<PAGE>
-------------------------------------------------------------------------------
Dear Participant:
- - --------------------------------------------------------------------------------
For the six months ending June 30, 1996, Separate Account (B)'s Accumulated
Unit Value increased 11.24% while the dividend-adjusted Standard & Poor's
Composite Index of 500 stocks (S&P 500) increased by 10.10%. The Account's
twelve month gain was 28.03% versus the S&P 500's dividend adjusted return of
26.00%.
1995 was an excellent year for the equity markets as reflected in a
dividend-adjusted return of 37.53% for the S&P 500. Although we mentioned in
your annual letter that management was guardedly optimistic for 1996, the double
digit returns for the first half surprised us, particularly considering that the
stock market seemed to decouple from the bond market. Interest rates climbed
sharply, particularly in the 2-year plus maturity range. Rising interest rates
generally act as a brake to the equity markets because fixed-income returns
become more competitive with equity returns. Capitalization rates also tend to
increase which in turn reduces stock price/earnings multiples. Apparently these
negative factors were offset during the first half by continued strong earnings
reports and low inflation expectations.
Separate Account (B) remained essentially fully invested during the first
half. The cash position tends to fluctuate between 5% to 10% reflecting
individual stock opportunities rather than bets on the direction of the market.
To enhance our cash returns, we have written call options, taking in net premium
of slightly in excess of $377,000 for the six months ended June 30. Options are
only written on stocks owned or stocks specifically purchased to write an
attendant option. We previously sent a communication to our participants in
1995, indicating Separate Account (B)'s intention to participate in the options
markets.
Although the S&P 500 was up strongly in the first half, relative price
performance between the constituent groups was quite diverse. Separate Account
(B) is moderately overweighted in the Capital Goods-Technology sector as well as
the Consumer Services sector. On a price basis, the Capital Goods-Technology
sector was one of the stronger sectors with a 4.70% price gain, whereas the
Consumer Services sector had one of the weaker records with a negative 6.86%
price performance. Separate Account (B) had no investments in the Utilities
sector, which turned in the worst performance with a negative price return of
11.03%.
Management anticipates increased volatility for the stock market during the
second half. Earnings growth is slowing and the market is becoming more
concerned about inflation. These were two areas that were generally positive for
the market in the first half. Also, there will be a lot of political static
between now and the November election. The portfolio will continue to be
adjusted to reflect our ongoing concerns and expectations.
Thank you for your continued support and participation.
Cordially,
/S/ DONALD C. RYCROFT
Donald C. Rycroft
Chairman of the Committee
Separate Account (B)
- - --------------------------------------------------------------------------------
1
<PAGE>
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- - --------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
JUNE 30
(UNAUDITED) YEAR ENDED DECEMBER 31
(Per accumulation unit outstanding during the ----------- -----------------------------------------------------
period) 1996 1995 1994 1993 1992
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Value at beginning of period $ 11.74 $ 8.85 $8.91 $7.70 $7.29
------- ------- ------- ------- -------
Investment income .09 .19 .19 .15 .16
Fees .05 .09 .07 .07 .06
------- ------- ------- ------- -------
INVESTMENT INCOME--NET .04 .10 .12 .08 .10
Net gain (loss) on investments 1.28 2.79 (.18) 1.13 .31
------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN PARTICIPANTS'
EQUITY RESULTING FROM OPERATIONS 1.32 2.89 (.06) 1.21 .41
------- ------- ------- ------- -------
VALUE AT END OF PERIOD $ 13.06 $11.74 $8.85 $8.91 $7.70
======= ======= ======= ======= =======
Ratio of investment income--
net to average participants' equity 0.7%(a) 1.0% 1.3% 1.0% 1.4%
Ratio of fees to average participants' equity .83%(a) .83% .83% .83% .83%
Portfolio turnover rate 24% 46% 52% 69% 71%
Number of accumulation units outstanding at
end of period 8,715,245 8,763,186 9,298,777 9,385,475 9,935,498
- - -----------------------------------------------------------------------------------------------------------------------
(a) annualized See accompanying Notes to Financial Statements.
- - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
COMMITTEE FOR SEPARATE ACCOUNT (B)
- - --------------------------------------------------------------------------------
MEMBERS
- - --------------------------------------------------------------------------------
Donald C. Rycroft, Chairman
Group Vice President
Continental Assurance Company
Richard W. Dubberke
Vice President and
Portfolio Manager
Continental Assurance Company
Richard T. Fox
Consultant to
21st Century Environmental
Management, Inc.
William W. Tongue
Professor of Economics
and Finance, Emeritus
University of Illinois at Chicago
Peter J. Wrenn
President
Hudson Technology, Inc.
- - --------------------------------------------------------------------------------
SECRETARY
Lynne Gugenheim
Counsel
Continental Assurance Company
AUDITORS
Deloitte & Touche LLP
Chicago, Illinois
CUSTODIAN
First National Bank of Chicago
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
<PAGE>
- - --------------------------------------------------------------------------------
RECORD OF ACCUMULATION UNIT VALUES RECORD OF ANNUITY UNIT VALUES
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNIT UNIT
VALUATION MARKET VALUATION MARKE
DATE VALUE DATE VALUE
- - ------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1996 June 30 $13.06 The Annuity Unit Values shown at 1996 July 1 $4.77
1995 December 31 11.74 the right are based on the monthly 1996 January 1 4.36
1994 December 31 8.85 increases or decreases in the 1995 January 1 3.35
1993 December 31 8.91 accumulation unit values in excess of 1994 January 1 3.39
1992 December 31 7.70 an assumed annualized rate of 3 1/2% 1993 January 1 3.14
1991 December 31 7.29 and rounded to the nearest cent. 1992 January 1 2.71
1990 December 31 5.45 1991 January 1 2.36
1989 December 31 5.31 1990 January 1 2.40
1988 December 31 4.56 1989 January 1 2.08
1987 December 31 3.91 1988 January 1 1.86
1986 December 31 3.72 1987 January 1 1.94
</TABLE>
- - --------------------------------------------------------------------------------
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, and June 30, 1996. 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.
[CHART APPEARS HERE]
Unit Value Bar Graph
1996 $13.06
1995 11.74
1994 8.85
1993 8.91
1992 7.70
1991 7.29
1990 5.45
1989 5.31
1988 4.56
1987 3.91
1986 3.72
- - --------------------------------------------------------------------------------
3
<PAGE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
=================================================================================================================
JUNE 30, 1996 NUMBER OF MARKET
(All investments are in securities of unaffiliated issuers) SHARES VALUE
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS:
AEROSPACE-(1.9%)
United Technologies Corporation 19,100 $ 2,196,500
----------
BROADCASTING-(1.1%)
Tele-comm Liberty Media Gr-A* 49,250 1,305,125
----------
CHEMICAL-(1.4%)
Minerals Technologies Inc. 47,300 1,620,025
----------
COMPUTER TECHNOLOGY-(8.9%)
Electronic Data Systems Corporation 37,500 2,015,625
First Data Corp. 40,000 3,185,000
Hewlett-Packard Company 32,000 3,188,000
Xerox Corporation 30,000 1,605,000
----------
9,993,625
----------
COSMETICS-(2.9%)
The Gillette Company 52,000 3,243,500
----------
DIVERSIFIED-(4.5%)
Tenneco Inc. 40,000 2,045,000
Thermo Electron Corp.* 74,625 3,106,266
----------
5,151,266
----------
ELECTRONIC COMPONENTS-(5.1%)
Molex Incorporated/Class A 103,437 3,038,462
Motorola, Inc. 44,000 2,766,500
----------
5,804,962
----------
ELECTRONIC INSTRUMENTATION-(0.3%)
Thermo Optek Corporation* 27,200 353,600
----------
ENGINEERING & CONSTRUCTION-(1.9%)
Fluor Corporation 33,000 2,157,375
----------
FINANCIAL SERVICES (BANK)-(7.7%)
Banc One Corporation 49,500 1,683,000
Boatmens Bancshares Inc. 72,000 2,889,000
Citicorp 50,500 4,172,562
----------
8,744,562
----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS-(cont.)
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
=================================================================================================================
JUNE 30, 1996 NUMBER OF MARKET
(All investments are in securities of unaffiliated issuers) SHARES VALUE
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FOODS-(2.3%)
C P C International Inc. 36,800 2,649,600
----------
HEALTH CARE-(11.7%)
Cardinal Health, Inc. 46,500 3,353,812
Healthsouth Corp.* 104,000 3,744,000
Pfizer Inc. 59,400 4,239,675
United HealthCare Corp. 40,000 2,020,000
----------
13,357,487
----------
HOSPITAL MANAGEMENT-(2.1%)
Columbia HCA Healthcare Corp. 45,000 2,401,875
----------
HOUSEHOLD PRODUCTS-(3.0%)
Procter & Gamble Co. 38,300 3,470,938
----------
See Accompanying Notes to Financial Statements.
==================================================================================================================
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
=================================================================================================================
JUNE 30, 1996 NUMBER OF MARKET
(All investments are in securities of unaffiliated issuers) SHARES VALUE
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS:
INSURANCE-(1.5%)
Travelers/Aetna Property Casualty Corporation* 60,000 $ 1,702,500
-----------
LODGING-(1.8%)
ITT Corp* 30,000 1,987,500
-----------
MACHINERY-(1.7%)
Illinois Tool Works, Inc. 28,400 1,920,550
-----------
METALS (DIVERSIFIED)-(1.5%)
Aluminum Co. of America 30,000 1,721,250
-----------
NATURAL GAS PIPELINE-(2.9%)
Enron Corp. 80,000 3,270,000
-----------
OFFICE PRODUCTS-(2.1%)
Boise Cascade Office Products Corporation* 68,000 2,354,500
-----------
OIL FIELD SERVICES & EQUIPMENT-(1.5%)
Schlumberger Limited 20,000 1,685,000
-----------
OIL & GAS EQUIPMENT-(2.4%)
Camco International Inc. 80,000 2,710,000
-----------
PAPER & FOREST PRODUCTS-(1.9%)
Buckeye Cellulose Corp.* 80,000 2,210,000
-----------
PHARMACEUTICAL-(2.4%)
Schering-Plough Corporation 44,000 2,761,000
-----------
RAILROADS-(2.2%)
Burlington Northern Santa Fe 30,212 2,443,396
-----------
RESTAURANTS/FAST FOOD-(2.0%)
McDonald's Corporation 50,000 2,337,500
-----------
RETAIL STORES-(4.8%)
Home Depot Inc. 48,333 2,609,982
The Sports Authority, Inc.* 86,500 2,832,875
-----------
5,442,857
-----------
SEMICONDUCTOR-(3.5%)
Applied Materials Inc.* 59,000 1,799,500
Intel Corp. 30,000 2,203,125
-----------
4,002,625
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
=================================================================================================================
JUNE 30, 1996 NUMBER OF MARKET
(All investments are in securities of unaffiliated issuers) SHARES VALUE
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS-(5.0%)
A T & T Corporation 39,000 2,418,000
Loral Space & Communications* 119,000 1,621,375
Tele-Communications, Inc./Class A* 91,000 1,649,375
-----------
5,688,750
-----------
TRANSPORTATION-(1.8%)
AMR Corporation* 22,151 2,015,741
-----------
TOTAL COMMON STOCKS--(93.8%) 106,703,609
-----------
See Accompanying Notes to Financial Statements.
- - -----------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
==================================================================================================================
JUNE 30, 1996
NUMBER OF
CONTRACTS
OR PAR MARKET
(All investments are in securities of unaffiliated issuers) VALUE VALUE
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPTIONS:
HEALTH CARE-(0.0%)
Pfizer Inc. 100 $ 9,499
------------
TOTAL OPTIONS-(0.0%) 9,499
------------
BONDS:
BROADCASTING-(0.8%)
Tele-communications International Inc., Conv. Sub. Deb., 4.50%, due 2/15/06 $1,000,000 865,000
------------
TOTAL BONDS-(0.8%) 865,000
------------
SHORT-TERM NOTES:
BANKS-(2.9%)
The First National Bank of Chicago Eurodollar Time Deposit, 5.50%, due 7/01/96 3,380,000 3,380,516
------------
COMMERCIAL SERVICES-(0.9%)
PHH Corp., 5.35%, due 7/22/96 1,035,000 1,031,463
------------
DIVERSIFIED-(1.8%)
Textron Financial Corp., 5.55%, due 7/03/96 2,000,000 1,998,773
------------
TOTAL SHORT-TERM NOTES-(5.6%) 6,410,752
------------
TOTAL INVESTMENTS-(100.2%) 113,988,860
Cash and receivables less liabilities-(-0.2%) (207,096)
- - ------------------------------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY-NET ASSETS-(100.0%) $113,781,764
==================================================================================================================
*Non-income producing security in 1996.
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
=================================================================================================================
SIX MONTHS ENDED JUNE 30, 1996 (IN SHARES) INCREASED DECREASED NOW OWNED
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
AMR Corporation 22,152 1 22,151
A T & T Capital Corp. - 50,000 -
Aluminum Co. of America 5,000 - 30,000
Applied Materials Inc. 10,000 - 59,000
Banc One Corporation 49,500 - 49,500
Boise Cascade Office Products Corporation 36,500 28,000 68,000
Circus Circus Enterprises, Inc. - 43,610 -
Colgate-Palmolive Company 15,000 15,000 -
Columbia HCA Healthcare Corp. 15,000 - 45,000
Electronic Data Systems Corporation 37,500 - 37,500
General Motors Corporation 37,500 37,500 -
Hercules, Inc. - 30,000 -
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
=================================================================================================================
SIX MONTHS ENDED JUNE 30, 1996 (IN SHARES) INCREASED DECREASED NOW OWNED
<S> <C> <C> <C>
- - ------------------------------------------------------------------------------------------------------------------
Hewlett-Packard Company 5,000 - 32,000
ITT Corporation 30,000 - 30,000
Illinois Tool Works, Inc. - 16,000 28,400
Intel Corp. 5,000 - 30,000
Lilly (Eli) & Company 50,000 50,000 -
Loral Corp. - 94,000 -
Loral Space & Communications 119,000 - 119,000
PNC Bank Corp. - 70,000 -
Schlumberger Limited 20,000 - 20,000
Thermo Electron Corp. 24,875 20,000 74,625
Thermo Optek Corporation 27,200 - 27,200
Travelers/Aetna Property Casualty Corporation 60,000 - 60,000
Trex Medical Corporation 2,500 2,500 -
United Technologies Corporation 19,100 - 19,100
Vastar Resources Inc. - 65,700 -
Xerox Corporation 30,000 15,000 30,000
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------
TEN LARGEST COMMON STOCK HOLDINGS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
==================================================================================================================
MARKET % OF NET
JUNE 30, 1996 VALUE ASSETS
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Pfizer Inc. $ 4,239,675 3.7%
Citicorp 4,172,562 3.7
Healthsouth Corp. 3,744,000 3.3
Procter & Gamble Co. 3,470,938 3.0
Cardinal Health, Inc. 3,353,812 2.9
Enron Corp. 3,270,000 2.9
The Gillette Company 3,243,500 2.9
Hewlett-Packard Company 3,188,000 2.8
First Data Corp. 3,185,000 2.8
Thermo Electron Corp. 3,106,266 2.7
- - ------------------------------------------------------------------------------------------------------------------
$34,973,753 30.7%
==================================================================================================================
- - -----------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
===================================================================================================================
JUNE 30 1996 1995
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities of unaffiliated issuers--Note 1:
Common stocks at market (cost $71,324,249 and $59,081,677) $106,703,609 $81,215,031
Preferred stocks at market (cost $2,103,588) - 1,917,000
Call options written at market (cost $14,499) 9,499 -
Bonds at market (cost $999,375 and $3,680,000) 865,000 3,558,750
Short-term notes at amortized cost (approximates market) 6,410,752 5,371,374
----------- ----------
TOTAL INVESTMENTS 113,988,860 92,062,155
Cash 21,329 -
Dividends receivable--Note 1 90,102 97,238
Interest receivable 17,688 87,054
Receivable for Securities Sold 42,386 -
Receivable from Continental Assurance Company for fund deposits 19,665 -
----------- ----------
TOTAL ASSETS 114,180,030 92,246,447
----------- ----------
LIABILITIES
Fees payable to Continental Assurance Company--Note 4 36,003 29,212
Payable for Securities Purchased 35,000 14,976
Deferred income call options written 14,499 -
Payable to Continental Assurance Company for fund withdrawals 312,764 80,761
----------- ----------
TOTAL LIABILITIES 398,266 124,949
- - -------------------------------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY--NET ASSETS (8,715,245 and 9,034,188 units issued and
outstanding at $13.06 and $10.20 per unit)--Note 2 $113,781,764 $92,121,498
===================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
===================================================================================================================
SIX MONTHS ENDED JUNE 30 1996 1995
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income:
Dividends $ 555,031 $ 556,985
Interest 284,144 368,227
Miscellaneous 628 -
----------- ----------
839,803 925,212
----------- ----------
Fees (Continental Assurance Company)--Note 4:
Investment advisory fees 271,392 213,219
Service fees 179,118 140,724
----------- ----------
450,510 353,943
----------- ----------
INVESTMENT INCOME--NET 389,293 571,269
----------- ----------
Investment gain--Note 3:
Net realized gain 7,428,145 1,259,258
Net unrealized gain 3,811,944 10,546,609
----------- ----------
NET GAIN ON INVESTMENTS 11,240,089 11,805,867
- - -------------------------------------------------------------------------------------------------------------------
NET INCREASE IN PARTICIPANTS' EQUITY RESULTING FROM OPERATIONS $ 11,629,382 $12,377,136
===================================================================================================================
See accompanying Notes to Financial Statements.
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN PARTICIPANTS' EQUITY
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
===================================================================================================================
SIX MONTHS ENDED JUNE 30 1996 1995
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From operations:
Investment income--net $ 389,293 $ 571,269
Net realized gain on investments 7,428,145 1,259,258
Net unrealized gain on investments 3,811,944 10,546,609
----------- ----------
Net increase in participants' equity resulting from operations 11,629,382 12,377,136
----------- ----------
From unit transactions:
Sales 718,953 399,821
Withdrawals (1,411,655) (2,919,889)
----------- ----------
Net decrease in participants' equity resulting from unit transactions (692,702) (2,520,068)
----------- ----------
TOTAL INCREASE IN PARTICIPANTS' EQUITY 10,936,680 9,857,068
Participants' equity, January 1 102,845,084 82,264,430
- - ------------------------------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY, JUNE 30 $113,781,764 $92,121,498
==================================================================================================================
See accompanying Notes to Financial Statements.
</TABLE>
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- - --------------------------------------------------------------------------------
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.
<PAGE>
- - --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES: (cont.)
================================================================================
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.
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) 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. The gross notional
principal amount of these instruments at June 30, 1996 totaled $750,000.
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.
The fair value of derivatives 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 substantially all of
Separate Account (B)'s derivatives.
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. No
loans were outstanding June 30, 1996 and 1995.
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.
- - --------------------------------------------------------------------------------
9
<PAGE>
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------
NOTE 2. PARTICIPANTS' EQUITY--NET ASSETS:
======================================================================================================================
Participants' equity--net assets consisted of the following:
- - ----------------------------------------------------------------------------------------------------------------------
JUNE 30 1996 1995
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From operations:
Accumulated investment income--net $ 50,917,612 $ 50,176,499
Accumulated net realized gain on investment transactions 74,676,575 63,469,332
Accumulated unrealized gain 35,523,994 23,194,722
Accumulated unrealized loss (269,510) (1,369,206)
----------- -----------
Accumulated income 160,848,671 135,471,347
From unit transactions:
Accumulated proceeds from sale of units, net of withdrawals (47,066,907) (43,349,849)
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL PARTICIPANTS' EQUITY--NET ASSETS $113,781,764 $ 92,121,498
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------
NOTE 3. INVESTMENTS:
======================================================================================================================
NET REALIZED GAIN ON INVESTMENTS
SIX MONTHS ENDED JUNE 30 1996 1995
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Aggregate proceeds $181,635,609 $190,224,905
Aggregate cost 174,207,464 188,965,647
- - ----------------------------------------------------------------------------------------------------------------------
Net realized gain $ 7,428,145 $ 1,259,258
======================================================================================================================
<CAPTION>
CHANGE IN UNREALIZED GAIN ON INVESTMENTS
SIX MONTHS ENDED JUNE 30 1996 1995
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized gain on investments:
Balance, June 30 $ 35,254,483 $ 21,825,516
Less balance, January 1 31,442,539 11,278,907
- - ----------------------------------------------------------------------------------------------------------------------
Change in net unrealized gain $ 3,811,944 $ 10,546,609
======================================================================================================================
<CAPTION>
AGGREGATE COST OF SECURITIES PURCHASED
SIX MONTHS ENDED JUNE 30 1996 1995
======================================================================================================================
<S> <C> <C>
Common stocks $ 24,205,958 $ 20,017,741
Put options 3,000 -
Bonds 999,375 -
Short-term notes 156,355,885 168,001,644
- - ----------------------------------------------------------------------------------------------------------------------
Total purchases $181,564,218 $188,019,385
======================================================================================================================
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
- - --------------------------------------------------------------------------------
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.
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FEES AND EXPENSES PAID TO ASSURANCE
SIX MONTHS ENDED JUNE 30 1996 1995
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Investment advisory fees $271,392 $213,219
Service fees 179,118 140,724
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Total fees charged to fund income 450,510 353,943
Sales and administrative fees paid by participants 1,589 1,940
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Total $452,099 $355,883
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["B" GRAPHIC]
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CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
REPORT TO PARTICIPANTS
JUNE 30, 1996
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