1
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Dear Participant:
--------------------------------------------------------------------------------
Continental Assurance Company Separate Account (B) ended 1999 with an
Accumulated Unit Value increases of 33.55% for the year, while the
dividend-adjusted Standard & Poor's Composite Index of 500 stocks (S&P 500) had
a total return of 21.04%. The average stock mutual-fund, as reported in the Wall
Street Journal, returned 27.11% for this time period.
The market advance was the fifth consecutive year of returns exceeding 20%.
This is the longest streak of 20% plus returns in U.S. equity markets. It is
also the longest run of consecutive years with positive returns -- the nine
years from 1991 through 1999. The previous record was eight straight from 1982
through 1989 and from 1922 through 1929. 1999 was an interesting year in that
there was a divergence between the direction of bond prices and stock prices,
and also that approximately 28% of the year's total return for the S&P 500 came
in one month, December. During the year the Federal Reserve raised the fed funds
rate target three times from 4.75% to 5.50% with the last rate hike coming in
November. Because of Y2K concerns, the Chairman of the Federal Reserve, Xxxx
Xxxxxxxxx, gave indications in November that no further action would be taken
until the next meeting of the Federal Reserve in February of 2000. The stock
market took that as a "go" sign and proceeded to have an exceptionally strong
December.
The U.S. financial market environment has deteriorated somewhat since our
mid-year 1999 report. Although inflation remains subdued and the economy has
continued to grow at a strong pace, the bond market traded lower throughout 1999
and the Federal Reserve raised interest rates three times. Stock prices
generally reflect three major influences: earnings, interest rates and risk
perception. Corporate earnings continue to be relatively strong, with the S&P
500 earnings having gained approximately 13% in 1999. Expectations are for
earnings to gain 8-12% in 2000. Interest rates are currently the major negative
for the market, although the stock and bond markets seemed to be disconnected
throughout 1999. Risk perception is reflected in the market multiple that is
attached to earnings to create market value. The market multiple has climbed
over the past several years, reflecting reduced risk perception based on
non-inflationary growth of the economy, apparent productivity gains created by
rapidly advancing technology, and reduced cyclicality of the U.S. economy. The
reduced cyclicality is at least partly attributable to better inventory and
receivables management. The market volatility so far this year is a reflection
of the conflict between rising interest rates and the high levels of
capitalization rates, or market multiples. Higher rates affect stocks negatively
in several ways. Most importantly, as the risk free return increases,
capitalization rates for long duration assets, such as common stock, tend to
decline. Secondly, bonds can become an attractive asset alternative to common
stocks. So far this has not been much of a factor because of the double-digit
returns that stocks have had over the past five years. Higher interest rates can
also have an economic effect of narrowing profit margins in a period of low
inflation, thus reducing earnings gains. Thus far, productivity gains apparently
have been able to blunt this effect.
Your Separate Account (B) portfolio is structured for growth, with a core
holding of high quality, large capitalization growth companies. The median
market capitalization for the portfolio was $41.5 billion as of December 31,
1999, with five holdings exceeding $200 billion and only one holding, Bank
United, under $1 billion. The portfolio has strong representation in the
technology area, which helped Separate Account (B)'s performance for 1999. At
year-end approximately 36% of the portfolio was classified as Technology versus
approximately 30% in the S&P 500 index. Only 2.3% of the portfolio, American
Online and PSI Net, could be considered Internet related companies, although
some of the major holdings such as Cisco, Sun Microsystems, and IBM provide
infrastructure for the Internet. The portfolio continues to have exposure to the
health care industry with equity holdings in Pfizer, Schering-Xxxxxx, Xxx Xxxxx,
Medtronics and Cardinal Health. Although these are quality companies, this area
underperformed the market during 1999. The portfolio was relatively
underweighted in
--------------------------------------------------------------------------------
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Financials and did not have exposure to the traditional income stocks, such as
electric utilities and Real Estate Investment Trusts.
Separate Account (B) employs a program of writing options on stocks held in
the portfolio. This program has enhanced portfolio cash flow and generated net
premium of approximately $2.1 million during 1999.
2000 could present some challenges to the stock market. It is anticipated
that the Federal Reserve could raise interest rates at least
twice and maybe three times during the first half of the year to temper economic
growth. Rising interest rates traditionally put pressure on high growth, high
multiple companies that have earnings discounted well into the future. We
anticipate a particularly volatile first half of 2000, with short-term concerns
sometimes overwhelming continuing long-term positives. On balance, we continue
to believe that long-term growth fundamentals and favorable demographics will
prevent an extended bear market from occurring.
Your investment managers 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,
Xxxxxxx X. XxXxxx
Xxxxxxx X. XxXxxx
Chairman of the Committee
--------------------------------------------------------------------------------
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FINANCIAL HIGHLIGHTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------
(PER ACCUMULATION UNIT OUTSTANDING DURING THE PERIOD) 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------------------------------
Value at the beginning of the period $21.55 $17.69 $14.14 $11.74 $8.85
----- ----- ----- ----- -----
Investment income .17 .20 .23 .19 .19
Fees .20 .16 .13 .10 .09
----- ----- ----- ----- -----
NET INVESTMENT INCOME/(LOSS) (.03) .04 .10 .09 .10
----- ----- ----- ----- -----
Net gain on investments 7.26 3.82 3.45 2.31 2.79
----- ----- ----- ----- -----
NET INCREASE IN PARTICIPANTS' EQUITY RESULTING
FROM OPERATIONS 7.23 3.86 3.55 2.40 2.89
----- ----- ----- ----- -----
VALUE AT END OF PERIOD $28.78 $21.55 $17.69 $14.14 $11.74
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Ratio of investment income -- net to average
participants' equity (0.13)% 0.20% 0.60% 0.70% 1.00%
Ratio of fees to average participants equity .83% .83% .83% .83% .83%
Portfolio turnover rate 34% 41% 45% 53% 46%
Number of accumulation units outstanding at end of
period 7,908,845 8,320,912 8,612,630 8,502,140 8,763,186
--------------------------------------------------------------------------------
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
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.
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RECORD OF ACCUMULATION UNIT VALUES RECORD OF ANNUITY UNIT VALUES
--------------------------------------------------------------------------------
UNIT
VALUATION MARKET
DATE VALUE
-------------------------
1999 December 31 $28.78
1998 December 31 21.55
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
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
-----------------------
2000 January 1 $8.71
1999 January 1 6.69
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
--------------------------------------------------------------------------------
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 stock
prices. These values should not be considered representations of values which
may be achieved in the future.
Unit Value Bar Graph
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--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31, 1999
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES COST VALUE
-------------------------------------------------------------------------------------------------------
PREFERRED STOCKS:
PAPER & FOREST PRODUCTS-(0.6%)
Georgia-Pacific Corporation 25,000 $1,109,376 $ 1,278,125
-----------
Total preferred stocks-(0.6%) 1,278,125
-----------
COMMON STOCKS:
BANKS-(4.2%)
Bank United Corp 70,000 2,251,875 1,907,500
Citigroup Inc. 73,125 1,137,760 4,063,008
Xxxxx Fargo & Company 90,000 1,988,150 3,639,375
-----------
9,609,883
-----------
BEVERAGES-(2.4%)
Anheuser-Xxxxx Companies, Inc. 30,000 2,313,875 2,126,250
PepsiCo, Inc. 92,000 2,925,018 3,243,000
-----------
5,369,250
-----------
BIOTECHNOLOGY-(1.6%)
Amgen Inc.* 60,000 2,876,562 3,603,750
-----------
BROADCASTING-RADIO-(1.1%)
Infinity Broadcasting Corporation* 70,000 2,230,762 2,533,125
-----------
CABLE SERVICES-(9.3%)
AT&T Corp.-Liberty Media-A* 266,624 1,257,516 15,130,912
Comcast Corporation 120,000 2,964,297 6,067,500
-----------
21,198,412
-----------
COMMUNICATION EQUIPMENT-(2.9%)
L-3 Communications Holdings, Inc.* 43,700 1,871,582 1,819,012
Tellabs, Inc.* 76,000 2,901,125 4,878,250
-----------
6,697,262
-----------
COMPUTER HARDWARE-(2%)
Sun Microsystems, Inc.* 60,000 1,555,938 4,646,250
-----------
See accompanying Notes to Financial Statements.
--------------------------------------------------------------------------------
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6
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31, 1999
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES COST VALUE
-------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE-(3.2%)
First Data Corp. 75,000 $1,756,600 $ 3,698,437
Microsoft Corporation* 31,000 2,360,266 3,619,250
-----------
7,317,687
-----------
COMPUTER SYSTEMS-(9.4%)
Cisco Systems, Inc.* 115,000 2,238,090 12,319,375
XXX Xxxxxxxxxxx * 60,000 1,564,100 6,555,000
International Business Machines Corporation 25,000 2,104,187 2,700,000
-----------
21,574,375
-----------
COSMETICS AND TOILETRIES-(1.5%)
Xxx Xxxxxxxx Xxxxxxx 84,000 1,546,470 3,459,750
-----------
DRUG DISTRIBUTION-(1.5%)
Cardinal Health, Inc. 69,625 3,211,142 3,333,297
-----------
DRUGS-(4.8%)
Xxx Xxxxx and Company 30,000 2,153,462 1,995,000
Pfizer Inc. 133,000 147,049 4,314,188
Schering-Plough Corporation 110,000 951,712 4,640,625
-----------
10,949,813
-----------
ELECTRONIC CONNECTORS-(1.5%)
Molex Incorporated/Class A 77,595 926,660 3,511,174
-----------
ELECTRONICS EQUIPMENT-(5.7%)
Applied Materials, Inc.* 58,000 3,383,250 7,347,875
Motorola, Inc. 39,000 2,698,402 5,742,750
-----------
13,090,625
-----------
ELECTRONIC - SEMI-(3.9%)
Intel Corp. 49,600 3,059,762 4,082,700
Texas Instruments Incorporated 50,000 2,213,150 4,843,750
-----------
8,926,450
-----------
See accompanying Notes to Financial Statements.
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31, 1999
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES COST VALUE
-------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT - MAJOR-(2.7%)
General Electric Company 40,000 $2,014,213 $ 6,190,000
-----------
ENTERTAINMENT-(0.9%)
Carnival Corporation 45,000 2,169,913 2,151,563
-----------
FINANCIAL MULTISERVICE-(1.8%)
American Express Company 25,000 2,471,481 4,156,250
-----------
HOUSEHOLD PRODUCTS-(2.1%)
Procter & Xxxxxx Co. 43,800 1,504,771 4,798,837
-----------
INTERNET-(2.3%)
America Online, Inc. 40,000 2,651,513 3,017,500
PSINet Inc.* 35,000 2,142,563 2,161,250
-----------
5,178,750
-----------
LIFE SCIENCES-(1.3%)
Monsanto Company 80,000 2,821,024 2,850,000
-----------
MACHINERY-INDUSTRIAL-(4.6%)
Illinois Tool Works, Inc. 51,800 217,625 3,499,737
Tyco International Ltd. 102,000 2,705,075 3,965,250
United Technologies Corporation 46,400 1,258,970 3,016,000
-----------
10,480,987
-----------
MEDICAL INSTRUMENTS-(1.9%)
Medtronic, Inc. 120,000 2,025,850 4,372,500
-----------
MERCHANDISING-FOODS-(2.2%)
The Kroger Co.* 120,000 3,024,930 2,265,000
Safeway Inc.* 80,000 2,223,050 2,845,000
-----------
5,110,000
-----------
MERCHANDISING-HARDLINES-(1.4%)
Tandy Corporation 65,000 1,948,563 3,197,188
-----------
See accompanying Notes to Financial Statements.
--------------------------------------------------------------------------------
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8
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31, 1999
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES COST VALUE
-------------------------------------------------------------------------------------------------------
MERCHANDISING-MASS-(1.2%)
Wal-Mart Stores, Inc. 40,000 $1,991,325 $ 2,765,000
-----------
METALS-ALUMINUN-(1.5%)
Alcoa Inc. 40,000 2,524,794 3,320,000
-----------
NATURAL GAS DIVERSIFIED-(3.5%)
Enron Corp. 140,000 1,797,453 6,212,500
The Xxxxxxxx Companies, Inc. 60,000 2,251,700 1,833,750
-----------
8,046,250
-----------
OFFICE EQUIPMENT & SUPPLIES-(0.7%)
Pitney Xxxxx Inc. 35,000 2,326,225 1,690,938
-----------
OIL SERVICES-(1.8%)
Schlumberger Limited 64,600 2,173,701 3,633,750
Transocean Sedco Forex Inc. 12,506 231,634 421,315
-----------
4,055,065
-----------
PUBLISHING-NEWS-(1.7%)
Tribune Company 70,000 2,018,025 3,854,375
-----------
TELECOMMUNICATIONS-(3.2%)
Equant NV * 30,000 2,182,988 3,360,000
Loral Space & Communications* 161,500 2,602,899 3,926,468
-----------
7,286,468
-----------
UTILITIES-COMMUNICATIONS-(6.2%)
Intermedia Communications Inc.* 100,000 2,482,812 3,881,250
MCI Worldcom, Inc.* 90,000 2,321,875 4,775,625
Sprint Corporation 80,000 2,738,033 5,385,000
-----------
14,041,875
-----------
TOTAL COMMON STOCKS-(96.0%) $219,367,149
-----------
TOTAL COMMON & PREFERRED STOCKS-(96.6%) $220,645,274
-----------
SHORT-TERM NOTES:
FINANCIAL SERVICES-BANK-(3.4%)
Bank One NA Illinois Time Deposit, 5.0% due 1/05/00 7,851,000 7,853,181
-----------
TOTAL SHORT-TERM NOTES-(3.4%) 7,853,181
------------
TOTAL INVESTMENTS-(100.0%) $228,498,455
-----------
-----------
=======================================================================================================
*Non-income producing security in 1999.
See accompanying Notes to Financial Statements.
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31, 1999
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) CONTRACTS VALUE
---------------------------------------------------------------------------------------------
OPTIONS:
America Online Inc. 100 $ 17,624
American Express Company 50 (11,500)
Amgen Inc. 200 (148,502)
XXX Xxxxxxxxxxx 50 62
Motorola, Inc. 50 (3,688)
PSINet Inc. 50 2,250
Schering-Plough Corporation 100 6,374
Schlumberger Limited 100 4,499
Transocean Sedco Forex Inc. 100 0
Sun Microsystems, Inc. 50 (563)
Tandy Corporation 100 2,874
Tellabs, Inc. 50 6,312
Texas Instruments Incorporated 100 8,375
Tyco International Ltd. 200 (101,001)
------------
TOTAL OPTIONS (216,884)
------------
See accompanying Notes to Financial Statements.
--------------------------------------------------------------------------------
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10
--------------------------------------------------------------------------------
TEN LARGEST COMMON STOCK HOLDINGS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MARKET % OF NET
DECEMBER 31, 1999 VALUE ASSETS
----------------------------------------------------------------------------------------
AT&T Corp-Liberty Media-A $15,130,912 6.7%
Cisco Systems, Inc. 12,319,375 5.4
Applied Materials, Inc. 7,347,875 3.2
EMC Corp. 6,555,000 2.9
Enron Corporation 6,212,500 2.7
General Electric Company 6,190,000 2.7
Comcast Corporation 6,067,500 2.7
Motorola, Inc. 5,742,750 2.5
Sprint Corporation 5,385,000 2.4
Tellabs, Inc. 4,878,250 2.1
----------------------------------------------------------------------------------------
TEN LARGEST COMMON STOCK HOLDINGS $75,829,162 33.3%
========================================================================================
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ALLOCATION OF EQUITY INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31, 1999 1999
--------------------------------------------------------------------------------------
Technology 36.2%
Consumer Staples 18.4
Consumer Services 15.0
Utilities 6.4
Financial Services 6.2
Capital Goods 7.6
Energy 5.5
Consumer Cyclicals 2.7
Basic Industries 2.0
--------------------------------------------------------------------------------------
ALLOCATION OF EQUITY INVESTMENTS 100%
======================================================================================
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31 1999
--------------------------------------------------------------------------
ASSETS:
Investment in securities of unaffiliated issuers: - Note
1
Common stocks, at market ( Cost $113,411,767 ) $219,367,149
Preferred stocks, at market ( Cost $1,109,376 ) 1,278,125
Short-term notes, at amortized cost (approximates market) 7,853,181
------------
TOTAL INVESTMENTS 228,498,455
Cash 54,295
Dividends receivable - Note 1 68,767
------------
TOTAL ASSETS 228,621,517
------------
LIABILITIES:
Fees Payable to Continental Assurance Company - Note 4 71,006
Liability for open call options written - Note 5 216,884
Deferred income on call options written 261,866
Payable for securities purchased 320,000
Payable to Continental Assurance Company for fund
withdrawals 97,420
------------
TOTAL LIABILITIES 967,176
--------------------------------------------------------------------------
PARTICIPANTS' EQUITY--NET ASSETS(7,908,845 units issued and
outstanding at $28.78 per unit) - Note 2 $227,654,341
==========================================================================
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999
-------------------------------------------------------------------------
Investment income:
Dividends $ 1,137,744
Interest and other 239,510
-----------
Total investment income 1,377,254
-----------
Fees to Continental Assurance Company: - Note 4
Investment advisory fees 988,661
Service fees 652,517
-----------
Total fees 1,641,178
-----------
NET INVESTMENT INCOME/(LOSS) (263,924)
-----------
Investments: - Note 3
Net realized gain
Stock 22,415,616
Calls written 1,957,316
Change in unrealized gain 34,080,402
-----------
NET GAIN ON INVESTMENTS 58,453,334
-------------------------------------------------------------------------
NET INCREASE IN PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $58,189,410
=========================================================================
See accompanying Notes to Financial Statements.
--------------------------------------------------------------------------------
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12
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN PARTICIPANTS' EQUITY
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998
---------------------------------------------------------------------------------------------
From operations:
Net investment income/(loss) $ (263,924) $ 309,022
Net realized gain on investments 24,372,932 13,986,986
Change in unrealized gain on investments 34,080,402 18,682,566
------------ -------------
Net increase in participants' equity resulting from
operations 58,189,410 32,978,574
From unit transactions:
Sales 2,513,319 3,226,883
Withdrawals (12,394,214) (9,238,525)
------------ -------------
Net decrease in participants' equity resulting from
unit transactions (9,880,895) (6,011,642)
------------ -------------
TOTAL INCREASE IN PARTICIPANTS' EQUITY 48,308,515 26,966,932
Participants' equity, January 1 179,345,826 152,378,894
---------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY, DECEMBER 31 $227,654,341 $ 179,345,826
---------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ORGANIZATION
Continental Assurance Company 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 the Continental
Assurance Company (CAC), 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 86% of the outstanding common stock of CNA.
The operations of CAC include the sale of certain variable annuity contracts,
the proceeds of which are invested in Separate Account (B). CAC 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 CAC.
INVESTMENTS
Investments in securities traded on national securities exchanges are valued
at the last reported sales price. 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.
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 the loaned securities. As
of December 31, 1999 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 by Separate
Account (B) on the net investment income and net gain on investments, which are
reinvested in Separate Account (B) and taken into account in determining unit
values.
OTHER
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
NOTE 2. PARTICIPANTS' EQUITY - NET ASSETS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Participants' equity--net assets consisted of the following:
---------------------------------------------------------------------------------------------
DECEMBER 31 1999 1998
---------------------------------------------------------------------------------------------
From operations:
Accumulated investment income--net $ 52,230,262 $ 52,494,186
Accumulated net realized gain on investment transactions 134,434,867 110,061,935
Accumulated unrealized gain 108,747,051 74,723,866
Accumulated unrealized loss (2,839,804) (2,897,021)
------------ ------------ ---
Accumulated income 292,572,376 234,382,966
From unit transactions:
Accumulated proceeds from sale of units, net of
withdrawals (64,918,035) (55,037,140)
---------------------------------------------------------------------------------------------
TOTAL PARTICIPANTS' EQUITY--NET ASSETS $227,654,341 $179,345,826
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 3. INVESTMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NET REALIZED GAIN ON INVESTMENTS
YEAR ENDED DECEMBER 31 1999
------------------------------------------------------------------------------
Aggregate proceeds $981,783,250
Aggregate cost 957,410,318
------------------------------------------------------------------------------
Net realized gain $ 24,372,932
------------------------------------------------------------------------------
------------------------------------------------------------------------------
CHANGE IN UNREALIZED GAIN ON INVESTMENTS
YEAR ENDED DECEMBER 31 1999
------------------------------------------------------------------------------
Unrealized gain on investments:
Balance December 31 $105,907,247
Less Balance, January 1 71,826,845
------------------------------------------------------------------------------
Change in net unrealized gain $ 34,080,402
------------------------------------------------------------------------------
------------------------------------------------------------------------------
AGGREGATE COST OF SECURITIES PURCHASED
YEAR ENDED DECEMBER 31 1999
------------------------------------------------------------------------------
Common stocks $ 64,693,999
Preferred stocks 1,109,376
Short-term notes 906,391,650
------------------------------------------------------------------------------
Total purchases $972,195,025
------------------------------------------------------------------------------
------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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14
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NOTE 4. MANAGEMENT FEES:
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Separate Account (B) pays fees to CAC for investment advisory and
management services 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 CAC for certain legal, accounting and other expenses. Such
reimbursement of service fees is computed at the rate of 0.33 of one percent per
annum of the average daily net assets of Separate Account (B).
Participants pay fees directly to CAC 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 CAC
YEAR ENDED DECEMBER 31 1999
--------------------------------------------------------------------------
Investment advisory fees $ 988,661
Service fees 652,517
----------
Total fees charged to participants equity 1,641,178
Sales and administrative fees paid by participants 7,961
--------------------------------------------------------------------------
Total $1,649,139
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS:
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Separate Account (B) invests from time to time in certain derivative
financial instruments, namely call options, to increase investment returns.
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 underlying stock price. The credit risk associated with these
instruments is minimal as all transactions are cleared through security
exchanges.
A summary of the aggregated notional amounts and estimated market values of
call options at December 31, 1999, as well as the monthly average market values
and the average market values and the recognized gain, are presented below.
CALL OPTIONS
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YEAR ENDED DECEMBER 31 1999
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NOTIONAL VALUE $ 8,900,000
MARKET VALUE (216,884)
MONTHLY AVERAGE (28,106)
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YEAR ENDED DECEMBER 31 1999
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NET REALIZED GAIN $ 1,957,316
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These options were collateralized by stock with a market value of
$8,373,969 at December 31, 1999.
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NOTE 6. ACCOUNTING STANDARDS
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In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, which is effective for all fiscal
years beginning after June 15, 2000. Under SFAS 133, certain contracts that were
not formerly considered derivatives may now meet the definition of a derivative.
Separate Account (B) intends to adopt SFAS 133 effective January 1, 2001.
Management has not yet evaluated the impact of the adoption of this standard on
the Separate Account (B) financial statements.
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INDEPENDENT AUDITORS REPORT
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
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The Committee Members and the Participants of
Continental Assurance Company Separate Account (B)
We have audited the accompanying statement of assets and liabilities of
Continental Assurance Company Separate Account (B) ("Separate Account") (a
separate account of Continental Assurance Company, which is an affiliate of CNA
Financial Corporation, an affiliate of Loews Corporation), including the
schedule of investments, as of December 31, 1999, and the related statements of
operations for the year then ended, the statement of changes in participants'
equity for each of the two years in the period then ended, and the financial
highlights (shown on page three) for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Separate Account'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. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and per share data
and ratios 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 as of
December 31, 1999, 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 and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Continental Assurance Company Separate Account (B) as of December 31, 1999, and
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and financial
highlights for each of the five years in the period then ended, in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 18, 2000
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MANAGEMENT'S DISCUSSION OF IMPACT OF YEAR 2000 ON SEPARATE ACCOUNT (B)
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Separate Account(B) does not maintain any systems instead it relies on the
systems of CNA and the systems of other business partners.
CNA believes that it has successfully resolved the Year 2000 issue. There
were no problems observed that would affect the normal processing of CNA
business. No significant processing or other computer problems related to Year
2000 have arisen at CNA nor in any of the systems of Separate Account (B)
business partners. Going forward, CNA does not expect any Year 2000 systems
processing problems that would have a material impact on the results of
operations or equity of CNA or of Separate Account (B).
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