,800 3,096,725
------------
INSTRUMENTS/CAPITAL GOODS-(1.3%)
Xxxxxxx-Xxxxxx Holdings Inc.* 116,200 2,004,450
------------
MACHINERY-(2.2%)
Illinois Tool Works, Inc. 56,800 3,415,100
------------
MERCHANDISING-DRUGS-(1.4%)
Rite Aid Corporation 35,000 2,054,062
------------
MERCHANDISING-FOODS-(1.7%)
Safeway Inc.* 40,000 2,530,000
------------
OIL FIELD SERVICES & EQUIPMENT-(6.1%)
Camco International, Inc. 50,000 3,184,375
Santa Fe International 70,000 2,848,125
Schlumberger Limited 41,000 3,300,500
------------
9,333,000
------------
PHARMACEUTICAL-(9.8%)
Amgen, Inc.* 45,000 2,435,625
Xxx Lilly and Company 40,000 2,785,000
Pfizer Inc. 81,000 6,039,562
Schering-Plough Corporation 60,000 3,727,500
------------
14,987,687
------------
PUBLISHING-(1.8%)
Tribune Company 45,000 2,801,250
------------
RAILROADS-(1.5%)
Burlington Northern Santa Fe 25,212 2,343,140
------------
RETAIL STORES-(1.2%)
The Sports Authority, Inc.* 124,750 1,840,062
------------
See accompanying Notes to Financial Statements.
--------------------------------------------------------------------------------
5
6
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
DECEMBER 31, 1997
NUMBER OF
SHARES
OR MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) PAR VALUE VALUE
-----------------------------------------------------------------------------------------------
SEMICONDUCTOR-(3.6%)
Applied Materials, Inc.* 88,000 $ 2,651,000
Intel Corp. 40,000 2,810,000
------------
5,461,000
------------
TELECOMMUNICATIONS-(2.0%)
Loral Space & Communications* 141,500 3,033,406
------------
UTILITY (COMMUNICATION)-(2.8%)
Teleport Communications Group Inc.* 35,000 1,920,625
Worldcom, Inc.* 80,000 2,420,000
------------
4,340,625
------------
UTILITY (WATER)-(0.6%)
United States Filter Corporation* 30,000 898,125
------------
TOTAL COMMON STOCKS--(95.4%) 145,406,403
------------
SHORT-TERM NOTES:
INSURANCE-(4.8%)
AIG Funding Inc., 5.82%, due 01/02/98 $7,335,000 7,333,814
------------
TOTAL SHORT-TERM NOTES-(4.8%) 7,333,814
------------
TOTAL INVESTMENTS-(100.2%) 152,740,217
------------
Cash and receivables less liabilities-(-0.2%) (361,323)
-----------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY-NET ASSETS-(100.0%) $152,378,894
===============================================================================================
*Non-income producing security in 1997.
**Effective 1/02/98 name changed to Bestfoods.
See accompanying Notes to Financial Statements.
--------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
YEAR ENDED DECEMBER 31, 1997 (IN SHARES) INCREASED DECREASED NOW OWNED
-----------------------------------------------------------------------------------------------
COMMON STOCK:
A T & T Corporation 15,000 59,000 -
Adaptec, Inc. 50,000 50,000 -
American Express Company 15,000 10,000 35,000
American Standard Companies, Inc. 55,000 - 55,000
Amgen, Inc. 45,000 - 45,000
Applied Materials, Inc. 69,000 30,000 88,000
Banc One Corporation 10,000 10,000 54,500
--------------------------------------------------------------------------------
6
7
--------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
YEAR ENDED DECEMBER 31, 1997 (IN SHARES) INCREASED DECREASED NOW OWNED
-----------------------------------------------------------------------------------------------
COMMON STOCK:
Bank United Corp. 70,000 - 70,000
Boatmen's Bancshares Inc. - 40,000 -
Burlington Northern Santa Fe - 5,000 25,212
CMP Media Inc. 2,000 2,000 -
Camco International, Inc. 5,000 35,000 50,000
Cardinal Health, Inc. 10,000 30,000 49,750
Cisco Systems, Inc. 45,000 - 45,000
Citicorp - 5,000 35,500
Cognizant Corp. 25,000 25,000 -
The Columbia Gas System, Inc. - 35,000 -
Columbia HCA Healthcare Corp. - 62,500 -
Corning Inc. 52,700 - 52,700
Crown Cork & Seal Company, Inc. 10,000 - 50,000
Deere & Company - 46,600 -
Electronic Data Systems Corporation - 57,500 -
XXX Xxxxxxxxxxx 80,000 - 80,000
Enron Corp. 10,000 10,000 80,000
Fluor Corporation - 33,000 -
General Electric Company 22,500 - 45,000
Xxx Xxxxxxxx Xxxxxxx - 10,000 42,000
Xxxxxx International Industries, Inc. 35,000 35,000 -
Healthsouth Corp. 94,000 60,000 128,000
Hewlett-Packard Company 10,000 15,000 59,000
Home Depot, Inc. - 38,333 -
Honeywell, Inc. 35,000 - 35,000
Illinois Tool Works, Inc. 28,400 - 56,800
Intel Corp. 40,000 25,000 40,000
Iona Technologies PLC-ADR 10,000 10,000 -
Xxx Xxxxx and Company 60,000 30,000 40,000
Loral Space & Communications 22,500 - 141,500
XxXxxxxx'x Corporation - 50,000 -
Medtronic, Inc. 60,000 - 60,000
Xxxxxxx-Xxxxxx Holdings Inc. 116,200 - 116,200
Minerals Technologies Inc. - 47,300 -
Molex Incorporated/Class A 52,558 - 145,995
Monsanto Company 20,000 10,000 65,000
XXX Xxxxxxxxxxx 2,750 2,750 -
Nationsbank Corporation 52,200 - 52,200
Norwest Corporation 45,000 - 90,000
Pfizer Inc. 40,500 10,000 81,000
Procter & Xxxxxx Co. 19,400 8,900 38,800
Raytheon Company 45,000 - 45,000
Rite Aid Corporation 35,000 - 35,000
Safeway Inc. 40,000 - 40,000
Santa Fe International 70,000 - 70,000
Schering Plough Corporation 40,000 20,000 60,000
--------------------------------------------------------------------------------
7
8
--------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
YEAR ENDED DECEMBER 31, 1997 (IN SHARES) INCREASED DECREASED NOW OWNED
-----------------------------------------------------------------------------------------------
COMMON STOCK:
Schlumberger Limited 23,000 5,000 41,000
Solutia Inc. 13,000 13,000 -
The Sports Authority, Inc. 20,000 - 124,750
Tele-Communications, Inc./Class A - 55,000 -
Tele-comm Liberty Media Gr-A 29,625 - 88,875
Teleport Communications Group Inc. 35,000 - 35,000
Thermo Electron Corp. - 61,625 -
Travelers/Aetna Property Casualty Corporation 25,000 95,000 -
Tribune Company 45,000 - 45,000
Tricon Global Restaurants 6,700 6,700 -
United States Filter Corporation 85,000 55,000 30,000
Worldcom, Inc. 80,000 - 80,000
===============================================================================================
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TEN LARGEST COMMON STOCK HOLDINGS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
MARKET % OF NET
DECEMBER 31, 1997 VALUE ASSETS
----------------------------------------------------------------------------------------
Pfizer Inc. $ 6,039,562 4.0%
Citicorp 4,488,531 2.9
Xxx Xxxxxxxx Xxxxxxx 4,218,375 2.8
Molex Incorporated/Class A 4,197,356 2.8
Cardinal Health, Inc. 3,737,469 2.5
Schering-Plough Corporation 3,727,500 2.4
Hewlett-Packard Company 3,687,500 2.4
Healthsouth Corp. 3,552,000 2.3
Norwest Corporation 3,476,250 2.3
Bank United Corp. 3,425,625 2.2
----------------------------------------------------------------------------------------
$40,550,168 26.6%
========================================================================================
--------------------------------------------------------------------------------
8
9
--------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
DECEMBER 31 1997 1996
-----------------------------------------------------------------------------------------
ASSETS
Investments in securities of unaffiliated issuers--Note
1:
Common stocks at market (cost $92,262,123 and
$73,779,133) $145,406,403 $112,751,631
Call options written at market - 20,059
Short-term notes at amortized cost (approximates
market) 7,333,814 8,027,747
------------ ------------
TOTAL INVESTMENTS 152,740,217 120,799,437
Cash 13,730 188,311
Dividends receivable--Note 1: 102,376 144,192
Receivable for securities sold - 520,198
Receivable from Continental Assurance Company for fund
deposits 58,304 1,719
------------ ------------
TOTAL ASSETS 152,914,627 121,653,857
------------ ------------
LIABILITIES
Fees payable to Continental Assurance Company--Note 4: 40,585 40,876
Payable for securities purchased - 1,083,750
Deferred income call options written - 99,747
Payable to Continental Assurance Company for fund
withdrawals 495,148 237,842
------------ ------------
TOTAL LIABILITIES 535,733 1,462,215
-----------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY--NET ASSETS (8,612,630 and 8,502,140
units issued
and outstanding at $17.69 and $14.14 per unit)--Note 2 $152,378,894 $120,191,642
=========================================================================================
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
YEAR ENDED DECEMBER 31 1997 1996
----------------------------------------------------------------------------------------
Investment income:
Dividends $ 1,316,494 $ 1,177,681
Interest and other 755,828 509,710
----------- -----------
2,072,322 1,687,391
----------- -----------
Fees (Continental Assurance Company)--Note 4:
Investment advisory fees 704,159 562,628
Service fees 464,745 371,335
----------- -----------
1,168,904 933,963
----------- -----------
INVESTMENT INCOME--NET 903,418 753,428
----------- -----------
Investment gain--Note 3:
Net realized gain 16,194,879 12,631,639
Net unrealized gain 14,151,723 7,550,017
----------- -----------
NET GAIN ON INVESTMENTS 30,346,602 20,181,656
----------------------------------------------------------------------------------------
NET INCREASE IN PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $31,250,020 $20,935,084
========================================================================================
See accompanying Notes to Financial Statements.
--------------------------------------------------------------------------------
9
10
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN PARTICIPANTS' EQUITY
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
YEAR ENDED DECEMBER 31 1997 1996
--------------------------------------------------------------------------------------------
From operations:
Investment income--net $ 903,418 $ 753,428
Net realized gain on investments 16,194,879 12,631,639
Net unrealized gain on investments 14,151,723 7,550,017
------------ ------------
Net increase in participants' equity resulting from
operations 31,250,020 20,935,084
------------ ------------
From unit transactions:
Sales 11,909,643 2,182,340
Withdrawals (10,972,411) (5,770,866)
------------ ------------
Net increase (decrease) in participants' equity
resulting from unit transactions 937,232 (3,588,526)
------------ ------------
TOTAL INCREASE IN PARTICIPANTS' EQUITY 32,187,252 17,346,558
Participants' equity, January 1 120,191,642 102,845,084
--------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY, DECEMBER 31 $152,378,894 $120,191,642
--------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
================================================================================
ORGANIZATION
Continental Assurance Company Separate Account (B) (Separate Account (B)) is
registered under the Investment Company Act of 1940, as amended, as an open-end
diversified management investment company. Separate Account (B) is part of
Continental Assurance Company (Assurance), an Illinois life insurance company
which is a wholly-owned subsidiary of Continental Casualty Company (Casualty).
Casualty is wholly-owned by CNA Financial Corporation (CNA). Loews Corporation
owns approximately 84% of the outstanding common stock of CNA.
The operations of Assurance include the sale of certain variable annuity
contracts, the proceeds of which are invested in Separate Account (B). Assurance
also provides investment advisory and administrative services to Separate
Account (B) for a fee.
The assets and liabilities of Separate Account (B) are segregated from those
of Assurance.
INVESTMENTS
Investments in securities traded on national securities exchanges are valued
at the last reported sales price on each business day of the year. Securities
not traded on a national exchange are valued at the bid price of
over-the-counter market quotations. Short-term notes are valued at cost plus
accrued discount or interest (amortized cost) which approximates market.
Separate Account (B) invests from time to time in certain derivative
financial instruments to increase investment returns. Financial instruments used
for such purposes include put and call options on stocks. No open derivative
positions existed at December 31, 1997. The gross notional principal amount of
these instruments at December 31, 1996 totaled $3,841,250.
Derivatives are carried at fair value which generally reflects the estimated
amounts that Separate Account (B) would receive or pay upon termination of the
contracts at the reporting date. Dealer quotes are available for all of Separate
Account (B)'s derivatives.
The fair values associated with these instruments are generally affected by
changes in the stock market. The credit risk associated with these instruments
is minimal as all transactions are cleared through security exchanges.
Net realized gains and losses on sales of securities are determined as the
difference between proceeds and cost, using the specific identification method.
There are no differences in cost for financial statement and Federal income tax
purposes.
Security transactions are accounted for on the trade date. Dividend income is
recorded on the ex-dividend date.
Separate Account (B) may loan securities, up to a maximum of 25% of its net
assets, to brokers under loan agreements which are fully secured by cash or
government securities. Loaned securities are not reported herein as purchases or
sales since Separate Account (B) remains the owner of loaned securities. During
the years ended December 31, 1997 and 1996 no investment securities owned by
Separate Account (B) were loaned to brokers under loan agreements.
FEDERAL INCOME TAXES
Under existing Federal income tax law, no taxes are payable on net investment
income and net realized capital gains, which are reinvested in Separate Account
(B) and taken into account in determining unit values.
--------------------------------------------------------------------------------
10
11
--------------------------------------------------------------------------------
NOTE 2. PARTICIPANTS' EQUITY--NET ASSETS:
================================================================================
Participants' equity--net assets consisted of the following:
---------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996
---------------------------------------------------------------------------------------------
From operations:
Accumulated investment income--net $ 52,185,165 $ 51,281,747
Accumulated net realized gain on investment transactions 96,074,948 79,880,069
Accumulated unrealized gain 55,477,008 39,694,309
Accumulated unrealized loss (2,332,729) (701,753)
------------ ------------ ---
Accumulated income 201,404,392 170,154,372
From unit transactions:
Accumulated proceeds from sale of units, net of
withdrawals (49,025,498) (49,962,730)
---------------------------------------------------------------------------------------------
TOTAL PARTICIPANTS' EQUITY--NET ASSETS $152,378,894 $120,191,642
=============================================================================================
--------------------------------------------------------------------------------
NOTE 3. INVESTMENTS:
================================================================================
NET REALIZED GAIN ON INVESTMENTS
YEAR ENDED DECEMBER 31 1997 1996
---------------------------------------------------------------------------------------------
Aggregate proceeds $820,595,354 $385,825,919
Aggregate cost 804,400,475 373,194,280
---------------------------------------------------------------------------------------------
Net realized gain $ 16,194,879 $ 12,631,639
=============================================================================================
CHANGE IN UNREALIZED GAIN ON INVESTMENTS
YEAR ENDED DECEMBER 31 1997 1996
---------------------------------------------------------------------------------------------
Unrealized gain on investments:
Balance, December 31 $ 53,144,279 $ 38,992,556
Less balance, January 1 38,992,556 31,442,539
---------------------------------------------------------------------------------------------
Change in net unrealized gain $ 14,151,723 $ 7,550,017
=============================================================================================
AGGREGATE COST OF SECURITIES PURCHASED
YEAR ENDED DECEMBER 31 1997 1996
---------------------------------------------------------------------------------------------
Common stocks $ 60,343,096 $ 54,207,247
Put options - 3,000
Bonds - 2,346,875
Short-term notes 761,856,229 327,063,972
---------------------------------------------------------------------------------------------
Total purchases $822,199,325 $383,621,094
=============================================================================================
--------------------------------------------------------------------------------
11
12
--------------------------------------------------------------------------------
NOTE 4. MANAGEMENT FEES:
================================================================================
Separate Account (B) pays fees to Assurance for investment advisory and
management services (investment advisory fees) which are set by contract at
one-half of one percent per annum of the average daily net assets of Separate
Account (B).
The Investment Advisory Agreement additionally provides for the
reimbursement to Assurance for certain legal, accounting and other expenses
(service fees). Such reimbursement is computed at the rate of .33 of one percent
per annum of the average daily net assets of Separate Account (B).
Participants pay fees to Assurance for sales and administrative services.
Sales fees represent costs paid by participants upon purchase of additional
accumulation units; administrative fees are deducted annually from certain
participants' accounts.
--------------------------------------------------------------------------------
FEES AND EXPENSES PAID TO ASSURANCE
YEAR ENDED DECEMBER 31 1997 1996
-------------------------------------------------------------------------------------------
Investment advisory fees $ 704,159 $562,628
Service fees 464,745 371,335
---------- --------
Total fees charged to fund income 1,168,904 933,963
Sales and administrative fees paid by participants 11,417 12,704
-------------------------------------------------------------------------------------------
Total $1,180,321 $946,667
===========================================================================================
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
================================================================================
The Committee Members and the Participants of
Continental Assurance Company Separate Account (B)
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments as of December 31, 1997, of Continental
Assurance Company Separate Account (B) (a separate account of Continental
Assurance Company (the Company), which is an affiliate of CNA Financial
Corporation, an affiliate of Loews Corporation) as of December 31, 1997 and
1996, and the related statement of operations and changes in participants'
equity for the years then ended, and the financial highlights for each of the
five years in the period ended December 31, 1997. These financial statements and
financial highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These 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. Our procedures included
confirmation of securities owned by correspondence with the custodian and
brokers. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Continental Assurance
Company Separate Account (B) as of December 31, 1997 and 1996, the results of
its operations and changes in its participants' equity for the years then ended,
in conformity with generally accepted accounting principles. The financial
highlights present fairly the information set forth therein for each of the five
years in the period ended December 31, 1997.
Deloitte & Touche LLP
Chicago, Illinois
February 13, 1998
--------------------------------------------------------------------------------
12
13
[SEPARATE ACCOUNT B LOGO]
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
REPORT TO PARTICIPANTS
DECEMBER 31, 1997
[CNA LOGO]
[CA LOGO]
L 554-921 (12/97) 2/98
