1
--------------------------------------------------------------------------------
Dear Participant:
--------------------------------------------------------------------------------
Continental Assurance Company Separate Account (B) ended the year with an
Accumulated Unit Value increase of 21.82% while the dividend-adjusted Standard &
Poor's Composite Index of 500 stocks (S&P 500) increased by 28.58%. The average
stock fund, as reported in the Wall Street Journal, gained 14.52% and the
average growth fund returned 19.37% during 1998.
The market advance was quite narrow in 1998 with the average stock in the S&P
500 gaining just 10.80%. The difference in growth rates between the index and
the average is a result of the index being capitalization weighted. The largest
stocks with the strongest growth rates have continued to trade at higher
multiples to their earnings and growth rates. According to data going back to
1958, compiled by the Xxxxxxxx Group and reported in the Wall Street Journal,
the differential between the S&P 500 and the average stock in the index has
never been as large. Other indexes bear out this conclusion as well. The Dow
Xxxxx Industrial Average, still more reflective of slower growth, large
industrial companies, returned 18.13% and the Xxxxxxx 2000, a small company
index, actually had a negative return of 2.24%.
1998 experienced a record fourth consecutive year of the S&P 500 gaining in
excess of 20%. This strong bull market was originally driven by a cyclical
improvement in earnings and moderating interest rates. Following a sharp but
short summer correction of about 20% the Federal Reserve eased short term
interest rates three times which placed the market back on an upside trajectory.
With earnings gains slowing and long-term interest rates above their summer
lows, the driving force in the fourth quarter was market liquidity.
Separate Account (B) has concentrated its investments generally in large
capitalization companies. At December 31, 1998, the investment portfolio had a
median capitalization of approximately $25 billion. The fund owns stocks of
three companies with capitalizations in excess of $200 billion, Microsoft,
General Electric and Intel, and another six companies with capitalizations
exceeding $100 billion. Only three of the fund's holdings could be considered
small capitalization companies with less than $1 billion in market value, Emmis
Broadcasting, Intermedia Communications and Xxxxxx Mondavi. Separate Account (B)
has favored investments in technology and health care companies as well as a
blend of multinational companies. Management believes that the U.S. does
technology better than anyone else and that health care companies, particularly
pharmaceuticals, will continue to benefit as the population in industrial
countries continues to age. The large multinational companies will ultimately
benefit from the faster economic growth in emerging markets.
Separate Account (B) has taken advantage of the market's volatility by
employing a disciplined program of writing call options on stocks held in the
portfolio. During 1998 we generated $1.387 million in call premiums compared to
$986 thousand in 1997. We intend to judiciously use this strategy to enhance
income generation in 1999.
1999 could be a challenging year. Historically, the average return for the
stock market has been about 12.5%, well below the average of the last four
years. The S&P 500 price/ earnings multiple of approximately 25 times 1999
projected earnings is high historically and leaves little room for earnings
disappointments. Earnings are expected to be up, but only moderately in the 3%
to 7% range. If inflation continues to be subdued, the Federal Reserve will
probably not tighten monetary policy. In this economic environment, we currently
expect a positive, but more moderate stock market return than we have had over
the past four years. Because of the high market valuation, continued volatility
can be anticipated. Although we do not expect corrections to exceed 10%, any
move by the Federal Reserve to reduce liquidity would probably result in a
larger market adjustment.
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,
Xxxxxxx X. XxXxxx
Xxxxxxx X. XxXxxx
Chairman of the Committee
--------------------------------------------------------------------------------
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2
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------
(PER ACCUMULATION UNIT OUTSTANDING DURING THE PERIOD) 1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------------------------------------------------
Value at beginning of period $17.69 $14.14 $11.74 $ 8.85 $8.91
----- ----- ----- ----- ---
Investment income .20 .23 .19 .19 .19
Fees .16 .13 .10 .09 .07
----- ----- ----- ----- ---
NET INVESTMENT INCOME .04 .10 .09 .10 .12
Net gain (loss) on investments 3.82 3.45 2.31 2.79 (.18)
----- ----- ----- ----- ---
NET INCREASE (DECREASE) IN PARTICIPANTS' EQUITY
RESULTING FROM OPERATIONS 3.86 3.55 2.40 2.89 (.06)
----- ----- ----- ----- ---
VALUE AT END OF PERIOD $21.55 $17.69 $14.14 $11.74 $8.85
----- ----- ----- ----- ---
----- ----- ----- ----- ---
Ratio of investment income--
net to average participants' equity 0.20% 0.60% 0.70% 1.00% 1.30%
Ratio of fees to average participants' equity .83% .83% .83% .83% .83%
Portfolio turnover rate 41% 45% 53% 46% 52%
Number of accumulation units outstanding
at end of period 8,320,912 8,612,630 8,502,140 8,763,186 9,298,777
--------------------------------------------------------------------------------
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
-------------------------
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
1989 December 31 5.31
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
-----------------------
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
1990 January 1 2.40
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
3
4
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31, 1998
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES VALUE
-----------------------------------------------------------------------------------------------
COMMON STOCKS:
AEROSPACE-(3.0%)
Raytheon Company 45,000 $ 2,396,250
United Technologies Corporation 28,200 3,066,750
------------
5,463,000
------------
BEVERAGES-(3.3%)
The Xxxxxx Mondavi Corporation* 54,000 2,207,250
PepsiCo, Inc. 92,000 3,766,250
------------
5,973,500
------------
BROADCASTING-(4.5%)
Emmis Broadcasting Corporation* 45,000 1,951,875
Tele-comm Liberty Media A* 133,312 6,140,684
------------
8,092,559
------------
BUILDING MATERIALS-(1.4%)
Xxxx'x Companies, Inc. 50,000 2,559,375
------------
CABLE SERVICE-(3.3%)
Comcast Corporation 55,000 3,227,813
Tele-Communications Inc.* 50,000 2,765,625
------------
5,993,438
------------
CHEMICAL-(1.7%)
Monsanto Company 65,000 3,087,500
------------
COMPUTER SOFTWARE-(1.4%)
Microsoft Corporation* 18,000 2,496,375
------------
COMPUTER SYSTEMS-(9.8%)
Cisco Systems, Inc.* 67,500 6,264,844
XXX Xxxxxxxxxxx* 70,000 5,950,000
First Data Corp. 75,000 2,376,562
International Business Machines Corporation 15,000 2,771,250
------------
17,362,656
------------
COSMETICS-(2.3%)
Xxx Xxxxxxxx Xxxxxxx 84,000 4,058,250
------------
DIVERSIFIED-(4.5%)
General Electric Company 45,000 4,592,813
Tyco International Ltd. 46,000 3,470,125
------------
8,062,938
------------
See accompanying Notes to Financial Statements.
--------------------------------------------------------------------------------
4
5
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31, 1998
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES VALUE
------------------------------------------------------------------------------------------------
COMMON STOCKS:
ELECTRONIC EQUIPMENT-(7.2%)
AMP Incorporated 20,000 $ 1,041,250
Honeywell, Inc. 35,000 2,635,937
Molex Incorporated/Class A 125,995 4,016,091
Motorola, Inc. 44,000 2,686,750
Texas Instruments Incorporated 30,000 2,566,875
------------
12,946,903
------------
ENERGY-(2.5%)
Enron Corp. 80,000 4,565,000
------------
FINANCIAL SERVICES-(2.0%)
American Express Company 35,000 3,578,750
------------
FINANCIAL-BANKS -(6.2%)
Bank United Corp. 70,000 2,747,500
Citigroup Inc. 48,750 2,413,125
First Union Corporation 40,000 2,432,500
Xxxxx Fargo & Company 90,000 3,594,375
------------
11,187,500
------------
FOODS-(1.0%)
Bestfoods 30,600 1,629,450
------------
HEALTH CARE-(5.6%)
Cardinal Health, Inc. 74,625 5,662,172
Medtronic, Inc. 60,000 4,455,000
------------
10,117,172
------------
HOUSEHOLD PRODUCTS-(2.0%)
Procter & Xxxxxx Co. 38,800 3,542,925
------------
MACHINERY-(1.8%)
Illinois Tool Works, Inc. 56,800 3,294,400
------------
MERCHANDISING-DRUGS-(1.9%)
Rite Aid Corporation 70,000 3,469,375
------------
MERCHANDISING-FOODS-(4.4%)
The Kroger Co.* 50,000 3,025,000
Safeway Inc.* 80,000 4,875,000
------------
7,900,000
------------
OIL FIELD SERVICES & EQUIPMENT-(2.4%)
Santa Fe International 95,000 1,389,375
Schlumberger Limited 64,600 2,979,675
------------
4,369,050
------------
PHARMACEUTICAL-(9.8%)
American Home Products Corporation 54,000 3,040,875
Pfizer Inc. 61,000 7,651,687
Schering-Plough Corporation 120,000 6,630,000
------------
17,322,562
------------
See accompanying Notes to Financial Statements.
--------------------------------------------------------------------------------
5
6
--------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31, 1998
NUMBER OF
SHARES,
CONTRACTS OR MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) $ PAR VALUE VALUE
-------------------------------------------------------------------------------------------------
PUBLISHING-(1.5%)
Tribune Company 40,000 $ 2,640,000
------------
SEMICONDUCTOR-(3.4%)
Applied Materials, Inc.* 88,000 3,756,500
Intel Corp. 19,800 2,347,537
------------
6,104,037
------------
TELECOMMUNICATIONS-(3.2%)
Loral Space & Communications* 161,500 2,876,719
Tellabs, Inc.* 43,000 2,948,188
------------
5,824,907
------------
UTILITIES-COMMUNICATIONS-(5.6%)
Intermedia Communications Inc.* 80,000 1,380,000
MCI Worldcom, Inc.* 80,000 5,740,000
Sprint Corporation 35,000 2,944,375
------------
10,064,375
------------
TOTAL COMMON STOCKS-(95.7%) 171,705,997
------------
OPTIONS:
XXX Xxxxxxxxxxx 100 7,625
American Express Company 100 (9,875)
Bestfoods 200 (375)
Intel Corp. 100 4,811
Intermedia Communications Inc. 200 499
------------
TOTAL OPTIONS-(0.0%) 2,685
------------
SHORT-TERM NOTES:
COMPUTER ELECTRONICS-(2.8%)
Tandy Corporation, 5.82%, due 1/11/99 5,000,000 4,991,917
------------
FINANCIAL SERVICES-BANK-(1.5%)
The First National Bank of Chicago Eurodollar Time
Deposit, 5.0%, due 1/4/99 2,725,000 2,725,378
------------
TOTAL SHORT-TERM NOTES-(4.3%) 7,717,295
------------
TOTAL INVESTMENTS-(100.0%) $179,425,977
------------
------------
=================================================================================================
*Non-income producing security in 1998.
See accompanying Notes to Financial Statements.
--------------------------------------------------------------------------------
6
7
--------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 (IN SHARES) INCREASED DECREASED NOW OWNED
-----------------------------------------------------------------------------------------------
COMMON STOCK:
Advanced Communications Group, Inc. 110,000 110,000 -
American Express Company 10,000 10,000 35,000
American Home Products Corporation 64,000 10,000 54,000
American Standard Companies, Inc. 10,000 65,000 -
Amgen, Inc. - 45,000 -
AMP Incorporated 20,000 - 20,000
Banc One Corporation 5,450 59,950 -
Bankamerica Corporation - 52,200 -
Bestfoods 28,800 27,000 30,600
The Boeing Company 35,000 35,000 -
Burlington Northern Santa Fe - 25,212 -
Camco International, Inc. - 50,000 -
Cardinal Health, Inc. 44,875 20,000 74,625
Cisco Systems, Inc. 22,500 - 67,500
Citicorp - 35,500 -
Citigroup Inc. 73,750 25,000 48,750
Comcast Corporation 55,000 - 55,000
Corn Products International Inc. 7,200 7,200 -
Corning Inc. - 52,700 -
Crown Cork & Seal Company, Inc. 10,000 60,000 -
XXX Xxxxxxxxxxx - 10,000 70,000
Xxxxxxx Kodak Company 10,000 10,000 -
Emmis Broadcasting Corporation 45,000 - 45,000
Ericsson (LM) Tel-SP ADR 60,000 60,000 -
First Data Corp. 15,000 20,000 75,000
First Union Corporation 40,000 - 40,000
Xxx Xxxxxxxx Xxxxxxx 42,000 - 84,000
Healthsouth Corp. 10,000 138,000 -
Xxxxxx Financial, Inc. 75,700 75,700 -
Hewlett-Packard Company 5,000 64,000 -
Intel Corp. 25,000 45,200 19,800
Intermedia Communications Inc. 80,000 - 80,000
International Business Machines Corporation 15,000 - 15,000
The Kroger Co. 50,000 - 50,000
Xxx Xxxxx and Company 10,000 50,000 -
Xxxx'x Companies, Inc. 50,000 - 50,000
Loral Space & Communications 20,000 - 161,500
Xxxxxxx-Xxxxxx Holdings Inc. - 116,200 -
Microsoft Corporation 23,000 5,000 18,000
Molex Incorporated/Class A - 20,000 125,995
The Xxxxxx Mondavi Corporation 5,000 - 54,000
Motorola, Inc. 30,000 30,000 44,000
PepsiCo, Inc. 25,000 - 92,000
Pfizer Inc. - 20,000 61,000
Rite Aid Corporation 35,000 - 70,000
--------------------------------------------------------------------------------
7
8
--------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 (IN SHARES) INCREASED DECREASED NOW OWNED
-----------------------------------------------------------------------------------------------
COMMON STOCK:
Safeway Inc. 40,000 - 80,000
Santa Fe International 25,000 - 95,000
Schering-Plough Corporation 60,000 - 120,000
Schlumberger Limited 23,600 - 64,600
The Sports Authority, Inc. - 124,750 -
Sprint Corporation 35,000 - 35,000
Sprint PCS 17,500 17,500 -
Tele-comm Liberty Media A 44,438 1 133,312
Tele-communications, Inc. 50,000 - 50,000
Teleport Communications Inc. 10,000 45,000 -
Tellabs, Inc. 53,000 10,000 43,000
Texas Instruments Incorporated 30,000 - 30,000
Tribune Company 5,000 10,000 40,000
Tyco International Ltd. 46,000 - 46,000
Union Pacific Corp. 20,000 20,000 -
United States Filter Corporation 40,000 70,000 -
United Technologies Corporation - 10,000 28,200
Ziff Xxxxx Inc. 4,000 4,000 -
===============================================================================================
--------------------------------------------------------------------------------
8
9
--------------------------------------------------------------------------------
TEN LARGEST COMMON STOCK HOLDINGS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MARKET % OF NET
DECEMBER 31, 1998 VALUE ASSETS
----------------------------------------------------------------------------------------
Pfizer Inc. $ 7,651,687 4.3%
Schering-Plough Corporation 6,630,000 3.7
Cisco Systems, Inc. 6,264,844 3.5
Tele-comm Liberty Media A 6,140,684 3.4
XXX Xxxxxxxxxxx 5,950,000 3.3
MCI Worldcom, Inc. 5,740,000 3.2
Cardinal Health, Inc. 5,662,172 3.2
Safeway Inc. 4,875,000 2.7
General Electric Company 4,592,813 2.6
Enron Corp. 4,565,000 2.5
----------------------------------------------------------------------------------------
$58,072,200 32.4%
========================================================================================
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ALLOCATION OF EQUITY INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31 1998 1997
-----------------------------------------------------------------------------
Technological 29.2% 23.0%
Consumer Staples 27.4 23.9
Consumer Servicers 15.6 11.3
Financial Services 8.6 14.2
Capital Goods 6.6 8.8
Utilities 5.9 3.6
Energy 5.2 8.7
Consumer Cyclicals 1.5 1.3
Basic Industries - 3.6
Transportation - 1.6
-----------------------------------------------------------------------------
100% 100%
=============================================================================
--------------------------------------------------------------------------------
9
10
--------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31 1998 1997
-----------------------------------------------------------------------------------------
ASSETS
Investments in securities of unaffiliated issuers--Note 1
Common stocks, at market (cost $99,881,837 and
$92,262,123) $171,705,997 $145,406,403
Call options written, at market--Note 5 2,685 -
Short-term notes, at amortized cost (approximates
market) 7,717,295 7,333,814
------------ ------------
TOTAL INVESTMENTS 179,425,977 152,740,217
Cash 23,876 13,730
Dividends receivable--Note 1 79,613 102,376
Receivable from Continental Assurance Company for fund
deposits - 58,304
------------ ------------
TOTAL ASSETS 179,529,466 152,914,627
------------ ------------
LIABILITIES
Fees payable to Continental Assurance Company--Note 4 52,131 40,585
Deferred income on call options written 87,060 -
Payable to Continental Assurance Company for fund
withdrawals 44,449 495,148
------------ ------------
TOTAL LIABILITIES 183,640 535,733
-----------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY--NET ASSETS (8,320,912 and 8,612,630
units issued
and outstanding at $21.55 and $17.69 per unit)--Note 2 $179,345,826 $152,378,894
=========================================================================================
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1998 1997
----------------------------------------------------------------------------------------
Income:
Dividends $ 1,265,882 $ 1,316,494
Interest and other 398,095 755,828
----------- -----------
1,663,977 2,072,322
----------- -----------
Fees (to Continental Assurance Company)--Note 4
Investment advisory fees 816,238 704,159
Service fees 538,717 464,745
----------- -----------
1,354,955 1,168,904
----------- -----------
NET INVESTMENT INCOME 309,022 903,418
----------- -----------
Investments--Note 3
Net realized gain 13,986,986 16,194,879
Net unrealized gain 18,682,566 14,151,723
----------- -----------
NET GAIN ON INVESTMENTS 32,669,552 30,346,602
----------------------------------------------------------------------------------------
NET INCREASE IN PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $32,978,574 $31,250,020
========================================================================================
See accompanying Notes to Financial Statements.
--------------------------------------------------------------------------------
10
11
--------------------------------------------------------------------------------
STATEMENT OF CHANGES IN PARTICIPANTS' EQUITY
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1998 1997
--------------------------------------------------------------------------------------------
From operations:
Net investment income $ 309,022 $ 903,418
Net realized gain on investments 13,986,986 16,194,879
Net unrealized gain on investments 18,682,566 14,151,723
------------ ------------
Net increase in participants' equity resulting from
operations 32,978,574 31,250,020
------------ ------------
From unit transactions:
Sales 3,226,883 11,909,643
Withdrawals (9,238,525) (10,972,411)
------------ ------------
Net increase (decrease) in participants' equity
resulting from unit transactions (6,011,642) 937,232
------------ ------------
TOTAL INCREASE IN PARTICIPANTS' EQUITY 26,966,932 32,187,252
Participants' equity, January 1 152,378,894 120,191,642
--------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY, DECEMBER 31 $179,345,826 $152,378,894
--------------------------------------------------------------------------------------------
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 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 85% 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 loaned securities. During
the years ended December 31, 1998 and 1997 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 net investment income and net realized capital gains, 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 principles 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.
--------------------------------------------------------------------------------
11
12
--------------------------------------------------------------------------------
NOTE 2. PARTICIPANTS' EQUITY--NET ASSETS:
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
DECEMBER 31 1998 1997
---------------------------------------------------------------------------------------------
From operations:
Accumulated net investment income $ 52,494,186 $ 52,185,165
Accumulated net realized gain on investment transactions 110,061,935 96,074,948
Accumulated unrealized gain 74,723,866 55,477,008
Accumulated unrealized loss (2,897,021) (2,332,729)
------------ ------------ ---
Accumulated income 234,382,966 201,404,392
From unit transactions:
Accumulated proceeds from sale of units, net of
withdrawals (55,037,140) (49,025,498)
---------------------------------------------------------------------------------------------
TOTAL PARTICIPANTS' EQUITY--NET ASSETS $179,345,826 $152,378,894
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 3. INVESTMENTS:
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NET REALIZED GAIN ON INVESTMENTS
YEAR ENDED DECEMBER 31 1998 1997
-----------------------------------------------------------------------------------------------
Aggregate proceeds $1,070,942,016 $820,595,354
Aggregate cost 1,056,955,030 804,400,475
-----------------------------------------------------------------------------------------------
Net realized gain $ 13,986,986 $ 16,194,879
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED GAIN ON INVESTMENTS
YEAR ENDED DECEMBER 31 1998 1997
-----------------------------------------------------------------------------------------------
Unrealized gain on investments:
Balance, December 31 $ 71,826,845 $ 53,144,279
Less balance, January 1 53,144,279 38,992,556
-----------------------------------------------------------------------------------------------
Change in net unrealized gain $ 18,682,566 $ 14,151,723
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
AGGREGATE COST OF SECURITIES PURCHASED
YEAR ENDED DECEMBER 31 1998 1997
-----------------------------------------------------------------------------------------------
Common stocks $ 64,427,142 $ 60,343,096
Short-term notes 1,000,521,759 761,856,229
-----------------------------------------------------------------------------------------------
Total purchases $1,064,948,901 $822,199,325
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
12
13
--------------------------------------------------------------------------------
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 services fees 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 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 1998 1997
---------------------------------------------------------------------------------------------
Investment advisory fees $ 816,238 $ 704,159
Service fees 538,717 464,745
---------- ----------
Total fees charged to fund income 1,354,955 1,168,904
Sales and administrative fees paid by participants 10,428 11,417
---------------------------------------------------------------------------------------------
Total $1,365,383 $1,180,321
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS:
--------------------------------------------------------------------------------
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Separate Account (B) invests from time to time in certain derivative
financial instruments, namely put and call options, to increase investments
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 stock market. The credit risk associated with these instruments
is minimal as all transactions are cleared through security exchanges.
A summary of the aggregate notional amounts and estimated market values of
call options at December 31, 1998, as well as the monthly average market values
and the recognized gain, are presented below.
CALL OPTIONS
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NOTIONAL VALUE MARKET VALUE MONTHLY AVERAGE NET REALIZED GAIN
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$4,725,000 $2,685 $4,502 $1,300,540
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As December 31, 1998 these options were collateralized by stock with a
market value of $4,468,130.
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INDEPENDENT AUDITORS' REPORT
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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,
including the schedule of investments as of December 31, 1998, 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, 1998 and
1997, and the related statements of operations and changes in participants'
equity for the years then ended, and the financial highlights (shown on page
two) for each of the five years in the period ended December 31, 1998. 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 as of December 31, 1998, 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
Continental Assurance Company Separate Account (B) as of December 31, 1998 and
1997, the results of its operations and changes in its participants' equity for
the years then ended and the information included in the financial highlights
for each of the five years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 12, 1999
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MANAGEMENT'S DISCUSSION OF IMPACT OF YEAR 2000 ON SEPARATE ACCOUNT (B)
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The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations and
decision making functions may cause computer systems to malfunction when
processing information involving dates beginning in 1999. Such malfunctions
could lead to business delays and disruptions. Separate Account (B) does not
maintain any systems. Instead, it relies on the systems of its investment
advisor Continental Assurance Company (CAC) and third party vendors. Separate
Account (B) has a plan under which it reviews periodically the progress that
these parties are making on this issue. To date, CNA Financial Corporation (CNA)
on behalf of CAC has certified internally as Year 2000-ready all of the systems
used by CAC in its duties as investment advisor and administrative agent for
Separate Account (B). While there is no client charge to Separate Account (B),
CNA estimates that the total cost to replace and upgrade its systems to
accommodate Year 2000 processing will be approximately $60 to $70 million. As of
December 31, 1998, CNA has spent approximately $59 million on Year 2000
readiness matters.
CNA has also received statements of Year 2000 compliance from certain of
key business partners: The Chase Manhattan Bank (Separate Account (B)'s
custodian bank); Bloomberg L.P. (the system used for trade entry); MAXIMIS
(Separate Account (B)'s accounting system) and The Depository Trust Company (the
book-entry depository used to record ownership of securities). Separate Account
(B) management believes that the systems on which it relies do not have any
significant remaining exposure to the Year 2000 issue and, therefore, Separate
Account (B) does not have material exposure to the Year 2000 issue. However, due
to the interdependent nature of computer systems, there may be an adverse impact
on Separate Account (B) if banks, independent agents, vendors, insurance agents,
third party administrators, various governmental agencies and other business
partners fail to successfully address the Year 2000. To mitigate this impact,
CNA is communicating with these various entities to coordinate Year 2000
conversion.
In addition, CNA has developed business resumption plans to ensure that it
and Separate Account (B) are able to continue critical processes through other
means in the event that it becomes necessary to do so. Formal strategies have
been developed within each business unit and support organization to include
appropriate recovery processes and use of alternative vendors.
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[B LOGO]
Participants Inquiries To: CONTINENTAL ASSURANCE COMPANY
Continental Assurance Company
Separate Account (B) SEPARATE ACCOUNT (B)
Attn: Individual Pension Accounts-35S
P.O. Box 803572 REPORT TO PARTICIPANTS
Xxxxxxx, Xxxxxxxx 00000-0000
000-000-0000 DECEMBER 31, 1998
[CNA LOGO]
[CA LOGO]
L 554-921 (12/98) 2/99
