<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION--SUBJECT TO CHANGE.
SECURITIES ACT OF 1933 REGISTRATION NO.
2-25483
INVESTMENT COMPANY ACT OF 1940 REGISTRATION
NO. 811-1402
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-3
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 43 /X/
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 23 /X/
(Check appropriate box or boxes.)
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
(Exact name of Registrant)
CONTINENTAL ASSURANCE COMPANY
(Name of Insurance Company)
CNA PLAZA, CHICAGO, ILLINOIS 60685
(Address of Insurance Company's Principal Executive (Zip Code)
Offices)
Insurance Company's Telephone Number, including Area Code:
(800) 351-3001
------------------
Lynne Gugenheim, Esq.
Continental Assurance Company
CNA Plaza
Chicago, Illinois 60685
(Name and Address of Agent for Service)
------------------
Please send copies of all correspondence to:
Mitchell L. Hollins, Esq.
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
------------------
<PAGE>
It is proposed that this filing will become effective (check
appropriate box)
/X/ immediately upon filing pursuant to paragraph (b) of Rule 485
/ / on April 30, 1996 pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a)(1) of Rule 485
/ / on (date) pursuant to paragraph (a)(1) of Rule 485
/ / 75 days after filing pursuant to paragraph (a)(2) of Rule 485
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
------------------
CROSS REFERENCE SHEET
DATA IN POST-EFFECTIVE AMENDMENT NO. 43 TO REGISTRATION STATEMENT
ON FORM N-3 (FILE NO. 2-25483)
<TABLE>
<CAPTION>
ITEMS REQUIRED IN PART A OF FORM N-3 LOCATION IN PROSPECTUS
<S> <C>
1. Cover Page......................................... Cover Page
2. Definitions........................................ Glossary
3. Synopsis or Highlights............................. Synopsis
4. Condensed Financial Information.................... Condensed Financial Information
5. General Description of Registrant and Insurance
Company............................................ Description of the Company and the
Separate Account; Description of
Group Variable Annuity Contracts
6. Management......................................... Management; Synopsis
7. Deductions and Expenses............................ Deductions and Expenses
8. General Description of Variable Annuity
Contracts.......................................... Description of Group Variable
Annuity Contracts
9. Annuity Period..................................... Annuities; Annuity Payments;
Benefits on Death or Withdrawal
10. Death Benefit...................................... Benefits on Death or Withdrawal
11. Purchases and Contract Value....................... Description of Group Variable
Annuity Contracts; Deductions and
Expenses
12. Redemptions........................................ Benefits on Death or Withdrawal
13. Taxes.............................................. Federal Taxes
14. Legal Proceedings.................................. Legal Matters
15. Table of Contents of the Statement of Additional
Information........................................ Table of Contents of the Statement
of Additional Information
LOCATION IN
STATEMENT OF
ITEMS REQUIRED IN PART B OF FORM N-3 ADDITIONAL INFORMATION
----------------------------------
16. Cover Page......................................... Cover Page
17. Table of Contents.................................. Table of Contents
18. General Information and History.................... Description of the Company and the
Separate Account*; Investment
Advisory Services; Securities
Custodian
19. Investment Objectives and Policies................. Description of the Company and the
Separate Account--Investment
Policies and Restrictions*
20. Management......................................... Management of the Separate Account
21. Investment Advisory and Other Services............. Management--Investment Advisory
Agreement*; Investment Advisory
Services
22. Brokerage Allocation............................... Brokerage Allocations
23. Purchase and Pricing of Securities Being Offered... Underwriting; Deductions and
Expenses*
</TABLE>
<PAGE>
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
------------------
CROSS REFERENCE SHEET - CONT.
<TABLE>
<CAPTION>
<S> <C>
24. Underwriters....................................... Underwriting
25. Calculation of Performance Data.................... Calculation of Performance Data
26. Annuity Payments................................... Annuity Payments*
27. Financial Statements............................... Financial Statements; Financial
Statements of the Company Financial Statements*
</TABLE>
- ---------------
* Indicates a location in the Prospectus rather than in the Statement of
Additional Information.
<PAGE>
PROSPECTUS
GROUP
VARIABLE
ANNUITY
CONTRACTS [Continental Assurance Company Separate Account (B) LOGO]
The group variable annuity contracts described in this Prospectus (the
"Contracts") provide (i) tax deferred annuities for employees of public schools
and certain tax-exempt organizations and (ii) retirement plans for self-employed
individuals and their eligible employees. This is achieved through investment in
Continental Assurance Company Separate Account (B) (the "Separate Account"), a
separate account created by Continental Assurance Company (the "Company"). All
purchase payments under the Contracts will, after deduction of initial charges,
be placed in the Separate Account.
The assets of the Separate Account are invested primarily in common stocks
and securities convertible into common stocks. The primary investment objective
of the Separate Account is the growth of capital in relation to the growth of
the economy and the changing value of the dollar. Current investment income is a
secondary objective.
The Company acts as investment adviser to, and as principal underwriter
for, the Separate Account.
This Prospectus sets forth information about the Separate Account that a
prospective investor ought to know before investing and should be kept for
future reference. The Separate Account has filed a Statement of Additional
Information, dated April 30, 1996, with the Securities and Exchange Commission.
See the Table of Contents of the Statement of Additional Information on page 40.
The Statement of Additional Information is available, at no charge, upon
request, by contacting Continental Assurance Company, Attn: Individual Pension
Accounts-35S, P.O. Box 803572, Chicago, Illinois 60690, (800) 351-3001, in
writing or by telephone.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
DATED: APRIL 30, 1996
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE SEPARATE ACCOUNT. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Glossary............................................................ 2
Synopsis............................................................ 4
Condensed Financial Information..................................... 12
Description of the Company and the Separate Account................. 14
Management.......................................................... 18
Deductions and Expenses............................................. 19
Description of Group Variable Annuity Contracts..................... 21
Annuities........................................................... 26
Annuity Payments.................................................... 29
Benefits on Death or Withdrawal..................................... 31
Federal Taxes....................................................... 33
Legal Matters....................................................... 37
Reports to Participants............................................. 37
Financial Statements................................................ 38
Independent Auditors' Report........................................ 39
Table of Contents of the Statement of Additional Information........ 40
</TABLE>
GLOSSARY
The following terms have the indicated meanings when used in this
Prospectus:
Accumulation Unit: an accounting unit used to measure the value of a
participant's account before annuity payments begin. The term "equity unit",
which is used in some outstanding Contracts, is synonymous with "accumulation
unit".
Administrative Services Agreement: an agreement between the Company and the
Separate Account under which the Company provides certain administrative
services for the Separate Account.
Annuitant: the person on whose life annuity payments are based.
Annuity: a series of payments for life; with either a minimum number of payments
or a determinable sum guaranteed; or for the joint lifetime of the person
receiving payments and another person and thereafter during the lifetime of the
survivor.
Annuity Unit: an accounting unit used to calculate the amount of annuity
payments.
2
<PAGE>
Casualty: Continental Casualty Company.
CNA Financial: CNA Financial Corporation.
Committee: a five member board in which the supervision of the Separate Account
is vested.
Company: Continental Assurance Company.
Contract: a group variable annuity contract described by this Prospectus.
Contractholder: the entity to which the Contract is issued, usually the employer
for 403(b) Plans, and either (a) the Trustee of a trust for the benefit of
self-employed individuals and their employees, or (b) an association of
self-employed individuals for HR-10 Plans.
Eligible Rollover Distribution: distribution as described in Section 402(c)(2)
and Section 402(c)(4) of the Internal Revenue Code from a 403(b) Plan or a HR-10
Plan.
Employer: as used in HR-10 Plan Contracts, a sole proprietor or a partnership
which has adopted or joined, or which proposes to adopt or join, a plan, master
plan, or master plan and trust which includes participants who are self-employed
persons and which qualifies under Section 401 of the Internal Revenue Code.
ERISA: the Employee Retirement Income Security Act of 1974, as amended.
Excludable Amount: as used in HR-10 Plan Contracts, an amount excludable from
gross income under the provisions of the Internal Revenue Code.
Five Percent Owner or 5% Owner: a person who, at any time during a plan year or
any of the four preceding plan years owns or has owned (or is considered as
owning or as having owned through the application of certain attribution rules)
(a) more than 5% of the outstanding stock of an Employer which is a corporation
or stock possessing more than 5% of the total combined voting power of such
corporation, or (b) if the Employer is not a corporation, more than 5% of the
capital or more than a 5% interest in the profits of the Employer.
Fixed Annuity: an annuity providing for payments which remain fixed throughout
the payment period and which do not vary with the investment experience of the
Separate Account.
403(b) Plan: a plan that provides for deferred income tax treatment for annuity
purchase plans adopted by public school systems and certain tax-exempt
organizations under Section 403(b) of the Internal Revenue Code.
HR-10 Plan: a plan offered for use by certain self-employed individuals and
their employees which qualify under Section 401 of the Internal Revenue Code.
Internal Revenue Code: the Internal Revenue Code of 1986, as amended.
Investment Advisory Agreement: an agreement between the Company and the Separate
Account under which the Company acts as the investment adviser to the Separate
Account.
Investment in the Contract: as used in HR-10 Plan Contracts, the investment in
the Contract, as defined in Section 72 of the Internal Revenue Code.
Net Purchase Payment: the amount applied to the purchase of Accumulation Units,
which is equal to the Purchase Payment less the deduction for sales and
administrative charges.
<PAGE>
1940 Act: the Investment Company Act of 1940, as amended.
participant: a person having an interest in the Separate Account by reason of
Purchase Payments made on behalf of such person.
Purchase Payments: amounts paid to the Company by, or on behalf of, a
participant.
3
<PAGE>
Separate Account: Continental Assurance Company Separate Account (B), which
consists of assets set aside by the Company, the investment experience of which
is kept separate from that of other assets of the Company.
Valuation Date: a day on which the value of the Separate Account is determined.
Variable Annuity: an annuity providing for payments varying in amount in
accordance with the investment experience of the Separate Account.
SYNOPSIS
ANTICIPATED 403(B) PLAN CONTRACT FOR JOINT RETIREMENT BOARD OF THE RABBINICAL
ASSEMBLY OF AMERICA, ET AL
<TABLE>
<CAPTION>
<S> <C>
Contractholder Transaction Expenses
Sales Load Imposed on Purchases (as a percentage of Purchase Payments)......... 0.00%
Administrative Expenses (as a percentage of Purchase Payments)................. 0.00%
Deferred Sales Load (as a percentage of Purchase Payments or amount
surrendered).................................................................. None
Surrender Fee (as a percentage of amount surrendered).......................... None
Exchange Fee................................................................... 0.00%
Fixed Rate Annuity Purchase Fee................................................ $250
Annual Contract Fee................................................................. None
Annual Expenses
(as a percentage of average net assets)
Management Fee................................................................. 0.50%
Mortality and Expense Risk Fees................................................ None
Other Expenses................................................................. 0.68%
------
Service Fee.......................................................... 0.33%
Administration Fee (paid to the Joint Retirement Board of the
Rabbinical Assembly of America, et al)................................ 0.35%
Total Annual Expenses.......................................................... 1.18%
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
If you surrender your Contract at the end of the
applicable time period: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $0 $0 $0 $0
If you annuitize at the end of the applicable time
period:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $250 $250 $250 $250
If you do not surrender your Contract:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $0 $0 $0 $0
</TABLE>
4
<PAGE>
The purpose of this table is to assist the Contractholder in understanding
the various costs and expenses that a Contractholder will bear directly or
indirectly. The Contractholder currently pays an annual fee of .83% of average
net assets. However, under the proposed administrative service agreement with
the Joint Retirement Board of the Rabbinical Assembly of America, et al, (the
"Rabbinical Board") which the Company anticipates will become effective prior to
July 1, 1996, an additional fee of .35% of the Contractholder's net asset value
as of July 1 of that year and each July 1 thereafter, would be payable to the
Rabbinical Board. In addition to the expenses described above, premium taxes may
be applicable. The information presented in the Example listed above should not
be considered a representation of past or future expenses. Actual expenses may
be greater or lesser than those shown in the Example. The participant has
several different annuity options from which to choose. There is a $250 annuity
purchase fee only if the participant chooses a fixed rate annuity. See "The
Investment Adviser and Investment Advisory Fee" below in this Synopsis, "Sales
and Administrative Charges--403(b) Plans" below in this Synopsis, "Annuity
Selection" below in this Synopsis, "Deductions and Expenses--Investment Advisory
Charges", "Deductions and Expenses--Sales and Administrative Charges--Level
Deduction Contracts--403(b) Plans" and "Annuities--Electing the Retirement Date
and Form of Annuity--403(b) Plans" for more complete descriptions of the various
costs and expenses described in the above table. See "Transfers" below in this
Synopsis for a further description of the applicability of exchange fees.
LEVEL DEDUCTION CONTRACT FOR 403(B) PLANS
<TABLE>
<CAPTION>
<S> <C>
Contractholder Transaction Expenses
Sales Load Imposed on Purchases (as a percentage of Purchase Payments)........ 5.00%
Administrative Expenses (as a percentage of Purchase Payments)................ 1.00%
Deferred Sales Load (as a percentage of Purchase Payments or amount
surrendered)................................................................. None
Surrender Fee (as a percentage of amount surrendered)......................... None
Exchange Fee.................................................................. 0.01%
Fixed Rate Annuity Purchase Fee............................................... $250
Annual Contract Fee................................................................ None
Annual Expenses
(as a percentage of average net assets)
Management Fee................................................................ 0.50%
Mortality and Expense Risk Fees............................................... None
Other Expenses................................................................ 0.33%
-------
Service Fee.......................................................... 0.33%
Total Annual Expenses.......................................................... 0.83%
</TABLE>
5
<PAGE>
EXAMPLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
If you surrender your Contract at the end of the
applicable time period: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $60 $60 $60 $60
If you annuitize at the end of the applicable time
period:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $310 $310 $310 $310
If you do not surrender your Contract:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $60 $60 $60 $60
</TABLE>
The purpose of this table is to assist the Contractholder in understanding
the various costs and expenses that a Contractholder will bear directly or
indirectly. In addition to the expenses described above, premium taxes may be
applicable. The information presented in the Example listed above should not be
considered a representation of past or future expenses. Actual expenses may be
greater or lesser than those shown in the Example. The participant has several
different annuity options from which to choose. There is a $250 annuity purchase
fee only if the participant chooses a fixed rate annuity. A $10 exchange fee is
charged for the second and succeeding transfers in most of the 403(b) Contracts.
See "The Investment Adviser and Investment Advisory Fee" below in this Synopsis,
"Sales and Administrative Charges--403(b) Plans" below in this Synopsis,
"Annuity Selection" below in this Synopsis, "Deductions and Expenses--Investment
Advisory Charges", "Deductions and Expenses--Sales and Administrative
Charges--Level Deduction Contracts-- 403(b) Plans" and "Annuities--Electing the
Retirement Date and Form of Annuity--403(b) Plans" for more complete
descriptions of the various costs and expenses described in the above table. See
"Transfers" below in this Synopsis for a further description of the
applicability of exchange fees. Premium taxes also may be applicable.
GRADED DEDUCTION CONTRACT FOR 403(B) PLANS
<TABLE>
<CAPTION>
<S> <C>
Contractholder Transaction Expenses
Sales Load Imposed on Purchases (as a percentage of Purchase Payments)........ 5.00%
Deferred Sales Load (as a percentage of Purchase Payments or amount
surrendered)................................................................. None
Surrender Fee (as a percentage of amount surrendered).......................... None
Exchange Fee.................................................................. .01%
Fixed Rate Annuity Purchase Fee............................................... $250
Annual Contract Fee................................................................ $30
Annual Expenses
(as a percentage of average net assets)
Management Fee................................................................ 0.50%
Mortality and Expense Risk Fees............................................... None
Other Expenses................................................................ 0.33%
-------
Service Fee......................................................... 0.33%
Total Annual Expenses......................................................... 0.83%
</TABLE>
6
<PAGE>
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
If you surrender your Contract at the end of the
applicable time period: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $80 $140 $200 $350
If you annuitize at the end of the applicable time
period:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $330 $390 $450 $600
If you do not surrender your Contract:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $80 $140 $200 $350
</TABLE>
The purpose of this table is to assist the Contractholder in understanding
the various costs and expenses that a Contractholder will bear directly or
indirectly. In addition to the expenses described above, premium taxes may be
applicable. The information presented in the Example listed above should not be
considered a representation of past or future expenses. Actual expenses may be
greater or lesser than those shown in the Example. The applicable sales load for
these Contracts is 5% for the first $10,000 of Purchase Payments for each
participant; 4% for the next $10,000 of Purchase Payments for each participant;
and 2.5% on all Purchase Payments in excess of $20,000. The Company also makes
an administrative charge based upon the previous year's cost of administration.
There is no maximum dollar limit on this charge. In 1996, the Company will
assess this charge at an annual rate of $30 per participant. The participant has
several different annuity options from which to choose. There is a $250 annuity
purchase fee only if the participant chooses a fixed rate annuity. A $10
exchange fee is charged for the second and succeeding transfers in most of the
403(b) Plan Contracts. See "The Investment Adviser and Investment Advisory Fee"
below in this Synopsis, "Sales and Administrative Charges--403(b) Plans" below
in this Synopsis, "Annuity Selection" below in this Synopsis, "Deductions and
Expenses--Investment Advisory Charges", "Deductions and Expenses--Sales and
Administrative Charges--Graded Deduction Contracts--403(b) Plans" and
"Annuities--Electing the Retirement Date and Form of Annuity--403 Plans" for
more complete descriptions of the various costs and expenses described in the
above table. See "Transfers" below in this Synopsis for a further description of
the applicability of exchange fees. Premium taxes also may be applicable.
7
<PAGE>
HR-10 PLANS
<TABLE>
<CAPTION>
Contractholder Transaction Expenses
<S> <C>
Sales Load Imposed on Purchases (as a percentage of Purchase Payments)........ 7.00%
Administrative Expenses (as a percentage of Purchase Payments)................ 1.50%
Deferred Sales Load (as a percentage of Purchase Payments or amount
surrendered)................................................................. None
Surrender Fee (as a percentage of Purchase Payments received prior to
withdrawal).................................................................. 2.00%
Exchange Fee.................................................................. 0.01%
Fixed Rate Annuity Purchase Fee............................................... $250
Individual Accounting Fee..................................................... $20
Accounting Withdrawal Fee..................................................... $10
Annual Contract Fee................................................................ None
Annual Expenses
(as a percentage of average net assets)
Management Fee................................................................ 0.50%
Mortality and Expense Risk Fees............................................... None
Other Expenses................................................................ 0.33%
-------
Service Fee......................................................... 0.33%
Total Annual Expenses......................................................... 0.83%
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
If you surrender your Contract at the end of the
<S> <C> <C> <C> <C>
applicable time period: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $135 $155 $175 $225
If you annuitize at the end of the applicable time
period:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $355 $375 $395 $445
If you do not surrender your Contract:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $105 $125 $145 $195
</TABLE>
The purpose of this table is to assist the Contractholder in understanding
the various costs and expenses that a Contractholder will bear directly or
indirectly. In addition to the expenses described above, premium taxes may be
applicable. The information presented in the Example listed above should not be
considered a representation of past or future expenses. Actual expenses may be
greater or lesser than those shown in the Example. The sales load under these
Contracts varies from 0% to 7% depending on the contract. The administrative
expense under these Contracts varies from 0% to 1.5% depending on the contract.
The participant has several different annuity options from which to choose.
There is a $250 annuity purchase fee only if the participant chooses a fixed
rate annuity. The Company may make an additional charge for the maintenance of
individual accounting records, not to exceed $20 for each new entrant and $10
per year per participant thereafter and $10 at each withdrawal. The Company did
not make this charge in 1993, 1994 or 1995. A $10 exchange fee is charged for
the second and succeeding transfer in most of the HR-10 Plan
8
<PAGE>
Contracts. The surrender fee (termination charge) of 2% of the Purchase Payments
received prior to withdrawal is applicable when the Account is terminated and
the entire interest in the Contract is withdrawn. A termination charge of 2% of
the pro rata amount of Purchase Payments received will also be assessed when a
Contractholder withdraws part of his or her interest in the Contract. See "The
Investment Adviser and Investment Advisory Fee" below in this Synopsis, "Sales
and Administrative Charges--HR-10 Plans" below in this Synopsis, "Annuity
Selection" below in this Synopsis, "Deductions and Expenses--Investment Advisory
Charges", "Deductions and Expenses--Sales and Administrative Charges--HR-10
Plans" and "Annuities--Annuity Options--HR-10 Plans" for more complete
descriptions of the various costs and expenses described in the above table. See
"Transfers" below in this Synopsis for a further description of the
applicability of exchange fees. See "Withdrawals--HR-10 Plans" below in this
Synopsis and "Description of Group Variable Annuity Contracts--Withdrawals" for
a further description of the applicability of the surrender fee (termination
charge). Premium taxes also may be applicable.
GROUP VARIABLE ANNUITY CONTRACTS
The Contracts offered by this Prospectus are designed to provide payments
under two types of plans: 403(b) Plans and HR-10 Plans. Contracts for 403(b)
Plans are issued to annuity purchase plans adopted by public school systems and
certain tax-exempt organizations under Section 403(b) of the Internal Revenue
Code. Contracts for HR-10 Plans are issued to self-employed individuals for
themselves and their employees, or to a trustee for the benefit of such persons
and to associations of self-employed persons for the benefit of participating
members. Two types of Contracts for 403(b) Plans are presently in existence: the
level deduction Contract and the graded deduction Contract. See "Deductions and
Expenses". One type of Contract is offered for HR-10 Plans. Each Contract may be
modified or amended. See "Description of Group Variable Annuity
Contracts--Modification or Termination of the Contract".
THE INVESTMENT ADVISER AND INVESTMENT ADVISORY FEE
The Company acts as the investment adviser to the Separate Account. The
Company is a stock life insurance company organized under the Illinois Insurance
Code in 1911, and maintains its principal office at CNA Plaza, Chicago, Illinois
60685. The Separate Account has been registered as an open-end diversified
management investment company under the 1940 Act. See "Description of the
Company and the Separate Account--General".
The Company receives an investment advisory fee at the annual rate of 0.5%
of the average daily net asset value of the Separate Account and a service fee
at the annual rate of 0.33% of the average daily net asset value of the Separate
Account for investment management and other services. See "Deductions and
Expenses--Investment Advisory Charges".
SALES AND ADMINISTRATIVE CHARGES--403(B) PLANS
Under the current 403(b) Plan Contract with the Rabbinical Board, (the
"Rabbinical Plan"), the Company does not make any deduction from Purchase
Payments for sales and administrative expenses. However, under the proposed
administrative service agreement with the Rabbinical Board, which the Company
anticipates will become effective prior to July 1, 1996, each Participant under
the Rabbinical Plan will be charged a fee of .35% of the Participant's net asset
value as of July 1 of that year and each July 1 thereafter. That fee will be
remitted to the Rabbinical Board for administrative services performed by it on
behalf of Rabbinical Plan Participants.
9
<PAGE>
The level deduction Contract provides for deductions aggregating 6% (6.38%
of the net amount invested) to be made from each Purchase Payment for sales and
administrative expenses. Of such 6% deduction, 5% is for sales expenses and 1%
is for administrative expenses. The Company reserves the right to increase the
rate of deductions for administrative expenses in the future. Although the
Company no longer offers new level deduction Contracts to employers, it
continues to honor and to service existing level deduction Contracts with
current Contractholders and to accept Purchase Payments thereunder. See
"Deductions and Expenses--Sales and Administrative Charges--Level Deduction
Contracts--403(b) Plans".
The graded deduction Contract provides for a maximum deduction of 5% (5.26%
of the net amount invested) to be made from each Purchase Payment for sales
expenses. The deduction is reduced on a graduated scale based upon the aggregate
Purchase Payments made under both fixed and variable annuities. The minimum
deduction before allowance for experience rating credits is 2.5% (2.57% of the
net amount invested). The Company also makes an administrative charge based upon
the previous year's cost of administration. There is no maximum dollar limit on
this charge. In 1996, the Company will assess this charge at an annual rate of
$30 per participant. See "Deductions and Expenses--Sales and Administrative
Charges--Graded Deduction Contracts--403(b) Plans".
SALES AND ADMINISTRATIVE CHARGES--HR-10 PLANS
A charge of 0 to 8.5% of Purchase Payments (0 to 9.29% of the net amount
invested) comprised of 0 to 7.0% of Purchase Payments (0 to 7.65% of the net
amount invested) to cover sales expenses and 0 to 1.5% of Purchase Payments (0
to 1.64% of the net amount invested) to cover certain administrative expenses is
made by deduction from each Purchase Payment. The balance of the Purchase
Payment is credited to the participant's account in the form of Accumulation
Units. The exact level of such charges will vary from Contract to Contract,
depending on volume of Purchase Payments expected, services to be performed by
the Company and the applicable commission expenses. Accordingly, individual
Contracts do not provide for reduced sales charges upon attainment of any given
level of Purchase Payments. Certain Contracts may also provide for additional
annual fixed dollar charges imposed on a per participant basis for the
maintenance of individual accounting records. The Company reserves the right to
increase the rate of deductions for administrative expenses in the future. See
"Deductions and Expenses--Sales and Administrative Charges--HR-10 Plans". With
respect to the termination charge which the Company is entitled to make upon
withdrawal by a Contractholder of his or her entire interest in the Contract for
an HR-10 Plan, see "Withdrawals--HR-10 Plans" below in this Synopsis.
PURCHASE LIMITS
The minimum Purchase Payment on Contracts for 403(b) Plans which can be
made at any time on behalf of any participant is $10. There is no minimum
Purchase Payment on Contracts for HR-10 Plans.
INVESTMENT OBJECTIVES
The assets of the Separate Account are invested primarily in common stocks
and securities convertible into common stocks. The primary investment objective
of the Separate Account is the growth of capital in relation to the growth of
the economy and the changing value of the dollar. Current investment income is a
secondary objective. The Separate Account's investment policies require the
Company, in making investments for the Separate Account, to maintain the
Separate Account's status as a diversified investment company. See "Description
of the Company and the Separate Account--Investment Policies and Restrictions".
The dollar amount of investment accumulation before retirement and the dollar
amount of subsequent retirement
10
<PAGE>
benefits will vary to reflect the dividends, interest and fluctuations in the
market value of the securities held in the Separate Account and will be subject
to the same risks as are inherent in the ownership of common stocks.
TRANSFERS
Prior to commencement of annuity payments, a participant may transfer funds
between fixed and variable annuity contracts. Some of the 403(b) Plan Contracts
and HR-10 Plan Contracts offered hereby provide that any such transfer will be
made without charge. Others provide that the Company may charge a $10 exchange
fee for the second and each succeeding transfer in any calendar year. A
participant may change the percentage allocation of future Purchase Payments
between fixed and variable annuity contracts at any time without charge. See
"Annuities--Electing The Retirement Date and Form of Annuity--403(b) Plans" and
"Annuities--Annuity Options--HR-10 Plans".
ANNUITY SELECTION
The participant has several different annuity options from which to choose.
See "Annuities". There is a $250 annuity purchase fee if the participant chooses
a fixed rate annuity. For the other annuity options, there is no fee. The
Company reserves the right to change these charges at any time.
WITHDRAWALS--403(B) PLANS
By written direction to the Company, a participant may withdraw, without
charge, all or a portion of his individual account (except for certain amounts
attributable to a salary reduction agreement) prior to commencement of annuity
payments. A withdrawal may be subject to penalty taxes, in addition to
applicable federal income taxes. See "Benefits on Death or Withdrawal",
"Description of Group Variable Annuity Contracts--Withdrawals" and "Federal
Taxes--Federal Tax Treatment of Participants--403(b) Plans".
WITHDRAWALS--HR-10 PLANS
Subject to limitations, the Contractholder may withdraw part or all of his
or her interest in the Contract in one lump sum on any Valuation Date, except
for funds held for terminated or retired participants. In such event, the
Company is entitled to make a termination charge of 2% of the pro rata amount of
the Purchase Payments received under the Contract relating to the withdrawal
before withdrawal. See "Benefits on Death or Withdrawal" and "Description of
Group Variable Annuity Contracts--Withdrawals".
PENALTY TAXES
Distributions made prior to age 59 1/2 generally will be subject to a 10%
tax, in addition to otherwise applicable federal income taxes. This additional
tax will not apply if the distribution is made in connection with death or
disability, or if it is made after separation from service where the separation
occurred during or after the calendar year in which the participant attains age
55, or if it is part of a series of annual or more frequent annuity payments
made after separation from service and at least over the life of the participant
or if it is made for certain medical expenses within the deductible limitation
under the Internal Revenue Code or if it is made to an alternate payee pursuant
to a qualified domestic relations order ("QDRO"). Further, a 15% additional tax
applies to distributions in excess of prescribed dollar limits, and a 50% excise
tax applies to the amount by which a distribution is less than the minimum
required distribution, determined under U.S. Treasury regulations. See "Federal
Taxes--Federal Tax Treatment of Participants--Distributions--HR-10 Plans".
11
<PAGE>
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
------------------
<TABLE>
<CAPTION>
CONDENSED FINANCIAL INFORMATION
INCOME AND CAPITAL CHANGES PER ACCUMULATION UNIT
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD)
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income(a)...............$ .187 $ .189 $ .155 $ .164 $ .185 $ .243 $ .299 $ .126 $ .134 $ .107
Expenses(b)........................ .085 .073 .068 .060 .052 .044 .042 .036 .036 .030
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income.............. .102 .116 .087 .104 .133 .199 .257 .090 .098 .077
Capital changes
Net realized and unrealized gain
(loss) on investments.......... 2.788 (.181) 1.124 .307 1.707 (.055) .491 .562 .085 .445
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net increase (decrease) in net
asset value.................... 2.890 (.065) 1.211 .411 1.840 .144 .748 .652 .183 .522
Accumulation unit value at the
beginning of the period.......... 8.847 8.912 7.701 7.290 5.450 5.306 4.558 3.906 3.723 3.201
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Accumulation unit value at end of
period...........................$11.737 $8.847 $8.912 $7.701 $7.290 $5.450 $5.306 $4.558 $3.906 $3.723
======= ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of fees and expenses to
average net assets(b)(c)......... .83% .83% .83% .83% .83% .83% .83% .83% .83% .83%
Ratio of net investment income to
average net assets(c)............ 1.00% 1.31% 1.05% 1.44% 2.11% 3.74% 5.08% 2.08% 2.26% 2.40%
Portfolio turnover rate............ 46% 52% 69% 71% 13% 55% 47% 14% 31% 19%
Number of accumulation units
outstanding at end of period (000
omitted)......................... 8,763 9,299 9,385 9,935 10,486 11,086 11,983 13,477 15,130 16,401
- ---------------
(a) No declaration of dividends or distribution of gains is made, and such
amounts are applied to increase Accumulation Unit values.
(b) Pursuant to the terms of the Investment Advisory Agreement, the Company
makes quarterly withdrawals for investment advisory services to the Separate
Account at an annual rate of one half of one percent of the average net asset
value and quarterly withdrawals of a service fee at an annual rate of thirty-
three hundredths of one percent of the average net asset value.
(c) Participants' equity appearing on the financial statements incorporated
by reference herein is the equivalent of net assets.
</TABLE>
<PAGE>
The Separate Account may from time to time measure performance in terms of
total return, which is calculated for any specified period of time by assuming
the purchase of units at the Separate Account's unit value at the beginning of
the period. Such units are then valued at the Separate Account's unit value at
the end of the period. The percentage increase is determined by subtracting the
initial value of the investment from its value at the end of the period and
dividing that amount by the initial value. The total return on this hypothetical
investment in the Separate Account shows its overall dollar or percentage change
in value, exclusive of fees based on the initial amount of the contribution and
recurring annual fees. If these fees were
12
<PAGE>
included, the amount or return that a Participant would realize for an
investment during the specified period would be lower.
A cumulative total return reflects the Separate Account's performance over
a stated period of time. An average annual total return reflects the
hypothetical annually compounded return that would have produced the same
cumulative return if the Separate Account's performance had been constant over
the entire period. Because average annual returns for more than one year tend to
smooth out variation's in the Separate Account's annual returns, participants
should recognize that such figures are not the same as actual year-by-year
results. Separate Account performance figures are based on historical results
and are not intended to indicate future performance. The investment return and
unit value of the Separate Account will vary and may be worth more or less at
redemption than their original cost.
From time to time, the Separate Account may produce advertising or sales
materials which disclose the Separate Account's performance over various periods
of time. The Separate Account may also compare its performance to that of
selected other funds, fund averages or recognized stock market indices. Such
performance ratings or comparisons may be made with funds that may have
different investment restrictions, objectives, policies or techniques than the
Separate Account and the portfolios of such other funds or market indices may be
comprised of securities that differ significantly from the Separate Account's
investments.
13
<PAGE>
DESCRIPTION OF THE COMPANY AND THE SEPARATE ACCOUNT
GENERAL
The Company is a stock life insurance company which was organized under the
Illinois Insurance Code in 1911, and has been an investment adviser registered
under the Investment Advisers Act of 1940 since 1966. Its life insurance
business involves the writing of group and individual life insurance, accident
and health insurance, and annuity policies. The Company's principal office is
located at CNA Plaza, Chicago, Illinois 60685. All of the voting securities of
the Company are owned by Casualty, a stock casualty insurance company organized
under the Illinois Insurance Code, located at CNA Plaza, Chicago, Illinois
60685. All of the voting securities of Casualty are owned by CNA Financial, a
Delaware corporation, located at CNA Plaza, Chicago, Illinois 60685. Loews
Corporation, a Delaware corporation, located at 667 Madison Avenue, New York,
New York 10021-8087, with interests in insurance, hotels, watches and other
timing devices, drilling rigs and tobacco, owned approximately 84% of the
outstanding voting securities of CNA Financial as of March 29, 1996. Laurence A.
Tisch, the Chairman of the Board, Co-Chief Executive Officer and a director of
Loews Corporation and Chief Executive Officer and a director of CNA Financial,
and his brother, Preston R. Tisch, President, Co-Chief Executive Officer and a
director of CNA Financial and Loews Corporation, owned, in the aggregate,
approximately 32% of the outstanding common stock of Loews Corporation as of
March 29, 1996. Therefore, they may be deemed to be parents of Loews
Corporation, and thus of CNA Financial and the Company, within the meaning of
the federal securities laws.
The Separate Account was established by the Company on June 1, 1966, under
the provisions of the Illinois Insurance Code, in order to fund variable annuity
contracts. In addition to serving as investment adviser to the Separate Account,
the Company also serves as investment adviser to CNA Income Shares, Inc., a
closed-end diversified management investment company.
Variable annuity contracts are securities within the meaning of the
Securities Act of 1933, and are not exempt from registration under the
provisions of that Act. The issuer of such contracts is subject to regulation
under the 1940 Act. The Separate Account has been registered as an open-end
diversified management investment company under the 1940 Act, but such
registration does not involve supervision of the management or the investment
practices or policies of the Separate Account or the Company by the Securities
and Exchange Commission. The Separate Account has no sub-accounts.
Net Purchase Payments made in accordance with the provisions of the
Contracts described herein are added to the Separate Account and invested as
described herein. See "Description of the Company and Separate
Account--Investment Policies and Restrictions" and "Deductions and Expenses".
Net Purchase Payments made prior to April 29, 1977 under HR-10 Plan Contracts
were added to Continental Assurance Company Separate Account (A) and invested
therein.
The Company owns the Separate Account's assets and, under existing law, is
not considered to be a Trustee with respect to those assets. Nevertheless, the
assets of the Separate Account are held for the benefit of the participants and
persons entitled to payments under the Contracts described in this Prospectus.
Moreover, investment income and gains and losses from assets allocated to the
Separate Account (whether realized or not) are credited to or charged against
the Separate Account without regard to other income, gains or losses of the
Company (in accordance with the Contracts' provisions). Thus, the dollar amount
of payments or values which vary reflect the investment results of just the
Separate Account. Additionally, the Illinois Insurance Code and the Contracts
themselves prohibit the Company from charging any liabilities arising out of
other business of the Company against the Separate Account's assets (equal to
the reserves and other contract liabilities of the Separate Account).
14
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
The objectives and policies in making investments for the Separate Account
are set forth below.
1. The primary objective of the Company in making investments for the
Separate Account will be the growth of capital in relation to the growth
of the economy and the changing value of the dollar. Current investment
income will be a secondary objective. Accordingly, the assets of the
Separate Account will be invested primarily in common stocks and in other
securities convertible into common stocks.
2. When the Company believes that economic and market conditions indicate a
likelihood that investing a majority of the assets of the Separate
Account in common stocks or securities convertible into common stocks
might result in a material decrease in the unit value of the Separate
Account, less than a majority of the assets of the Separate Account may
be invested in common stocks or securities convertible into common
stocks. In these situations, any assets not invested in common stocks or
securities convertible into common stocks will be invested primarily in
investment grade debt instruments with a maturity of one year or less,
such as U.S. Treasury bills, bank certificates of deposit, bank
repurchase agreements or commercial paper.
3. When the Company deems that economic and market conditions so indicate,
a portion of the assets of the Separate Account may be invested in
preferred stocks and publicly distributed debt instruments such as
corporate bonds, debentures, equipment trust certificates, U.S.
Government securities or U.S. Government Agency securities.
4. Temporary investments for the Separate Account may be made in short-term
instruments such as U.S. Treasury Bills, bank certificates of deposit,
bank repurchase agreements or commercial paper.
5. To the extent of 75% of the assets of the Separate Account, the Company
may not purchase for the Separate Account the securities of any issuer if
such purchase would cause more than 5% of the market value of the
Separate Account's assets to be invested in the securities of such issuer
(other than obligations of the United States and its instrumentalities)
or would cause more than 10% of any class of securities of such issuer to
be held in the Separate Account's portfolio. The balance of 25% of the
assets of the Separate Account may be invested without regard to such 5%
or 10% limitations.
6. The Company, in acting for the Separate Account, will not underwrite
securities of others or invest in restricted securities.
7. The Company, in acting for the Separate Account, will not concentrate
more than 25% of the Separate Account's investments in any one industry.
8. The assets of the Separate Account will not be invested in commodity
contracts.
9. The assets of the Separate Account will not be invested in securities of
investment companies.
<PAGE>
10. The Company, in acting for the Separate Account, will not make loans to
other persons except through the acquisition of securities issued or
guaranteed by banks, bonds, debentures, other debt securities which are
publicly distributed and the lending of portfolio securities ("Portfolio
Loans"). Portfolio Loans will be continually secured by cash, letters of
credit, U.S. Government securities or U.S. Government Agency securities
having a market value of not less than the market value of the portfolio
securities loaned. The aggregate value of Portfolio Loans will not exceed
25% of the Separate Account's net assets at any time.
15
<PAGE>
11. The Company, in acting for the Separate Account, will not engage in the
purchase and sale of interests in real estate, except that the Company
may engage in the purchase and sale of marketable securities of real
estate companies and real estate trusts which may represent indirect
interests in real estate.
12. The Company, in acting for the Separate Account, will not purchase
securities for the purpose of control or management of the issuer
thereof.
13. The Company will not make short sales for the Separate Account.
14. The Company will not borrow money for the Separate Account.
15. The Company will keep the Separate Account's assets substantially fully
invested in assets described in paragraphs 1, 2, 3 and 4 above, as
described therein, and will limit the Separate Account's cash position,
to the extent feasible, to such amounts as may be required to permit the
Company to make normal contract payments from the Separate Account.
16. The Company, in acting for the Separate Account, will not issue any
senior securities (as defined in the 1940 Act) except for the lending of
portfolio securities permitted by paragraph 10 above.
The investment policies enumerated above may not be changed without
approval of a majority (as defined in the 1940 Act) in interest of the
participants.
There is no investment policy limitation as to the timing of sales and
purchase of securities. Although it will not be the general policy of the
Company, in acting for the Separate Account, to engage in short term trading,
securities may be sold without regard to the length of time held whenever
investment judgment makes such action advisable. (Since the Separate Account is
not subject to federal income taxes on capital gains, it is in a relatively
advantageous position in realizing capital gains even though an increased
portfolio turnover results in correspondingly greater brokerage expenses.) The
rate of total portfolio turnover for 1995 was 46%, for 1994 was 52% and for 1993
was 69%. Changes in the rate of portfolio turnover from year to year are
attributable to changes in the Company's assessment of prevailing market
conditions. All investment income and realized capital gains will be reinvested.
The Company, in acting for the Separate Account, will limit portfolio
transactions to those which the Company, in the exercise of prudent business
judgment, deems advisable in order for the Separate Account to carry out its
investment policies and to make payments to participants. The dollar amount of
investment accumulation before retirement and the dollar amount of subsequent
retirement benefits will vary to reflect the dividend, interest and fluctuations
in the market value of the securities held in the Separate Account and will be
subject to the same risks as are inherent in the ownership of common stocks.
The Company, in acting for the Separate Account, will not participate in
any trading account in securities on a joint or joint and several basis;
provided, however, that the bunching of orders for the sale or purchase of
marketable portfolio securities with those of other accounts under the
management of the Company or its affiliates and the averaging of prices among
the Separate Account and such other accounts will not be deemed to result in a
trading account in securities. The Company, in acting for the Separate Account,
will not mortgage or pledge the investments of the Separate Account, purchase
securities on margin or, except as described below, invest in puts or calls.
Unlike the investment policies and restrictions stated in the preceding
paragraphs, the policies and restrictions described in this paragraph are
subject to change without vote of the participants.
16
<PAGE>
The Company, in acting for the Separate Account, may write covered call
options. The "writing" of call options by the Separate Account means that the
Separate Account will be selling the right, but not the obligation, to acquire a
specified number of securities held in the Separate Account's portfolio at a
price set in the option contract (the "exercise price"). The optionholder
generally may exercise this right to purchase the underlying securities at any
time prior to the expiration of the option by notifying the Separate Account of
its intention to exercise and delivering to the Separate Account funds equal to
the aggregate exercise price of the securities covered by the contract (the
"exercise payment"). Generally, a holder of a call option will exercise its
rights under the call option only if the market price of the underlying stock
exceeds the exercise price of the option. If the market price of the underlying
securities is greater than the option exercise price on the date of exercise,
the holder is, by virtue of the option contract, entitled to purchase the
underlying securities at the below-market exercise price. If the option is
exercised and the market value of the underlying securities exceeds the sum of
the exercise payment and the payment received by the Separate Account on the
sale of the option (the "premium"), the Separate Account would be left in a less
favorable position than if such call option had not been written (because of the
lost opportunity to realize the economic value represented by such excess).
To close out a position when writing covered call options, the Separate
Account may make a "closing purchase transaction," which involves purchasing a
call option on the same security with the same or similar exercise price and
expiration date as the option which it has previously written. The Separate
Account will realize a profit or loss from a closing purchase transaction
depending upon the difference between the amount paid to purchase an option and
the amount received from the sale thereof.
The Company, in acting for the Separate Account, may also purchase covered
put options for hedging purposes. A put option gives the purchaser of the option
the right to sell, and obligates the writer to buy, the underlying securities at
the exercise price at any time during the term of the option. Generally, a
holder of a put option will exercise its rights under the put option, only if
the market price of the underlying securities is less than the exercise price of
the option. If the put option is not exercised or the amount by which the
exercise price exceeds the market price of the underlying securities is less
than the premium paid, the Separate Account would be left in a less favorable
position than if such put option had not been purchased. If market conditions
are appropriate for the Separate Account to exercise the purchased put option,
the Separate Account also may sell a put option to close out a purchased put
option rather than exercising the purchased put option.
The Separate Account will write call options and purchase put options only
if the related stock is held in its portfolio. The put and call options
described above will generally have a contract term of nine months or less. The
market value of the securities subject to such option obligations at the time
such options are written or purchased will not, in the aggregate, exceed 20% of
the Separate Account's total assets.
The use of options exposes the Separate Account to certain additional
investment risks and transaction costs. The risks that may be associated with
the use of option contracts include, but are not limited to, the risk that
securities prices will not move in the direction anticipated by the Separate
Account and the risk that the skills needed to successfully use option
strategies may be different from those needed to select portfolio securities. In
addition, assets segregated or set aside to cover the writing of a call option
generally may not be disposed of during the term of such option. Segregating
assets could diminish the Separate Account's return due to the opportunity
losses of foregoing other potential investments with the segregated assets.
<PAGE>
The Company is permitted to enter into repurchase agreements and reverse
repurchase agreements on behalf of the Separate Account. A repurchase agreement
is an instrument under which the purchaser (i.e., the
17
<PAGE>
Separate Account) acquires ownership of the obligation (debt security) and the
seller agrees, at the time of the transfer, to repurchase the obligation at a
mutually agreed upon time and price, thereby determining the yield during the
purchaser's holding period. This results in a fixed rate of return insulated
from market fluctuations during such period. Repurchase agreements usually are
for short periods, normally ranging from one day to one month. Repurchase
agreements will be entered into only with respect to obligations in which the
Separate Account may otherwise invest.
A reverse repurchase agreement is an agreement under which the lender
(i.e., the Separate Account) loans a security, usually a U.S. Government
security, to a borrower, usually a bank or a stockbroker, against cash
collateral. The transaction is normally characterized as a loan by the lender of
the security and a simultaneous agreement by the lender to repurchase such
security at an agreed price at a specified later date. The transaction is
normally structured to permit the lender to receive a yield in excess of the
yield of the underlying security. Reverse repurchase agreements are usually made
for short periods, normally ranging from one week to one month. A reverse
repurchase agreement will be a Portfolio Loan permitted by paragraph 10 above.
Sufficient funds will be maintained in the form of cash and short-term
investments, and segregated on an accounting basis, to satisfy such repurchase
commitments.
The Federal Bankruptcy Code provides that a repurchase participant may
enforce a clause requiring the liquidation of a repurchase agreement because of
the insolvency or financial condition of the other party to the repurchase
agreement or because of the commencement of the bankruptcy case by the other
party to the repurchase agreement. The Federal Bankruptcy Code also provides
that the automatic stay does not apply to the set-off by a repurchase
participant of a mutual debt or claim in connection with repurchase agreements
where the set-off is for a margin payment or a settlement payment. Repurchase
agreements are narrowly defined by Section 101(47) of the Bankruptcy Code to
mean only agreements involving the transfer of certificates of deposit, eligible
banker's agreements or securities that are direct obligations of or fully
guaranteed by the United States government. Repurchase agreements not falling
within this definition may not be covered by the protection of Sections 559 and
362(b)(7) of the Bankruptcy Code. It is possible that repurchase agreements not
covered by those sections may be considered by a bankruptcy court to be loans by
the purchaser to the seller. In such event, the purchaser might not be able to
sell the obligation in the event of bankruptcy of seller without leave of the
appropriate court. The purchaser would then be at risk due to a decline of the
value of the obligation, and in the event of bankruptcy would face delays in the
sale of the obligation and would incur legal, disposition and other expenses.
The Company will limit investments by the Separate Account which may not be
sold and settlement received therefor within 5 business days (or such shorter
settlement period as the Commission designates for investment companies as
defined under the 1940 Act) to 10 percent of the net assets of the Separate
Account.
MANAGEMENT
THE COMMITTEE
The supervision of the Separate Account is vested by the Company in a
Committee. The Committee has the following specific duties:
1. To review periodically the portfolio of the Separate Account to
ascertain that such portfolio is managed in the long-term interest of
the participants and to take such corrective action as may be necessary.
<PAGE>
2. To approve, annually, agreements providing for sales, investment and
administrative services.
18
<PAGE>
3. To recommend from time to time any changes deemed appropriate in the
fundamental investment policies of the Separate Account, to be submitted
to the participants at their next meeting.
4. To select independent auditors, whose engagement shall be approved
annually by the participants.
INVESTMENT ADVISORY AGREEMENT
Under the Investment Advisory Agreement, the Company acts as the investment
adviser to the Separate Account. In rendering its services as investment
adviser, the Company is responsible to the Committee. The Company, as the
Separate Account's investment adviser, provides the Separate Account with an
investment program complying with the investment objectives, policies and
restrictions of the Separate Account (see "Description of the Company and the
Separate Account--Investment Policies and Restrictions"). In carrying out the
Separate Account's investment program, the Company makes the investment
decisions and is responsible for the investment and reinvestment of the Separate
Account's assets by the purchase and sale of securities on behalf of the
Separate Account. The Company performs research, statistical analysis, and
continuous supervision of the Separate Account's investment portfolio, and also
furnishes office space for the Separate Account and pays the salaries and fees
of the Separate Account's officers and Committee Members. The Investment
Advisory Agreement does not require employees of the Company to devote their
exclusive efforts to the Separate Account's business, and it is expected that
they will provide investment advisory services for the Company's other customers
and for CNA Financial and its affiliates.
DEDUCTIONS AND EXPENSES
SALES AND ADMINISTRATIVE CHARGES--GENERAL
The Company may be deemed to be the principal underwriter for the Separate
Account and performs all sales and administrative functions relative to the
Contracts and the Separate Account. The Company does not act as principal
underwriter for any other investment company.
The Company has received the following sales and administrative fees in
connection with the operations of the Separate Account: 1995, $13,563; 1994,
$65,144; and 1993, $68,805.
The Company, in its sole discretion, may grant an experience rating credit
to participants covered by a 403(b) Plan Contract based upon its profitability.
Experience rating credits of 1% to 5% of Purchase Payments have been granted in
certain cases where substantial individual solicitation has not been necessary.
<PAGE>
SALES AND ADMINISTRATIVE CHARGES--RABBINICAL PLAN CONTRACT WITH THE RABBINICAL
BOARD
Under the current 403(b) Plan Contract with the Rabbinical Board, the
Company does not make any deduction from Purchase Payments for sales and
administrative expenses. However, under the proposed administrative service
agreement with the Rabbinical Board, which the Company anticipates will become
effective prior to July 1, 1996, each Participant under the Rabbinical Plan will
be charged a fee of .35% of the Participant's net asset value as of July 1 of
that year and each July 1 thereafter. That fee will be remitted to the
Rabbinical Board for administrative services performed by it on behalf of
Rabbinical Plan Participants.
SALES AND ADMINISTRATIVE CHARGES--LEVEL DEDUCTION CONTRACTS--403(B) PLANS
Pursuant to the Administrative Service Agreement, and as provided in the
Contracts, the Company currently deducts 6% (6.38% of the net amount invested)
from each Purchase Payment as received for sales
19
<PAGE>
expenses and administrative expenses. Of such 6% deduction, 5% is for sales
expenses and 1% is for administrative expenses. These charges do not cover the
expenses covered by the service fee charged under the Investment Advisory
Agreement. See "Deductions and Expenses--Investment Advisory Charges". The
Company guarantees that during the first five years of a participant's
participation under the Contract no further deductions will be made to cover
such expenses, but any part of the 6% aggregate charge not needed to cover such
expenses accrues as a profit to the Company. Following the end of the fifth year
of participation under the Contract, the 1% deduction by the Company from
Purchase Payments to cover administrative expenses may be increased by the
Company upon prior written notice to the participant.
SALES AND ADMINISTRATIVE CHARGES--GRADED DEDUCTION CONTRACTS--403(B) PLANS
Pursuant to the Administrative Service Agreement, and as provided in the
Contracts, to cover sales expenses the Company makes deductions from Purchase
Payments as follows:
5% (5.26% of the net amount invested) on the first $10,000 of Purchase
Payments for each participant;
4% (4.17% of the net amount invested) on the next $10,000 of Purchase
Payments for each participant; and
2.5% (2.57% of the net amount invested) on all Purchase Payments for each
participant in excess of $20,000.
Total Purchase Payments for each participant under both fixed and variable
annuity contracts are included in determining the charge. Any part of such
charge which is not needed to cover such expenses accrues as a profit to the
Company.
Pursuant to the Administrative Service Agreement, and as provided in the
Contracts, the Company makes an administrative charge based upon its cost of
administration. There is no maximum dollar limit on this charge, except that
this charge (for any given year) will not exceed the previous year's cost of
administration. This charge is made on December 31st of each year against the
account of each participant who is not receiving an annuity. In 1996, the
Company will assess this charge at an annual rate of $30 per participant.
Neither the sales charge nor the administrative charge covers the expenses
covered by the service fee charged under the Investment Advisory Agreement. See
"Deductions and Expenses--Investment Advisory Charges".
In the event Purchase Payments are made on behalf of a participant who is
in the accumulation period for a partial year, the administrative charge is
prorated on a monthly basis. For example, if the annual charge for a calendar
year is $30 and the participant is covered under the Contract prior to the
commencement of annuity payments for only 8 months of that year, his
administrative charge would be $20.
If no Purchase Payments are received on behalf of a participant during a
calendar year, the deduction from the participant's account for that year will
be 50% of the administrative charge which would otherwise be made. For example,
if the annual charge for a calendar year is $30 and the participant is in the
accumulation period during the entire calendar year but no Purchase Payments are
received on behalf of the participant during the year, his administrative charge
would be 50% of $30 or $15.
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SALES AND ADMINISTRATIVE CHARGES--HR-10 PLANS
Pursuant to the Administrative Service Agreement, and as provided in the
Contracts, each Purchase Payment received by the Company under an HR-10 Plan
Contract is, after deduction of a percentage charge, credited to the Separate
Account. The charge ranges from 0 to 8.5% of Purchase Payments (0 to 9.29% of
the net amount invested) comprised of 0 to 7% of Purchase Payments (0 to 7.65%
of the net amount invested) to cover sales expenses and 0 to 1.5% of Purchase
Payments (0 to 1.64% of the net amount invested) to cover certain administrative
expenses. This charge does not cover the expenses covered by the service fee
charged under the Investment Advisory Agreement. See "Deductions and
Expenses--Investment Advisory Charges". The Company guarantees that, except for
this charge and the charges described below, no further deductions will be made
for sales and administrative expenses. While the Company intends that this
charge merely cover such expenses, if any part of this charge is not needed to
cover such expenses, such part accrues as a profit to the Company. Conversely,
if such expenses exceed this charge, a loss to the Company results. The exact
level of this charge will vary from Contract to Contract, depending on the
volume of Purchase Payments expected, the extent of administrative services to
be performed by the Company and the applicable commission expenses. The
Contractholder, before entering into a Contract, and each self-employed or other
person subject to the Contract, before agreeing to make Purchase Payments
thereunder, will be given a separate written statement showing the percentage
amount of such charge. See also "Description of Group Variable Annuity
Contracts--Withdrawals" with respect to a termination charge applicable to
certain withdrawals under HR-10 Plan Contracts.
If the Contract so provides, the Company may make additional fixed dollar
charges per participant for the maintenance of individual accounting records.
These charges will not exceed $20 for each entry into the plan relating to such
Contract, $10 per year per participant thereafter, and $10 at each withdrawal.
The initial charge levels anticipated by the Company will be furnished at the
time that application for the Contract is under consideration, and the charges
provided for will be based upon the Company's good faith estimate of the cost to
it for the maintenance of individual accounting records. At the present time,
there are no Contracts in force under which fixed dollar charges per participant
are made.
No increase in the percentage charge for sales and administrative expense,
or in any charge per participant, may be made during the first five Contract
years. After the first five Contract years, the portion of such charges intended
to cover administrative expenses may be changed on the basis of the Company's
expenses.
INVESTMENT ADVISORY CHARGES
The Company makes quarterly withdrawals from the Separate Account at an
annual rate of 0.5% of the average daily net asset value of the Separate Account
for providing investment advisory services, and at an additional annual rate of
0.33% of the average daily net asset value of the Separate Account as a service
fee for bearing certain expenses of the Separate Account. Such expenses are
different from those covered by the Administrative Service Agreement.
DESCRIPTION OF GROUP VARIABLE ANNUITY CONTRACTS
GENERAL
The Contracts provide one method of investing retirement funds in equity
and other securities. The primary purpose of the Contracts is to provide
lifetime payments which will tend to reflect changes in the cost
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of living during both the years prior to retirement and the years following
retirement. The Company seeks to accomplish this objective by providing a medium
for investment, generally in equity securities, accompanied by an assumption of
the mortality risk. However, there is no assurance this objective will be
attained. The value of the investments fluctuates continuously and is subject to
the risks of changing economic conditions as well as the risks inherent in the
ability of the Company to anticipate changes in such investments necessary to
meet changes in economic conditions. There is no assurance that the value of a
participant's individual account during the years prior to retirement, or the
aggregate amount of the variable annuity payments received during the years
following retirement, will equal or exceed the Purchase Payments made on his
behalf.
The variable annuity payments are determined on the basis of (1) the
mortality table specified in the Contract, and (2) the investment performance of
the Separate Account. The dollar amount of the variable annuity payments will
not be affected by adverse mortality experience or by an increase in the
Company's expenses in excess of the expense deductions provided for in the
Contract. The dollar amounts of the payments will, however, reflect the
investment losses or gains and investment income, and thus will vary.
The significant difference between a regular or fixed annuity and a
variable annuity is that under a fixed annuity, the insurance company assumes
the risk of investment gain or loss and guarantees a specified interest rate and
a specified monthly annuity payment. Under a variable annuity, the participant
assumes the risk of investment gain or loss in that the value of his individual
account varies with the investment income and gains or losses of a specified
portfolio of securities. In both cases, the insurance company assumes the
mortality and expense risk under the Contract.
In assuming the mortality risk, the Company is taking the chance that the
actuarial estimate of mortality rates among annuitants may prove erroneous; in
assuming the expense risk, the Company is taking the chance that the expense
margins deducted by the Company may not prove sufficient to cover the actual
sales and administrative costs and contingency requirements. In either case, if
an error in estimation is against the Company, the Company's earnings will be
reduced; if an error in estimation favors the Company, the Company's earnings
will be increased.
SALES OF CONTRACTS
The Contracts are offered by employees and licensed agents and brokers of
the Company.
VOTING RIGHTS
Participants have the right to vote at the annual meeting of participants
upon the following matters:
1. To elect Members of the Committee for the Separate Account (see
"Management--The Committee").
2. To approve or disapprove any new or amended agreement providing for
investment services.
3. To approve or disapprove any changes in the fundamental investment
policies of the Separate Account.
4. To ratify or reject the Committee's selection of independent
auditors for the Separate Account.
<PAGE>
The number of votes which a participant who is not retired may cast is
equal to the number of Accumulation Units held by such participant under the
particular Contract concerned, which represent interests in the Separate
Account. The number of votes which a retired participant may cast is equal to
the
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monetary value of the actuarial reserve maintained by the Company in the
Separate Account for the annuity of that participant divided by the monetary
value of an Accumulation Unit. As payments are made to a retired participant,
the monetary value of that actuarial reserve is reduced; accordingly, the number
of votes which that retired participant may cast will decrease.
The determination of the number of votes to be cast will be made as of a
date within 60 days prior to the annual meeting of the participants. The
participants will receive at least 20 days' prior written notice of such meeting
and of the number of votes to which they are entitled. A participant will be
entitled to vote only if he is a participant on the foregoing record date and on
the date of the meeting.
ASSIGNMENT
The interest of any participant or beneficiary in or under a Contract is
not subject to assignment or transfer. Transfer or surrender of such interest
may be made only to the Company.
MODIFICATION OR TERMINATION OF THE CONTRACT
Each Contract provides that it may be modified or amended in any respect by
agreement between the Company and the Contractholder, without the consent of any
participant. However, no such modification or amendment may affect retired
participants in any manner, nor may any guarantees previously extended to active
participants be impaired. The Company may also modify or amend any Contract,
without the consent of the Contractholder or any participant, in order to
conform to applicable law or to changes in the operation of the Separate Account
which have been approved by vote of the participants or by the Committee.
A Contractholder may elect to terminate a Contract at any time by due
notice to the Company. An HR-10 Plan Contractholder has an option to transfer
funds to a new funding medium (for example to a fixed annuity contract). If an
HR-10 Plan Contract is terminated without transfer of funds to a new funding
medium or if a 403(b) Plan Contract is terminated, the rights of the
participants are the same as on termination of employment or other withdrawal.
See "Benefits on Death or Withdrawal--403(b) Plans" and "Benefits on Death or
Withdrawal--HR-10 Plans". When a participant commences to receive annuity
payments, his rights are fixed and are not affected by any Contract termination.
CONTRACTHOLDER INQUIRIES
All inquiries by Contractholders, Employers or participants should be made
in writing or by telephone to:
Continental Assurance Company
Attn: Individual Pension Accounts-35S
P.O. Box 803572
Chicago, Illinois 60690
(800) 351-3001
PURCHASE PAYMENTS AND ACCUMULATIONS
The minimum Purchase Payment on Contracts for 403(b) Plans is $10, which
may be made at any time on behalf of any participant.
There is no minimum Purchase Payment on Contracts for HR-10 Plans. The
HR-10 Plan Contracts permit a variety of payment schedules. A retirement plan
for the self-employed may provide for a fixed
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percentage of compensation to be paid by all Employers who are participating,
and additional payments to be made by them on behalf of any of their employees
who may also be eligible. If the plan incorporates a provision for employee
payments, these would normally be deducted regularly from their compensation
during the year, and remitted directly to the Company as collected.
ALLOCATION OF PURCHASE PAYMENTS--HR-10 PLANS
HR-10 Plans adopted by an Employer may provide for other investments in
addition to the Contracts. For example, these plans may also provide for
purchase of life insurance or fixed annuities. The terms of the plan adopted
will set forth the method of allocation of Purchase Payments between the
Contracts and other applications. There may be different allocations among the
participants under a plan. Reallocation of prior Purchase Payments between the
Contracts and insurance or fixed annuity contracts will be permitted prior to
retirement only with the consent of the Company. If the plan so provides, a
participant may upon retirement change the proportion of annuity to be paid on a
fixed or variable basis.
ACCUMULATION PERIOD
During the period before the commencement of annuity payments, when a
Purchase Payment is received on behalf of a participant, a sales and
administrative charge is deducted. (See "Deductions and Expenses--Sales and
Administrative Charges".) The balance of the Purchase Payment is credited to the
participant's account in the form of Accumulation Units. The number of
Accumulation Units credited for a participant is determined by dividing the
amount credited to his account by the value of an Accumulation Unit next
computed after receipt of the Purchase Payment at the principal office of the
Company, CNA Plaza, Chicago, Illinois 60685. The credit to the participant's
account occurs concurrently with such determination.
VALUE OF AN ACCUMULATION UNIT
During the accumulation period, the value of a participant's account varies
with the performance of the investments of the Separate Account, and there is no
assurance that such value will equal or exceed Purchase Payments made on behalf
of the participant.
Accumulation Units are valued as of 3:00 P.M., Central Time, on each day on
which the New York Stock Exchange is open and on each other day in which there
is a sufficient degree of trading in the portfolio securities of the Separate
Account that the current net asset value of Accumulation Units might be
materially affected by changes in the value of such portfolio securities, with
each day of valuation being referred to as a Valuation Date.
The value of an Accumulation Unit on a Valuation Date is determined by
dividing the net asset value of the Separate Account at the close of business on
that day by the number of Accumulation Units outstanding. Receipt of investment
income or realization of capital gains by the Separate Account will not change
the number of Accumulation Units outstanding. This number ordinarily may be
increased only through receipt of additional Purchase Payments, and decreased
only through withdrawals. The value of an Accumulation Unit on any day not a
Valuation Date will be the same as the value on the next Valuation Date.
The net asset value of the Separate Account is the market value of all
securities and other assets, less liabilities of the Separate Account, including
accrued investment advisory fees and other service fees. The determination of
the net asset value of the Separate Account is made (i) by valuing portfolio
securities which are traded on a national securities exchange at the last sale
price, or, in the absence of a sale, at the closing bid price on the exchange
where the security is primarily traded, (ii) by valuing other securities the
prices of
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which are quoted in the Nasdaq National Market at the last sale price or, in the
absence of a sale, at the closing bid price, (iii) by valuing other
over-the-counter market securities not so quoted on the basis of the bid price
of over-the-counter market quotations, if available, and (iv) by valuing all
other securities and other assets at a fair value determined in good faith by
the Committee.
Under current federal laws, no federal income tax is payable on income or
capital gains of the Separate Account. See "Federal Taxes--Federal Tax Status of
the Separate Account". In the event any income taxes are imposed, they will be
deducted in determining the net asset value of the Separate Account. Deductions
are also made by the Company for investment advisory services and other services
at such prorated percentages as are equivalent to an aggregate of 0.83% per
annum of the average daily net asset value of the Separate Account, under the
Company's Investment Advisory Agreement with the Separate Account. (See
"Deductions and Expenses--Investment Advisory Charges".)
The value of an Accumulation Unit was established as $1.00000 ($1) on June
30, 1966, and the initial deposits were applied at that initial unit value on
February 28, 1967. The value as of any later date is found as described above.
The value of a participant's account at any date can be determined by
multiplying the total number of Accumulation Units credited to his account by
the value of an Accumulation Unit on that date.
WITHDRAWALS
Subject to the limitations described in "Benefits on Death or
Withdrawal--HR-10 Plans", an HR-10 Plan Contractholder may withdraw from the
Company, in one lump sum on any Valuation Date, part or all of his or her
interest in the Contract, except for funds held for terminated or retired
participants. In such event, the Company is entitled to make a termination
charge of 2% of the pro rata amount of the Purchase Payments received under the
Contract before withdrawal relating to the withdrawal. In general, any
withdrawal made prior to age 59 1/2 (other than on account of death, disability,
separation from service during or after the calendar year in which the employee
attains age 55 or a withdrawal which is part of a series of annual or more
frequent annuity payments made after separation from service and at least over
the participant's life, or if the withdrawal is made for certain medical
expenses within the deductible limits under the Internal Revenue Code or if it
is made to an alternate payee pursuant to a QDRO) is subject to an additional
10% tax, under the Internal Revenue Code. See "Benefits on Death or
Withdrawal--HR-10 Plans" and "Federal Taxes--Federal Tax Treatment of
Participants--Distributions--HR-10 Plans".
A participant under a 403(b) Plan Contract may elect, by written notice to
the Company, to withdraw all or a portion of his individual account other than
certain amounts attributable to a salary reduction agreement prior to
commencement of annuity payments. The Company will redeem Accumulation Units
from participants, without any charge, at the net asset value per Accumulation
Unit next to be determined after receipt of a signed written request to the
office of the Company. (See "Description of Group Variable Annuity
Contracts--Value of an Accumulation Unit".) However, withdrawals prior to age
59 1/2 (except for the exceptions stated in the above paragraph) are generally
subject to an additional 10% tax. Distributions from a 403(b) Plan of amounts
contributed on or after January 1, 1989 pursuant to a salary reduction agreement
and of earnings on those contributions (and amounts earned on or after January
1, 1989 on contributions made before January 1, 1989) may be made only upon the
attainment of age 59 1/2, separation from service, death, disability or
<PAGE>
hardship. Hardship distributions are limited to amounts contributed pursuant to
a salary reduction agreement, excluding earnings on those amounts. Payment for
Accumulation Units redeemed will be made by the Company within seven days after
receipt of a written redemption request by the Company at the address set forth
above under "Description of Group Variable Annuity Contracts--Contractholder
Inquiries". Payments upon redemption may be more or less than the original costs
of the Accumulation Units. For a
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discussion of federal income tax consequences of the receipt of such lump sum
payments, see "Federal Taxes--Federal Tax Treatment of Participants".
ANNUITIES
ELECTING THE RETIREMENT DATE AND FORM OF ANNUITY--403(B) PLANS
A participant selects, in accordance with the Contract, a retirement date
and annuity option. The Company currently charges a $250 fee for the purchase of
a fixed rate annuity. The Company reserves the right to change this charge at
any time. Prior to commencement of annuity payments, a participant may transfer
funds between fixed and variable annuity contracts. Some of the 403(b) Plan
Contracts offered hereby provide that any such transfer will be made without
charge. Others provide that the Company may make a charge of $10 for the second
and each succeeding transfer in any calendar year. A participant may change the
percentage allocation of future Purchase Payments between fixed and variable
annuity contracts at anytime without charge. Subsequent changes in either the
retirement date or annuity option can be made up to 30 days prior to the date
annuity payments are to commence. Distributions must generally commence by April
1 of the year following the year of attainment of age 70 1/2 whether or not the
participant has retired. For participants employed by certain church or
governmental entities and certain persons who reached age 70 1/2 before 1988,
distributions generally must commence by April 1 of the year following the year
in which occurs the later of retirement or the attainment of age 70 1/2. The
403(b) Plan Contracts provide for the various annuity forms described below.
Level deduction Contract participants have three annuity forms; graded deduction
Contract participants have four. There is an additional annuity form, which is
not one of the four options described below, which is applicable only to plans
providing for a qualified joint and survivor annuity as defined in ERISA. That
annuity form is described following the descriptions of the four options. The
annuity payments may be either fixed or variable at the option of the
participant.
ANNUITY OPTIONS--403(B) PLANS
Option 1--Life Without Refund--Monthly payments for the life of the
participant only.
Option 2--Life Ten Years Certain--Monthly payments for life, with the
provision that if, at the death of the annuitant, payments have been made for
less than 120 months, annuity payments may, at the option of the beneficiary
designated by the participant, be discounted and paid in a single sum, or be
continued during the remainder of said period to the beneficiary. If the
beneficiary dies while receiving annuity payments, the value on the date of
death of the remaining number of annuity payments will be paid in a lump sum to
the estate of the beneficiary. (THIS OPTION IS CONSIDERED BY THE COMPANY TO BE
THE "NORMAL FORM" AND, UNLESS THE PLAN ADOPTED BY THE CONTRACTHOLDER AND
COMMUNICATED TO THE COMPANY PROVIDES FOR A QUALIFIED JOINT AND SURVIVOR ANNUITY
AS DEFINED IN ERISA, WILL BE APPLIED AUTOMATICALLY IF NO OTHER OPTION IS
ELECTED.)
Option 3--Joint and Survivor--Monthly payments to the participant for his
life, continuing on the basis of the same number of Annuity Units after the
participant's death to his spouse, for the balance of his spouse's life.
Option 4--Life Five Years Certain--Monthly payments for life, with a
provision similar to that under the Life Ten Years Certain form, but extending
only five years from retirement. This option may only be selected by
participants under the graded deduction Contract.
Ordinarily, no option may be elected if the first payment under such option
would be less than $25. If the amount of such first payment would be less than
$25, it will be paid in a lump sum.
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No option may be elected which has a period certain longer than the life
expectancy of the participant or the joint and last survivor life expectancies
of the participant and the participant's contingent annuitant, calculated, based
on such persons' attained ages in the year in which payments are required to
begin, using the mortality table provided for such purpose by the Secretary of
the Treasury. Further, with respect to benefits accrued after December 31, 1986,
the distribution cannot exceed a maximum period of years determined under tables
provided by the Secretary of the Treasury, and additional rules apply in
determining the minimum amount which must be distributed each year.
If a plan adopted by the Contractholder and communicated to the Company
provides for a qualified joint and survivor annuity as defined in ERISA, then,
unless the participant waives such form and his spouse consents, the automatic
annuity form under the Contract for each participant to whom such provision is
applicable will be an annuity for the life of the participant which provides a
survivor annuity for the life of the participant's surviving spouse which is not
less than one-half, nor greater than the full amount, of the annuity payable
during the life of the participant, and which is the actuarial equivalent of a
single life annuity with ten years certain for the life of the participant. Any
participant who affirmatively waives the automatic annuity form with the consent
of his spouse may select any of the options described above if he is covered by
a graded deduction Contract or any of Options 1, 2 or 3 if he is covered by a
level deduction Contract.
If Option 1 is elected, subsequent to the death of the participant no
payments are made to any person, and if Option 3 is elected, subsequent to the
death of the last to die of the participant and the participant's spouse no
payments are made to any person.
Other options are available with the consent of the Company. Information on
such options will be furnished upon written request to the Company. See
"Description of Group Variable Annuity Contracts--Contractholder Inquiries".
RETIREMENT OF PARTICIPANT--HR-10 PLANS
Distributions must generally commence by April 1 of the year following the
year of attainment of age 70 1/2, whether or not the participant has retired.
For certain persons who reached age 70 1/2 before 1988, distributions generally
must commence by April 1 of the year following the year of the later of
retirement or the attainment of age 70 1/2.
The HR-10 Plan Contract is flexible in allowing retirement on the first day
of any month as elected by the participant and specified in the plan. The only
requirements are that the initial monthly annuity payment must be at least equal
to a minimum amount established by the Company from time to time, and that the
participant must submit certain information to establish proof of his date of
birth. If the annuity would be less than the minimum, it may be paid as a
fixed-value income, or in a lump sum.
ANNUITY OPTIONS--HR-10 PLANS
The form of annuity payable to retired participants of a particular
organization depends on the terms and provisions of the plan adopted by that
organization. Annuity options normally available under the Contract, if the plan
so provides, will include the following listed below, provided that the option
selected must produce an initial monthly annuity payment in the amount of at
least $25. The Company currently charges $250 for the purchase of a fixed rate
annuity. The Company reserves the right to change this charge. Prior to
commencement of annuity payments, a participant may transfer funds between fixed
and variable annuity contracts. Some of the HR-10 Plan Contracts offered hereby
provide that any such transfer will be made without charge. Others provide that
the Company may make a charge of $10 for the second and each
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succeeding transfer in any calendar year. A participant may change the
percentage allocation of future Purchase Payments between fixed and variable
annuity contracts at any time without charge.
Option 1--Life Ten Years Certain--Monthly payments for life, with the
provision that if, at the death of the annuitant, payments have been made for
less than 120 months, annuity payments will be discounted at the reserve
interest rate, and paid to the beneficiary in a single sum. (THIS OPTION IS
CONSIDERED BY THE COMPANY TO BE THE "NORMAL FORM" AND, UNLESS THE PLAN ADOPTED
BY THE CONTRACTHOLDER AND COMMUNICATED TO THE COMPANY PROVIDES FOR A JOINT AND
SURVIVOR ANNUITY AS DEFINED IN ERISA, WILL BE APPLIED AUTOMATICALLY IF NO OTHER
OPTION IS ELECTED.)
Option 2--Life Five Years Certain--Monthly payments for life, with a
provision similar to that under the Life Ten Years Certain form, but only
extending for five years from retirement.
Option 3--Life Without Refund--Monthly payments for the life of the
participant only.
Option 4--Joint and Survivor--Monthly payments to the participant for his
life, continuing on the basis of the same number of Annuity Units after the
participant's death to his spouse, for the balance of his spouse's life.
Option 5--Fixed Installments--Level monthly payments of a stipulated dollar
amount, payable until the sum applied is exhausted. The period for which
payments are made will vary depending upon the investment results of the
Account.
Option 6--Fixed Period--Variable monthly payments payable over a
predesignated period of years, from one to twenty.
In the case of options with a fixed period, the beneficiary may, in lieu of
a lump sum settlement, elect to have the remaining installments continued on a
monthly basis. This election is available only if the beneficiary is a natural
person.
No option may be elected which has a certain period longer than the life
expectancy of the participant or the joint and last survivor life expectancies
of the participant and the participant's beneficiary calculated based on such
persons' attained ages in the years in which payments are required to begin,
using the mortality table prescribed for such purpose by the Secretary of the
Treasury. Additional special rules apply in determining the minimum amount which
is required to be distributed each year. Life expectancies of the participant
and the participant's spouse will be redetermined annually unless the plan
provides otherwise.
If a plan adopted by the Contractholder and communicated to the Company
provides for a qualified joint and survivor annuity as defined in ERISA then,
unless the participant waives such automatic form of payment with the consent of
the participant's spouse, the automatic annuity form under the Contract for each
participant to whom such provision is applicable will be an annuity for the life
of the participant which provides a survivor annuity for the life of the
participant's spouse which is not less than one-half, nor greater than the full
amount, of the annuity payable during the life of the participant, with respect
to a defined benefit plan, which is the actuarial equivalent of a single life
annuity with ten years certain for the life of the participant and, with respect
to a defined contribution plan, is the annuity which can be purchased with the
participant's individual account balance. Any participant who affirmatively
waives the automatic annuity form with the consent of his spouse may select any
of the options described above.
<PAGE>
If Option 3 is elected, subsequent to the death of the participant no
payments are made to any person, and if Option 4 is elected, subsequent to the
death of the last to die of the participant and the participant's spouse no
payments are made to any person.
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ANNUITY PAYMENTS
(1) Determination of Amount of the First Monthly Variable Annuity Payment
As of the date annuity payments are to commence, the value of a
participant's account is computed by multiplying the value of an Accumulation
Unit on the fifteenth day of the preceding calendar month (or the next working
day if the 15th falls on a Saturday, Sunday or holiday) by the number of
Accumulation Units credited to the participant's account, and subtracting from
the resulting figure any premium tax that is applicable under state law to the
purchase of the participant's annuity. Such premium taxes range from 0 to 3%.
Regardless of the date on which premium taxes are deducted from the accounts of
participants, such taxes are remitted by the Company to applicable state taxing
authorities once per calendar year. Certain states provide for credits against
premium tax liabilities based upon the Company's ownership of properties or
investments located therein (none of which are assets of the Separate Account).
In the event that the Company is able to avail itself of such credits, the
resulting saving is not passed on to participants from whose accounts premium
taxes have been deducted.
Each Contract contains tables setting forth the dollar amount of the first
monthly annuity payment which can be purchased by each $1,000. These tables vary
according to the type of Contract, the form of annuity selected by the
participant and the sex and age on the nearest birthday of the participant. The
tables are based on the 1951 Group Annuity Table projected 14 years with
projection scale C and with interest at the assumed investment rate of 3 1/2%.
Participants under the graded deduction Contract--403(b) Plan may also elect an
optional rate of 3%, 4%, 4 1/2% or 5%. The first monthly annuity payment for a
particular annuity form may be found by dividing the value of the participant's
individual account by $1,000 and multiplying this number by the annuity rate
from the applicable table.
(2) Determination of the Value of an Annuity Unit and Amount of Second and
Subsequent Monthly Variable Annuity Payments
The dollar amount of the first monthly variable annuity payment, determined
as above, is divided by the monetary value of an Annuity Unit as of the date of
retirement to fix the number of Annuity Units represented by the annuity
benefit. The number of Annuity Units, so determined, remains fixed thereafter
throughout the payment period. The dollar amount of the second monthly variable
annuity payment, due as of the first day of the month following retirement, is
determined by multiplying the fixed number of Annuity Units by the monetary
value of an Annuity Unit as of the due date of the second payment. This same
procedure is then followed to determine the monetary value of each succeeding
monthly variable annuity payment.
On each Valuation Date, a net investment factor is determined from the
investment performance of the assets of the Separate Account during the period
since the last Valuation Date. Such factor is equal to the value of an
Accumulation Unit at the end of the period, divided by the value on the
preceding Valuation Date, carried to the nearest one hundred thousandth. The net
investment factor is determined after the deduction for any taxes and for
investment advisory fees and services as described above.
The value of an Annuity Unit was established at $1.00000 ($1) on June 30,
1966. The monetary value of an Annuity Unit is redetermined for the entire month
as of the first day of each calendar month by multiplying the value of an
Annuity Unit on the first day of the preceding month by the ratio of the
Accumulation Unit value for the 15th day of the preceding month to the
Accumulation Unit value for the 15th day of the second preceding month, and
dividing the result by a monthly interest factor equivalent to the assumed net
investment rate (or the next working day if the 15th falls on a Saturday, Sunday
or holiday).
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The dollar amount of each monthly payment under a variable annuity will
fluctuate with the changing value of an Annuity Unit. The Annuity Unit value
will go up or down each month, depending on whether the actual effective
investment return for that month is at an annual rate which is greater than or
less than the assumed investment rate.
(3) Examples
The computation of the amounts payable under a variable annuity may be
illustrated by the following two examples, using unisex annuity tables. In each
case, assume a participant retired on January 1, 1996 at age 65. The participant
had on the date of retirement 15,000 Accumulation Units. The monetary value of
an Accumulation Unit as of December 15, 1995 was $11.758211. The total value of
the participant's account was therefore $176,372.17.
(a) 403(b) Plan Contract. Assume the participant selected Option 2--Life
Ten Years Certain. See "Annuities--Annuity Options--403(b) Plans". Both graded
deduction and level deduction 403(b) Plan Contracts provide an annuity rate of
$6.34 for a participant age 65, where Option 2 has been selected. The total
value of the account, $176,372.17 was therefore divided by $1,000 and multiplied
by the annuity rate of $6.34 to obtain the initial monthly payment, $1,118.21.
(It is assumed that no premium tax was applicable in this instance). Continuing
this example, the monetary value of an Annuity Unit on the date of retirement
was $4.360235. This was divided into $1,118.21 to obtain the quantity
256.456361, the number of Annuity Units represented by this benefit. This number
of Annuity Units will remain fixed for the duration of the annuity payments. The
second monthly payment, to be made on February 1, 1996, would be found by
multiplying the number of Annuity Units by the monetary value of an Annuity Unit
on that date. This was $4.218513. The dollar amount of the second payment would
have been 256.456361 times $4.218513 or $1,081.86. Each succeeding monthly
payment for this annuity would be determined in the same manner, being related
in turn to the monetary value of an Annuity Unit on the date the payment is due.
Again, the value of an Annuity Unit on that date will be found from the value on
the first day of the preceding month, adjusted for investment experience and
assumed interest for the period from the 15th day of the second preceding month
to the 15th day of the preceding month (or the next working day if the 15th
falls on a Saturday, Sunday or holiday).
(b) HR-10 Plan Contract. Assume the participant selected Option 1--Life
Ten Years Certain. See "Annuities--Annuity Options--HR-10 Plans". The HR-10 Plan
Contract provides an annuity rate of $6.34 for a participant age 65, where
Option 1 has been selected. The total value of the account, $176,372.17, was
therefore divided by $1,000 and multiplied by the annuity rate of $6.34 to
obtain the initial monthly payment, $1,118.21. (It is assumed that no premium
tax was applicable in this instance). Continuing this example, the monetary
value of an Annuity Unit on the date of retirement was $4.360235. This was
divided into $1,118.21 to obtain the quantity 256.456361, the number of Annuity
Units represented by this benefit. This number of Annuity Units will remain
fixed for the duration of the annuity payments. The second monthly payment, to
be made on February 1, 1996, would be found by multiplying the number of Annuity
Units by the monetary value of an Annuity Unit on that date. This was $4.218513.
The dollar amount of the second payment would have been 256.456361 times
$4.218513 or $1,081.86. Each succeeding monthly payment for this annuity would
be determined in the same manner, being related in turn to the monetary value of
an Annuity Unit on the date the payment is due. Again, the value of an Annuity
Unit on that date will be found from the value on the first day of the preceding
month, adjusted for investment experience and assumed interest for the period
from the 15th day of the second preceding month to the 15th day of the preceding
month (or the next working day if the 15th falls on a Saturday, Sunday or
holiday).
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(4) Assumed Investment Rate
The examples are based upon a assumed investment rate of 3 1/2%. Under the
403(b) Plan graded deduction Contract, the participant has the option to choose
an assumed investment rate of 3%, 3 1/2%, 4%, 4 1/2% or 5%. This option must be
selected at least 30 days prior to the date annuity payments are to commence. If
an assumed investment rate is not selected, then a 3 1/2% rate will be applied.
The Company, in special cases, may stipulate variable annuity premiums and
reserves on assumed investment rates other than 3 1/2% for HR-10 Plan Contracts.
Each special Contract of this character would have different monetary values for
Annuity Units.
A higher assumed investment rate will tend to result in a higher initial
payment but a more slowly rising series of subsequent payments (or a more
rapidly falling series of subsequent payments when Accumulation Unit values are
declining). A lower assumed investment rate would have the opposite effect. If
the actual net investment rate is equal to the assumed investment rate, the
annuity payments will be level. The assumed investment rate is an actuarial
technique rather than a guarantee of a rate of return, and no assurances can be
given that the actual net investment rate will equal or exceed the assumed
investment rate.
BENEFITS ON DEATH OR WITHDRAWAL
403(B)--PLANS
Upon termination of Purchase Payments on his behalf, a participant under a
403(b) Plan will have the following options, subject to the conditions in the
Contract:
(a) The participant may elect to have his individual account applied
to provide annuity payments commencing immediately under the selected
annuity option.
(b) The participant may surrender his individual account and receive
the value of the account. The value of the account will be computed from
the value of an Accumulation Unit next to be determined after a written
request for surrender is received at the principal office of the Company,
CNA Plaza, Chicago, Illinois 60685. Payment will be made within seven days
thereafter, without termination charge. Payments upon redemption may be
more or less than the original cost of the Accumulation Units.
(c) The participant may leave his individual account in force under
the Contract until his required beginning date (generally the April 1
following the year in which he reaches age 70 1/2, with exceptions for
certain persons who reached age 70 1/2 prior to 1988) and the account will
continue to participate in the investment results of the Separate Account.
At his required beginning date, the participant must take an annuity or
surrender his account and receive its value.
(d) If the individual participant moves to another employer which has
a similar group annuity contract in force with the Company, his individual
account may be transferred to the other group annuity contract.
Federal income taxes may be withheld from the taxable portion of any amount
distributed. See "Federal Taxes--Federal Tax Treatment of Participants--403(b)
Plans".
On the death of a participant prior to retirement, the value of his
individual account will be paid to his beneficiary in a single sum; or, if the
beneficiary is the participant's surviving spouse, it may be left in the
Separate Account until the date the participant would have attained age 70 1/2;
or it may be applied under one of the annuity options under the Contract to
provide a lifetime annuity on a variable basis, providing the initial monthly
annuity payment is at least $25 in amount. The participant's entire interest
must, however, be
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distributed within five years after his death unless the beneficiary is his
spouse or if the beneficiary takes the benefit in the form of a lifetime
annuity. In general, all death benefits are taxable as ordinary income when
received by the designated beneficiary or by the estate; however, the
participant's spouse may be eligible to elect to defer taxation on such death
benefit by directing a rollover to an individual retirement plan or making a
"tax-free" rollover contribution of such death benefit (including the amount of
taxes withheld on such benefit) within sixty days after receipt thereof to an
individual retirement plan. In addition, beneficiaries of employees of certain
religious, charitable and educational institutions (not publicly operated) may
avail themselves of an exclusion of up to $5,000 if they elect to receive the
death benefits in a lump sum within one taxable year. This exclusion of up to
$5,000 is not available to beneficiaries of public school employees. See
"Federal Taxes--Federal Tax Treatment of Participants--403(b) Plans".
HR-10 PLANS
Under all plans except certain profit sharing plans, death benefits in the
form of a survivor annuity will generally be paid to the surviving spouse of a
vested or partially vested participant if the participant was married for at
least one year as of the date of his death (or less if the HR-10 Plan so
provides), unless the participant waives such a spousal annuity and his spouse
consents. The monthly amount of the spousal annuity will be the amount the
surviving spouse would have received under a qualified joint and survivor
annuity as defined in ERISA if the participant had retired on the day before his
death (or, in the case of a participant who dies before he became eligible to
retire, the amount the surviving spouse would have received under such an
annuity if the participant had survived to the earliest retirement age under the
plan, retired, and died the day after such retirement). Under certain defined
contribution plans, the monthly amount of the spousal annuity is the amount that
would be provided under an annuity purchased with 50% of the participant's
individual account under the Contract. Under certain profit sharing plans, the
surviving spouse to whom a participant was married for at least one year on the
date of his death (or less if the HR-10 Plan so provides) will receive the
entire value of the participant's individual account under the Contract unless
the surviving spouse consents to another named beneficiary.
For participants who are unmarried or who were married less than a year (or
other applicable period under the HR-10 Plan) when they died, and for other
participants whose spouses consent to an alternative form of distribution or to
another named beneficiary, in the event of the death of a participant prior to
retirement, the beneficiary currently designated by the participant will be
entitled to the entire value of his individual account under the Contract. The
monetary value of his account will be determined at the Valuation Date next
following the date the notice of death is received at the principal office of
the Company, CNA Plaza, Chicago, Illinois 60685. Payments upon death or
withdrawal may be more or less than the total of the original purchase payments.
For a discussion of federal income tax consequences of the receipt of lump sum
payments by participants, see "Federal Taxes--Federal Tax Treatment of
Participants--HR-10 Plans".
If permitted by the plan, the beneficiary may elect to have the value
applied to provide a variable income to the beneficiary under rates set forth in
the Contract.
On the withdrawal of a participant from the plan prior to retirement due to
a termination of employment or to a termination of the plan itself, the
following options are available:
(a) A participant may, regardless of age, have his individual account
applied to provide a variable annuity option under the Contract, subject to
the minimums set forth therein and to the requirement that the
participant's spouse, if any, must consent in writing to the distribution.
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(b) A participant may, regardless of age, surrender his individual
account and receive the value of the account computed as of the Valuation
Date next after the date the request for surrender is received by the
Company, subject to spousal consent as described in subparagraph (a) above
if required under the Plan.
(c) A participant may, if his interest in the Separate Account on the
date of withdrawal is at least $2,000, allow his individual account to
remain in force under the Contract, and his individual account will
continue to participate in the investment results of the Separate Account.
On subsequent retirement, such participant may, regardless of age, begin to
receive annuity payments under the option selected. At any time in the
interim, such participant may instead surrender his individual account in
accordance with (b) above.
In lieu of the above options, and if permitted under the plan, any
participant may elect to have his individual account transferred to a fixed
annuity contract, whereupon options similar to those above will apply. There may
be a termination charge of 2% of the pro rata amount of the Purchase Payments
received under the Contract relating to the withdrawal before withdrawal with
respect to a lump sum withdrawal of part or all of the interest of a
Contractholder in a Contract. See "Deductions and Expenses--Sales and
Administrative Charges--HR-10 Plans" and "Description of Group Variable Annuity
Contracts--Withdrawals".
FEDERAL TAXES
FEDERAL TAX TREATMENT OF PARTICIPANTS
403(b) Plans. Amounts representing contractually permitted Purchase
Payments under 403(b) Plans made on behalf of participants are not recognizable
as taxable income to participants at the time they are made. However, Purchase
Payments made pursuant to salary reduction agreements will be subject to Social
Security ("FICA") taxes and Federal Unemployment Compensation ("FUTA") taxes.
Increases in the value of a participant's individual account are not taxable to
the participant until annuity payments are received by him.
All annuity payments received after retirement will be based on realized
and unrealized capital gains as well as amounts representing purchase payments
on behalf of a participant and the participant's pro rata share of investment
income. All such annuity payments will be taxed under Section 72 of the Internal
Revenue Code as ordinary income in the year of receipt to the extent that they
exceed the participant's Investment in the Contract. The Investment in the
Contract is the amount of Purchase Payments made by or on behalf of such
participant which are a part of his or her taxable income in the year in which
such payments are made; i.e., those which are not deductible. In general, the
participant's Investment in the Contract is divided by the expected number of
payments to be made under the Contract. The amount so computed constitutes the
Excludable Amount, which is the amount of each annuity payment considered a
return of capital in each year and therefore not taxable. The participant may
not recover tax-free more than his Investment in the Contract. Thus, if a
participant's payments continue to be made longer than expected, all amounts
received are taxable after the Investment in the Contract is recovered.
Similarly, if a participant dies before recovering his Investment in the
Contract, his estate is entitled to a deduction in the participant's last
taxable year for the unrecovered amount.
The rules for determining the Excludable Amount are contained in Section 72
of the Internal Revenue Code, and require adjustment for such features as refund
guarantees and payments required under the
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Contract to be made, regardless of the participant's death, for a term of years.
Adjustment also is made in the case of a joint and survivor annuity payable to a
named beneficiary following the death of the participant.
Should the participant elect to receive his termination value in a lump sum
in lieu of annuity payments, the amount received will be taxed as ordinary
income in the year received. If any portion of the balance to the credit of a
participant is payable to the participant in an Eligible Rollover Distribution,
the participant or his surviving spouse may elect to defer taxation by (1)
having such distribution paid directly to an individual retirement plan or
another tax-sheltered annuity which accepts such rollovers or (2) making a
"tax-free" rollover contribution equal to the amount of such distribution
received plus the amount of taxes withheld on such distribution within sixty
days after receipt of the distribution to an individual retirement plan or
another tax sheltered annuity. (No direct or indirect rollover is permitted to a
qualified pension or profit sharing plan and a direct rollover may not be
permitted if the amount of the distribution is less than $200). All taxable
distributions are generally Eligible Rollover Distributions except annuities
paid over life or life expectancy, installments for a period of ten years or
more and required minimum distributions under Section 401(a)(9) of the Internal
Revenue Code.
Limits on Contributions. The maximum deduction for Employer contributions
made to a qualified defined contribution plan is limited to 25% of compensation
(15% of compensation in the case of a stock bonus or profit sharing plan).
Nondeductible contributions are 10% excise-taxable to the Employer subject to
certain limitations (this excise tax does not apply to tax-exempt Employers
except with respect to unrelated business income tax). However, in general, the
sum of purchase payments by the Employer, forfeitures of other plan
participants, salary reduction contributions or elective deferrals, if any, and
an employee's voluntary nondeductible contributions may not exceed the lesser of
25% of compensation or $30,000 for any year. For certain 403(b) Plans, these
limitations may be modified at the election of the participant in the 403(b)
Plan.
For HR-10 Plans, nondeductible voluntary Purchase Payments are permitted to
be made by participants if the plan so provides, but only where such privilege
is extended to all participants. Nondeductible voluntary Purchase Payments may
be made, but are subject to certain nondiscrimination requirements and plan
limits which vary from plan to plan. Additionally, elective deferrals (or, for
403(b) Plans, salary reduction contributions) may be made, if permitted by the
plan, in an annual amount of up to $9,500. These contributions are subject to
certain non-discrimination rules.
HR-10 Plans. For a self-employed individual, compensation may generally be
defined as earned income, determined after the plan contribution. Only the first
$150,000 of a person's compensation ($235,840 for certain participants in plans
maintained by state or local governments that are amended to reflect the
compensation limitation applicable to all other participants) may be taken into
account. Plans may specify that purchase payments be made at a rate less than
25%, and profit sharing plans may provide for the rate of contribution to be
established (as described below) each year. If the plan is a top heavy plan (as
described below), generally an annual purchase payment of 3% of compensation
must be made for all non-key employees.
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The maximum deduction for Purchase Payments to a defined benefit plan is
determined annually by an actuary, subject to minimum funding standards
established by the Internal Revenue Code. Generally, no purchase payments may be
made to fund a normal retirement benefit in excess of 100% of compensation or,
if less, $120,000 per year for an individual beginning at his Social Security
retirement age. If it is a top heavy defined benefit plan, certain minimum
benefits must be provided for non-key employees. The $120,000 per year limit is
prorated if the individual has less than ten years of participation in the plan
and is reduced actuarially if benefits begin before Social Security retirement
age.
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Special rules apply to all plans (corporate or self-employed) which
primarily benefit the Employer's key employees ("top heavy plans"). A plan is a
top heavy plan (1) if it is a defined contribution plan and the value of the
aggregate accounts of key employees is more than 60 percent of all the value of
the aggregate accounts under the plan for all employees, or (2) if it is a
defined benefit plan and the present value of the cumulative accrued benefits
under the plan for key employees is more than 60 percent of the present value of
the cumulative accrued benefits under the plan for all employees. All plans of
an Employer in which a key employee is a participant and all plans required to
be aggregated to satisfy the qualification requirements of Section 401(a) of the
Internal Revenue Code must be aggregated in determining whether a plan is top
heavy. If the aggregation group, taken as a whole, is top heavy, then each plan
in the group is a top heavy plan. Any other tax qualified plans of the Employer
that meet certain rules may, but need not be, so aggregated. In general, an
employee is considered a key employee if he is (or was in any of the 4 preceding
years) (1) an officer of the Employer with annual compensation of more than
$60,000, (2) one of the 10 employees with annual compensation of more than
$30,000 who owns the largest interests in the Employer, (3) a 5% Owner, or (4)
an owner of 1 percent or more of the stock, profits or capital of the Employer
which owner has annual compensation of more than $150,000.
If an Employer maintains a defined contribution plan and a defined benefit
plan, there are aggregate limitations on the benefits and contributions that may
be provided under the combination of plans. The limitations are more restrictive
for top heavy plans and are most restrictive for super top heavy plans (that is,
defined contribution plans where more than 90% of aggregate account balances are
for key employees and defined benefit plans where more than 90% of the
cumulative accrued benefits are for key employees).
Distributions--HR-10 Plans. Similar treatment is accorded to self-employed
individuals and common-law employees with respect to distributions from a plan.
A lump sum distribution in a single taxable year after attainment of age 59 1/2,
or on account of death, or because of disability of a self-employed individual
or separation of a common-law employee from the service of the Employer, is
taxable in the following manner: Employee non-deductible contributions are
received tax-free (distributions are deemed to consist proportionally of
tax-free and taxable amounts, unless the Company has a separate record of
amounts attributable to pre-1987 non-deductible employee contributions, in which
case those amounts may continue to be tax free), and $5,000 of death benefits
may also be tax free. Either a self-employed individual or a common-law
employee, if such person is over 59 1/2 and has been a participant for at least
five taxable years before the year of distribution, may elect to be taxed on the
distribution (other than accumulated deductible qualified voluntary
contributions) at the rate applicable to a single taxpayer, subject to special
five-year forward income averaging. A person may make such an election only
once. For participants who were age 50 by January 1, 1986, an election may be
made to preserve the federal income tax treatment of the distribution in effect
prior to 1987, i.e., ten-year forward income averaging (using 1986 tax rates)
may be used instead of five-year averaging and the portion of the distribution
attributable to pre-1974 participation is taxable as long term capital gain at a
20% rate. Alternatively, if any portion of the balance to the credit of a
participant is payable to the participant in an Eligible Rollover Distribution,
a participant or his or her surviving spouse may be eligible to elect to defer
taxation on such distribution by (1) having such distribution paid directly to
an individual retirement plan or another qualified plan which accepts such
rollovers or (2) making a "tax-free" rollover contribution equal to the amount
of such distribution received plus the amount of taxes withheld on such
distribution within sixty days after receipt of such distribution to an
individual retirement arrangement or to another qualified plan. A direct
rollover may not be permitted if the amount of the distribution is less than
$200. All taxable distributions are generally Eligible Rollover Distributions
except annuities paid over life or life expectancy, installments for a period of
ten years or more and required minimum distributions under Section 401(a)(9) of
the Internal Revenue Code.
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Distributions--403(b) and HR-10 Plans. Distributions made to any
participant in an HR-10 Plan or 403(b) Plan prior to attainment of age 59 1/2
(unless the distribution is made on account of death, disability, separation
from service where the separation occurred during or after the calendar year in
which the participant attains age 55, certain medical expenses within the
deductible limits of the Internal Revenue Code, or as part of a series of annual
or more frequent annuity payments made after separation from service and at
least over the participant's life, or if the distribution is made to an
alternate payee pursuant to a QDRO) will generally be subject to a 10% tax in
addition to the otherwise applicable federal income tax. Also, to the extent a
participant receives a distribution in any year which exceeds $155,000 ($775,000
for certain qualifying lump sum distributions), such excess is subject to a 15%
penalty tax (offset by any tax imposed on premature withdrawals and excluding
certain grandfathered amounts). There is a 50% excise tax on the amount by which
a distribution is less than the required minimum distribution.
The withholding of federal income taxes depends upon whether a distribution
is an Eligible Rollover Distribution. There is mandatory income tax withholding
of twenty percent of the amount of any Eligible Rollover Distribution that is
not paid in a direct rollover to another qualifying plan; if such distribution
is paid in a direct rollover to another qualifying plan, there is no income tax
withholding obligation. Federal income taxes will be withheld from the taxable
portion of any distribution that is not an Eligible Rollover Distribution,
unless the recipient elects not to have withholding apply. Additional
withholding will not be made for the 10% additional tax on premature
distributions; however the recipient may be responsible for paying estimated
taxes.
FEDERAL TAX STATUS OF THE SEPARATE ACCOUNT
The Separate Account is not qualified as a "regulated investment company"
under subchapter M of the Internal Revenue Code, as it is not taxed separately
from the Company. While the Separate Account is part of the total operations of
the Company, under existing federal income tax law, no taxes are payable on the
investment income and realized capital gains which are reinvested in the
Separate Account and which are taken into account in determining the value of
the Accumulation Unit and the value of the Annuity Unit and which are not
distributed to participants except as part of annuity payments. (See
"Description of Group Variable Annuity Contracts".)
Both investment income and realized capital gains are accumulated and
reinvested.
The investment results credited to a participant's account are not taxable
to the participant until benefits are received by him. At that time, there is no
distinction made between investment income and realized and unrealized gains in
determining either the amount of the participant's benefits, or the taxes paid
by the participant on these benefits. All payments generally are taxable to the
recipient as ordinary income as received. A participant may wish to consult a
tax adviser for more complete information. See also "Federal Taxes--Federal Tax
Treatment of Participants".
EMPLOYEE RETIREMENT INCOME SECURITY ACT
ERISA contains many provisions which may apply to certain annuity plans
described under Sections 403(b) and 401 of the Internal Revenue Code, including
those offered hereunder. Employers and Contractholders may be subject to many
requirements and duties, including reporting and disclosure requirements,
requirements regarding the form and timing of benefit payments, fiduciary
responsibilities (including investment responsibilities) and prohibitions of
certain transactions involving or affecting the assets of the plan. Failure to
comply with ERISA may result in exposure of the Contractholder or Employer to
civil and criminal sanctions.
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Certain modifications in the Contracts described in this Prospectus may be
required from time to time by ERISA or other laws. Such modifications may be
made by the Company in accordance with provisions in the Contracts which permit
the Company to amend the Contracts to conform to applicable law. Contractholders
and, in the case of HR-10 Plans, Employers will be informed of any such
modifications. See "Description of Group Variable Annuity
Contracts--Modification or Termination of the Contract".
As heretofore noted in this Prospectus, the HR-10 Plan Contracts described
herein are offered solely in connection with certain retirement plans which are
qualified under Section 401 of the Internal Revenue Code. These plans include
not only individually designed plans of various employers or associations of
employers but also certain plans which are generally described as master or
prototype plans. In general, master or prototype plans are plans sponsored by an
organization such as an insurance company or trade association. The sponsoring
organization obtains a master or prototype plan opinion letter from the Internal
Revenue Service which indicates that the form of the plan meets the requirements
of Section 401 of the Internal Revenue Code. Once the sponsoring organization
has obtained a master or prototype plan opinion letter, Employers may, in
certain cases, adopt the master or prototype plan form as their own
tax-qualified plan with the benefit of a prior Internal Revenue Service approval
of the master or prototype plan form. Prototype plans sponsored by the Company
have been adopted by some Employers.
THIS PROSPECTUS DOES NOT FURNISH DETAILED INFORMATION CONCERNING THE
REQUIREMENTS OF ERISA OR THE INTERNAL REVENUE CODE, AND THOSE REQUIREMENTS MAY
VARY DEPENDING UPON THE PARTICULAR CIRCUMSTANCES REGARDING EACH EMPLOYER AND
EACH CONTRACTHOLDER. ALSO, THE FOREGOING DESCRIPTIONS UNDER "FEDERAL TAX
TREATMENT OF PARTICIPANTS" APPLY UNDER FEDERAL INCOME TAX LAWS IN EFFECT ON
APRIL 30, 1996, AND THE FEDERAL TAX TREATMENT OF PARTICIPANTS MAY CHANGE. IT IS
THEREFORE RECOMMENDED THAT EMPLOYERS, CONTRACTHOLDERS AND POTENTIAL PURCHASERS
CONSULT WITH COUNSEL OR OTHER COMPETENT ADVISERS REGARDING THE IMPACT OF ERISA
AND THE INTERNAL REVENUE CODE.
LEGAL MATTERS
The Separate Account is not involved in any pending legal proceedings. The
Company is involved in litigation arising in the ordinary course of its
business. Because of the nature of litigation, it is not possible to predict the
outcome of these actions; however, in the opinion of the management of the
Company, such litigation will not materially adversely affect the business or
financial position of the Company or the Separate Account or the ability of the
Company to perform its obligations under the Investment Advisory Agreement.
Legal matters in connection with the offering made hereby have been passed
upon by Lynne Gugenheim, Vice President and Associate General Counsel of the
Company.
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REPORTS TO PARTICIPANTS
Semi-annually, the Company will provide a financial report to each
participant covering the most recent six months or calendar year, as applicable.
These reports will include general information on the Separate Account,
including a schedule of its investments in securities as of the close of the
applicable period. Also provided will be a statement of the participants' equity
in the Separate Account, showing the changes therein for the period reported on.
Reports issued as of the close of a calendar year will contain financial
statements which have been audited by the Separate Account's independent
auditors.
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FINANCIAL STATEMENTS
The following financial statements of the Separate Account, the notes
thereto and the Independent Auditors' Report with respect thereto are
incorporated into the Statement of Additional Information by this reference from
the Separate Account's 1995 Annual Report to Participants: Balance Sheet;
Statement of Operations; Statement of Changes in Participants' Equity; and
Schedule of Investments. Copies of the 1995 Annual Report to Participants may be
obtained, at no charge, upon request to Continental Assurance Company Separate
Account (B), Attn: Individual Pension Accounts-35S, P.O. Box 803572, Chicago,
Illinois 60690, (800) 351-3001, in writing or by telephone.
Financial statements of the Company, the notes thereto and the Independent
Auditors' Report with respect thereto are set forth on pages 9 to 29 of the
Statement of Additional Information. Such financial statements are included
therein solely for the purpose of informing investors as to the financial
position of the Company and are not financial statements of the Separate
Account.
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Committee Members
and Participants of
Continental Assurance Company
Separate Account (B) and
Board of Directors of
Continental Assurance Company
We have audited the financial statements of Continental Assurance Company
Separate Account (B) (a separate account of Continental Assurance Company, a
wholly-owned subsidiary of Continental Casualty Company, which is an affiliate
of CNA Financial Corporation, an affiliate of Loews Corporation) as of December
31, 1995 and 1994 and for each of the two years in the period ended December 31,
1995, and the related schedule of investments as of December 31, 1995, and have
issued our report dated February 14, 1996; such financial statements, schedule
and report are included in the 1995 Continental Assurance Company Separate
Account (B) Report to Participants and are incorporated herein by reference. Our
audits also included the financial highlights for each of the ten years in the
period ended December 31, 1995 presented herein on page 12. This information is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial information, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
S/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chicago, Illinois
February 14, 1996
39
<PAGE>
TABLE OF CONTENTS
OF THE
STATEMENT OF ADDITIONAL
INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Glossary............................................................ 2
Management of the Separate Account.................................. 3
Investment Advisory Services........................................ 4
Securities Custodian................................................ 6
Independent Auditors................................................ 6
Brokerage Allocations............................................... 6
Calculation of Performance Data..................................... 7
Underwriting........................................................ 8
Financial Statements................................................ 8
</TABLE>
40
<PAGE>
[Continental Assurance Company Separate Account (B) LOGO]
Group
Variable
Annuity
Contracts
PROSPECTUS
Dated: April 30, 1996
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
[CNA LOGO]
FOR ALL THE COMMITMENTS YOU MAKE(R)
W557-838LL
<PAGE>
STATEMENT OF
ADDITIONAL
INFORMATION
GROUP
VARIABLE [Continental Assurance Company Separate Account (B) LOGO]
ANNUITY
CONTRACTS
This Statement of Additional Information provides certain
information about Continental Assurance Company Separate
Account (B) ("the Separate Account"), which is a separate
account created by Continental Assurance Company (the
"Company"), and certain Group Variable Annuity Contracts sold
by the Company. This Statement of Additional Information is
not a Prospectus and should be read in conjunction with the
Prospectus of the Separate Account, dated April 30, 1996. The
Prospectus is available, at no charge, upon request, by
contacting Continental Assurance Company Separate Account (B),
Attn: Individual Pension Accounts-35S, P.O. Box 803572,
Chicago, Illinois 60690, (800) 351-3001, in writing or by
telephone.
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
DATED: APRIL 30, 1996
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
STATEMENT OF ADDITIONAL INFORMATION AND IN THE PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE SEPARATE ACCOUNT. THIS STATEMENT OF ADDITIONAL
INFORMATION DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE TO PURCHASE
ANY SECURITIES. SUCH OFFER MAY BE MADE ONLY BY THE PROSPECTUS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Glossary............................................................ 2
Management of the Separate Account.................................. 3
Investment Advisory Services........................................ 4
Securities Custodian................................................ 6
Independent Auditors................................................ 6
Brokerage Allocations............................................... 6
Calculation of Performance Data..................................... 7
Underwriting........................................................ 8
Financial Statements................................................ 8
</TABLE>
GLOSSARY
The following terms have the indicated meanings when used in this Statement
of Additional Information:
Accumulation Unit: an accounting unit used to measure the value of a
participant's account before annuity payments begin. The term "equity unit",
which is used in some outstanding Contracts, is synonymous with "accumulation
unit".
Casualty: Continental Casualty Company.
CNA Financial: CNA Financial Corporation.
Committee: a five member board in which the supervision of the Separate Account
is vested.
Company: Continental Assurance Company.
Contract: a group variable annuity contract described in this Statement of
Additional Information.
Investment Advisory Agreement: an agreement between the Company and the
Separate Account under which the Company acts as the investment adviser to the
Separate Account.
1940 Act: the Investment Company Act of 1940, as amended.
Separate Account: Continental Assurance Company Separate Account (B), which
consists of assets set aside by the Company, the investment experience of which
is kept separate from that of other assets of the Company.
Variable Annuity: an annuity providing for payments varying in amount in
accordance with the investment experience of the Separate Account.
2
<PAGE>
MANAGEMENT OF THE SEPARATE ACCOUNT
<TABLE>
<CAPTION>
OFFICERS AND MEMBERS OF THE COMMITTEE
POSITION(S)
NAME AND HELD WITH THE PRINCIPAL OCCUPATION(S)
ADDRESS AGE SEPARATE ACCOUNT DURING PAST FIVE YEARS
- ---------------------------- --- ---------------------- -------------------------------------------------------
<S> <C> <C> <C>
Richard W. Dubberke*........ 58 Member of Committee Vice President and Manager of Corporate Bond
CNA Plaza Investments of the Company and Casualty. Vice
Chicago, Illinois 60685 President, Treasurer and Director of CNA Income Shares,
Inc. (registered closed-end investment company) ("CIS")
Richard T. Fox.............. 58 Member of Committee Consultant to 21st Century Environmental Management,
661 Sheridan Road Inc. (environmental recycling company) ("21EMI") since
Winnetka, Illinois 60093 October 1995; Chief Executive Officer of 21EMI from
August 1994 to September 1995(1). President of 21EMI
from 1993 to August 1994; Chairman and Chief Executive
Officer of 115 Corp. (formerly Curbmaster, Inc.) (heavy
equipment manufacturer) from 1990 to 1993
Donald C. Rycroft*.......... 58 Chairman of Committee Group Vice President and Treasurer of the Company and
CNA Plaza and Member of Casualty since January 1996. Prior to January 1996,
Chicago, Illinois 60685 Committee Senior Vice President and Treasurer of the Company and
Casualty; Chairman of the Board of Directors and
President of CIS
William W. Tongue........... 80 Member of Committee Professor Emeritus of Economics and Finance, University
212 Shoreline Drive of Illinois at Chicago
Park Ridge, Illinois 60068
Lynne Gugenheim*............ 36 Secretary of Committee Manager of Investment Company Administration for the
CNA Plaza Company. Vice President and Associate General Counsel
Chicago, Illinois 60685 of the Company and Casualty since January 1996.
Secretary of the Company and CIS since April 1995. From
November 1994 to December 1995, Assistant Vice
President and Assistant General Counsel of the Company
and Casualty. From January 1991 to November 1994,
Counsel of the Company and Casualty
Peter J. Wrenn.............. 60 Member of Committee President of Hudson Technology, Inc. (tooling and
915 Columbian Avenue manufacturing)
Oak Park, Illinois 60302
- ---------------
* An "interested person" (as defined in Section 2(a)(19) of the 1940 Act), by
virtue of his employment with the Company.
</TABLE>
<PAGE>
(1) CLE, Inc., a wholly owned indirect subsidiary of Casualty, owns 63% of the
outstanding non-voting preferred stock of 21EMI.
No Committee Member or officer receives any remuneration from the Separate
Account. The Company pays Committee Members a fee for their service. The
Committee Member's fee is currently $10,000 per annum. The Company also
reimburses Committee Members for expenses incurred in attending meetings of the
Committee. However, no payments of fees or expenses are made to any Committee
Member who is an officer or employee of or special consultant to the Company,
CNA Financial or any of their affiliated companies. Therefore, neither Mr.
Dubberke nor Mr. Rycroft has received or will receive any such payments. During
1995, there was no reimbursement payable for expenses incurred by Committee
Members.
The payment of fees to Committee Members is one of the items of expense for
which the Company receives a monthly investment advisory fee (at the annual rate
of 0.5% of the average daily net asset value of
3
<PAGE>
the Separate Account) from the Separate Account pursuant to the Company's
Investment Advisory Agreement with the Separate Account.
The following table sets forth information regarding the compensation of
all Committee Members of the Separate Account for services rendered in 1995 to
the Separate Account and to funds deemed to be included in the same fund complex
as the Separate Account. A "fund complex" for this purpose means any two or more
funds that hold themselves out to investors as related companies or that have a
common or related investment adviser.
<TABLE>
<CAPTION>
COMPENSATION TABLE
PENSION OR
AGGREGATE RETIREMENT BENEFITS ESTIMATED TOTAL COMPENSATION FROM
COMPENSATION ACCRUED AS PART ANNUAL BENEFITS FUND AND FUND COMPLEX
NAME OF PERSON, POSITION FROM FUND OF FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS
- ------------------------------- ------------ ------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
Richard W. Dubberke,
Committee Member*............ None None None None
Richard T. Fox,
Committee Member............. $10,000 None None $10,000
Donald C. Rycroft,
Committee Member*............ None None None None
William W. Tongue,
Committee Member............. $10,000 None None $10,000
Peter J. Wrenn,
Committee Member............. $10,000 None None $10,000
- ---------------
* An "interested person" (as defined in Section 2(a)(19) of the 1940 Act).
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of February 29, 1996, no person was deemed to be in control of the
Separate Account or was known by either the Company or the Separate Account to
own of record or beneficially 5% or more of the Accumulation Units of the
Separate Account. None of the officers or Members of the Committee of the
Separate Account own any Accumulation Units of the Separate Account.
INVESTMENT ADVISORY SERVICES
All of the voting securities of the Company are owned by Casualty, a stock
casualty insurance company organized under the Illinois Insurance Code, the home
office of which is located at CNA Plaza, Chicago, Illinois 60685. All of the
voting securities of Casualty are owned by CNA Financial, a Delaware
corporation, CNA Plaza, Chicago, Illinois 60685. Loews Corporation, a Delaware
corporation, 667 Madison Avenue, New York, New York 10021-8087, with interests
in insurance, hotels, watches and other timing devices, drilling rigs and
tobacco, owned approximately 84% of the outstanding voting securities of CNA
Financial as of March 29, 1996. Laurence A. Tisch, the Chairman of the Board,
Co-Chief Executive Officer and a director of Loews Corporation and Chief
Executive Officer and a director of CNA Financial and his brother, Preston R.
Tisch, President, Co-Chief Executive Officer and a director of CNA Financial and
Loews Corporation, owned, in the aggregate, approximately 32% of the outstanding
<PAGE>
common stock of Loews Corporation as of March 29, 1996. Therefore, they may be
deemed to be parents of Loews Corporation, and thus of CNA Financial Corporation
and the Company, within the meaning of the federal securities laws.
4
<PAGE>
Pursuant to the Investment Advisory Agreement, the Company makes quarterly
withdrawals from the Separate Account at an annual rate of 0.5% of the average
daily net asset value of the Separate Account for providing investment advisory
services, and at an additional annual rate of 0.33% of the average daily net
asset value of the Separate Account as a service fee for bearing the following
expenses of the Separate Account: costs and expenses incident to compliance with
federal and state regulations applicable to any public offering of Accumulation
Units in the Separate Account; expenses related to printing and distributing
prospectuses and statements of additional information to persons who, at the
time of such distribution, are participants in the Separate Account;
registration fees of the Securities and Exchange Commission; charges and
expenses for custodian services (other than charges and expenses relating to the
lending of portfolio securities); charges and expenses of independent auditors
and legal counsel; expenses of meetings of the participants and of the Committee
(including the preparation and distribution of proxy statements and semi-annual
and annual reports); and bookkeeping and postage expenses (other than postage
expenses relating to the mailing of prospectuses and statements of additional
information to persons who, at the time of such mailing, are not participants in
the Separate Account or relating to the mailing of sales literature). In the
event that the total amount of the expenses covered by the service fee is less
than the amount of such service fee, the difference will accrue to the Company
as a profit. If such expenses are greater than the fee, the difference will
accrue to the Company as a loss. Under its Investment Advisory Agreement with
the Separate Account, the Company is permitted to make such withdrawals on a
monthly basis instead of on a quarterly basis, but to date the Company has
nevertheless consented to being paid quarterly. The Separate Account has
incurred the following investment advisory and service fees payable to the
Company: 1995, $766,950; 1994, $689,015; and 1993, $657,790. The Separate
Account pays all expenses incurred in connection with the lending of portfolio
securities.
The Investment Advisory Agreement may be terminated at any time by either
party, without the payment of any penalty, on sixty days' prior written notice.
The Investment Advisory Agreement continues in effect from year to year so long
as it is approved at least annually by the vote of a majority of the Committee
Members who are not parties to the Agreement or interested persons (as defined
in the 1940 Act) of any such party, cast in person at a meeting called for the
purpose of voting upon such approval.
In the event the Investment Advisory Agreement is terminated and another
investment adviser cannot be found, the assets of the Separate Account may be
liquidated. In the event of such liquidation, the interest of any retired
participant in the Separate Account will be transferred by the Company to its
regular reserves, and the Company will pay a fixed annuity for the lifetime of
the participant in the same form as the variable annuity held. Participants who
are not retired will be offered an option to receive a lump sum settlement or to
receive an immediate or deferred fixed annuity. Under Section 1035(a)(3) of the
Internal Revenue Code of 1986, no gain or loss will be recognized on the
exchange of a variable annuity for the fixed annuity. Liquidation of the
Separate Account upon termination of the Investment Advisory Agreement may have
adverse federal income tax consequences for a participant electing to receive a
lump sum settlement since the full amount of the settlement received will be
taxable as ordinary income realized in the year of receipt.
Under separate agreements with the Account, the Company acts as principal
underwriter and performs all sales and administrative functions relative to the
Account and the variable annuity contracts of the Account. The amounts earned by
the Company for sales and administrative functions rendered to the Account for
each of the years 1995, 1994 and 1993 were $13,563, $65,144 and $68,805
respectively. The agreement covering sales and administrative services does not
cover the services covered by the Investment Advisory Agreement.
5
<PAGE>
The Company has an affiliate, CNA Investors Service, Inc. (the successor by
merger to CNA Securities Corp.), which is a member of the National Association
of Securities Dealers, Inc. The Company and the Separate Account are parties to
an agreement under which the Separate Account receives a credit from the Company
in the form of a reduction of the investment advisory fee to the extent that
services of CNA Investors Services, Inc. are utilized in connection with the
Separate Account's portfolio transactions. In 1975, the securities laws were
amended to abolish fixed brokerage commissions on securities transactions. Prior
to such changes, it was mutually advantageous to the Separate Account and to CNA
Securities Corp. for the services of CNA Securities Corp. to be utilized in
connection with certain of the Separate Account's portfolio transactions. The
advantage of such arrangement was reduced significantly by the abovementioned
changes in the securities laws. There was no such utilization in 1995, 1994 or
1993.
SECURITIES CUSTODIAN
The custodian of the Separate Account's portfolio securities is The First
National Bank of Chicago, One First National Plaza, Chicago, Illinois.
The custodian does not perform any managerial or policy-making functions
for the Separate Account.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, Two Prudential Plaza, 180 North Stetson, Chicago,
Illinois, are the independent auditors which audit the financial statements of
the Separate Account. They also audit the schedule of investments and the
financial highlights for the Separate Account. In addition, they audit the
consolidated balance sheets of the Company and the related statements of
operations, stockholder's equity and changes in financial position. These audits
are made in accordance with generally accepted auditing standards.
BROKERAGE ALLOCATIONS
Officers and employees in the Investment Department of the Company are
primarily responsible for making portfolio decisions for the Separate Account
and for placing brokerage business of the Separate Account. The Separate Account
has paid the following brokerage fees and commissions in connection with
portfolio transactions: 1995, $304,932; 1994, $237,209; and 1993, $445,933.
In selecting brokers to execute portfolio transactions, the Company's
primary criterion is the expected ability of such brokers to make the best
possible execution on orders. If several brokers are expected to be able to
provide equally good execution, preference is given to those brokers who provide
statistical research, assistance in pricing portfolio securities or other
services. Commissions on all transactions are negotiated, and the primary basis
of the commission agreed to by the Company is the quality of execution. Research
services, to the extent provided to the Company, may be used by the Company in
servicing its other accounts and not all such services are used in connection
with the Separate Account.
In connection with the purchase and sale of portfolio securities for the
Separate Account, the Company does not bunch orders for such transactions with
orders for other accounts under the management of Loews, CNA Financial, the
Company or other subsidiaries of CNA Financial unless such other accounts are
registered investment companies and unless such bunching would not have adverse
consequences for the Separate Account and such other accounts. Under no
circumstances are orders bunched with orders for the
6
<PAGE>
Company's own account or for the account of Loews Corporation, CNA Financial or
other subsidiaries of CNA Financial. No bunching of orders occurred during 1995.
Through June 30, 1993, the Company had an understanding with Ford Investor
Services, Inc. that in return for technical and statistical services and for
basic research and data materials, the Company would allocate brokerage business
to such firm for the Account and for all insurance companies which are
affiliates of CNA Financial generating annual commissions of at least $3,900
through June 30, 1993. During 1993, the amounts of the Account's transactions
allocated to Ford Investor Services, Inc. was approximately $1,777,575 comprised
of the purchase and sale of stock generating commissions of approximately
$2,950.
CALCULATION OF PERFORMANCE DATA
In computing the end-of-period values listed below of a hypothetical
investment in the Account, average annual total return ("Average Return") was
calculated by dividing the ending unit value by the beginning unit value raised
to the l/nth power and then subtracting one (with "n" equaling the number of
years). Fees based on a percentage of the purchase payment were subtracted at
the beginning of the specified period. Annual account fees, where applicable,
were deducted at the end of each year.
LEVEL DEDUCTION CONTRACT FOR 403(B) PLANS
If you invested $1,000 in the Account at the beginning of the applicable
time period and surrendered your contract at the end of the applicable time
period, the amount of money you would have received based on the Average Return
indicated is as follows:
<TABLE>
<CAPTION>
24.70% AVERAGE RETURN 15.15% AVERAGE RETURN 13.18% AVERAGE RETURN
FOR FOR FOR
1 YEAR PERIOD 5 YEAR PERIOD 10 YEAR PERIOD
ENDING ON 12-31-95 ENDING ON 12-31-95 ENDING ON 12-31-95
--------------------- --------------------- ---------------------
<S> <C> <C>
$1,246.96 $2,024.88 $3,448.63
</TABLE>
GRADED DEDUCTION CONTRACT FOR 403(B) PLANS
If you invested $1,000 in the Account at the beginning of the applicable
time period and surrendered your contract at the end of the applicable time
period, the amount of money you would have received based on the Average Return
indicated is as follows:
<TABLE>
<CAPTION>
23.02% AVERAGE RETURN 13.01% AVERAGE RETURN 11.19% AVERAGE RETURN
FOR FOR FOR
1 YEAR PERIOD 5 YEAR PERIOD 10 YEAR PERIOD
ENDING ON 12-31-95 ENDING ON 12-31-95 ENDING ON 12-31-95
--------------------- --------------------- ---------------------
<S> <C> <C>
$1,230.23 $1,843.04 $2,888.99
</TABLE>
7
<PAGE>
HR-10 PLANS
If you invested $1,000 in the Account at the beginning of the applicable
time period and surrendered your contract at the end of the applicable time
period, the amount of money you would have received based on the Average Return
indicated is as follows:
<TABLE>
<CAPTION>
16.38% AVERAGE RETURN 13.18% AVERAGE RETURN 11.97% AVERAGE RETURN
FOR FOR FOR
1 YEAR PERIOD 5 YEAR PERIOD 10 YEAR PERIOD
ENDING ON 12-31-95 ENDING ON 12-31-95 ENDING ON 12-31-95
--------------------- --------------------- ---------------------
<S> <C> <C>
$1,163.80 $1,857.13 $3,096.57
</TABLE>
UNDERWRITING
The Company may be deemed to be the principal underwriter for the Separate
Account, but receives no compensation from the Separate Account other than the
fees pursuant to the Investment Advisory Agreement and the Administrative
Service Agreement. See "Investment Advisory Services". The Contracts are offered
by employees and licensed agents and brokers of the Company, who may be deemed
to be "underwriters" under the Securities Act of 1933. Commissions to such
persons on the sale of the Contracts may be considered "underwriting
commissions".
FINANCIAL STATEMENTS
The following financial statements of the Separate Account, the notes
thereto and the Independent Auditors' Report with respect thereto are
incorporated into this Statement of Additional Information by this reference
from the Separate Account's 1995 Annual Report to Participants: Balance Sheet;
Statement of Operations; Statement of Changes in Participants' Equity; and
Schedule of Investments. Copies of the 1995 Annual Report to Participants may be
obtained, at no charge, upon request to Continental Assurance Company Separate
Account (B), Attn: Individual Pension Accounts-35S, P.O. Box 803572, Chicago,
Illinois 60690, (800) 351-3001, in writing or by telephone.
Financial statements of the Company, the notes thereto and the Independent
Auditors' Report with respect thereto are set forth on pages 9 to 29 of this
Statement of Additional Information. Such financial statements are included
herein solely for the purpose of informing investors as to the financial
position of the Company and are not financial statements of the Separate
Account.
8
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Continental Assurance Company
We have audited the accompanying consolidated balance sheets of Continental
Assurance Company (a wholly-owned subsidiary of Continental Casualty Company,
which is an affiliate of CNA Financial Corporation, an affiliate of Loews
Corporation) as of December 31, 1995 and 1994 and the related statements of
consolidated operations, stockholder's equity and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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 are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Continental Assurance Company as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for certain investments in debt and equity securities in
1993.
S/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chicago, Illinois
February 14, 1996
9
<PAGE>
The following consolidated financial statements are the Company's and not
those of the Separate Account. They are included in this Statement of Additional
Information for the purpose of informing investors as to the financial position
of the Company.
<TABLE>
<CAPTION>
CONTINENTAL ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
---------------------------------------------------------------------------------------------------------------
DECEMBER 31
(In thousands of dollars) 1995 1994
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments--Note 3:
Fixed maturities available-for-sale (cost: $4,443,956 and 3,982,111).............. $ 4,686,449 $ 3,800,402
Equity securities available-for-sale (cost: $42,835 and $38,148).................. 56,699 44,964
Mortgage loans and real estate (less accumulated depreciation: $2,923 and $2,841). 46,139 45,966
Policy loans...................................................................... 177,192 176,311
Other invested assets............................................................. 127,145 15,000
Short-term investments............................................................ 390,552 797,854
----------- -----------
TOTAL INVESTMENTS 5,484,176 4,880,497
Cash................................................................................ 81,804 19,418
Insurance receivables:
Reinsurance receivables........................................................... 88,332 63,709
Premium and other insurance receivables........................................... 826,020 542,859
Less allowance for doubtful accounts.............................................. (479) (94)
Deferred acquisition costs.......................................................... 524,619 434,056
Accrued investment income........................................................... 89,475 72,537
Federal income taxes recoverable--Note 8............................................ 23,546 46,071
Deferred income taxes--Note 8....................................................... -- 188,172
Property and equipment at cost (less accumulated depreciation: $139,710 and
$146,879)......................................................................... 119,409 112,563
Other assets........................................................................ 23,751 182
Separate Account business........................................................... 5,868,097 6,080,262
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $13,128,750 $12,440,232
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
---------------------------------------------------------------------------------------------------------------
DECEMBER 31
(In thousands of dollars) 1995 1994
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Insurance reserves:
Future policy benefits............................................................ $ 3,217,450 $ 2,822,308
Claims............................................................................ 635,307 584,625
Policyholders' funds.............................................................. 542,446 504,038
Securities sold under repurchase agreements......................................... 188,211 543,125
Participating policyholders' equity................................................. 140,135 97,955
Payables for securities purchased................................................... -- 11,787
Deferred income taxes............................................................... 79,122 --
Long-term debt--Note 4.............................................................. 10,000 10,000
Other liabilities................................................................... 397,470 338,948
Separate Account business........................................................... 5,868,097 6,080,262
----------- -----------
TOTAL LIABILITIES............................................................. 11,078,238 10,993,048
----------- -----------
Stockholder's equity--Note 5:
Common stock........................................................................ 21,831 21,831
Additional paid-in capital.......................................................... 335,666 335,666
Retained earnings................................................................... 1,408,891 1,203,596
Net unrealized investment gains (losses) -- Note 3.................................. 284,124 (113,909)
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 2,050,512 1,447,184
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $13,128,750 $12,440,232
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL ASSURANCE COMPANY
STATEMENT OF CONSOLIDATED OPERATIONS
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
(In thousands of dollars) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums--Note 9.................................................... $3,032,333 $2,678,202 $2,442,167
Net investment income--Note 3....................................... 369,671 311,907 261,154
Realized investment gains (losses)--Note 3.......................... 138,985 (81,184) 126,026
Other............................................................... 63,785 42,461 33,115
---------- ---------- ----------
3,604,774 2,951,386 2,862,462
---------- ---------- ----------
Benefits and expenses:
Insurance claims and policyholders' benefits--Note 9................ 2,839,940 2,473,639 2,308,191
Amortization of deferred acquisition costs.......................... 60,682 48,745 27,944
Other operating expenses............................................ 372,986 338,077 309,210
Participating policyholders' interest............................... 14,837 590 12,681
---------- ---------- ----------
3,288,445 2,861,051 2,658,026
---------- ---------- ----------
Income before income tax.......................................... 316,329 90,335 204,436
Income tax expense--Note 8............................................ 111,034 32,104 71,403
- ---------------------------------------------------------------------------------------------------------------
NET INCOME $ 205,295 $ 58,231 $ 133,033
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL ASSURANCE COMPANY
STATEMENT OF CONSOLIDATED STOCKHOLDER'S EQUITY
------------------------------------------------------------------------------------------------------------
NET
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED INVESTMENT
(In thousands of dollars) STOCK CAPITAL EARNINGS GAINS (LOSSES) TOTAL
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992.......................... $21,831 $335,666 $1,012,332 $ 6,686 $1,376,515
Net income........................................ -- -- 133,033 -- 133,033
Unrealized investment losses, net--Note 3......... -- -- -- (3,985) (3,985)
Adjustment resulting from change in accounting for
debt securities--Note 2......................... -- -- -- 39,143 39,143
------- ---------- ---------- ------------ -----------
BALANCE, DECEMBER 31, 1993.......................... 21,831 335,666 1,145,365 41,844 1,544,706
Net income........................................ -- -- 58,231 -- 58,231
Unrealized investment losses, net--Note 3......... -- -- -- 155,753) (155,753)
------- ---------- ---------- ------------ ----------
BALANCE, DECEMBER 31, 1994.......................... 21,831 335,666 1,203,596 113,909) 1,447,184
Net income........................................ -- -- 205,295 -- 205,295
Unrealized investment gains, net--Note 3.......... -- -- -- 398,033 398,033
- ------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 $21,831 $335,666 $1,408,891 $284,124 $2,050,512
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL ASSURANCE COMPANY
STATEMENT OF CONSOLIDATED CASH FLOWS
----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
(In thousands of dollars) 1995 1994 1993
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $ 205,295 $ 58,231 $ 133,033
----------- ----------- -----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Pre-tax realized investment(gains) losses.......................... (138,985) 81,184 (126,026)
Participating policyholders' interest.............................. (3,573) (12,017) (4,169)
Amortization of bond (discount) premium............................ (16,180) (5,078) 594
Depreciation....................................................... 18,863 19,702 24,969
Changes in:
Insurance receivables............................................ (45,342) 16,880 (62,703)
Deferred acquisition costs....................................... (90,564) (10,702) (30,735)
Accrued investment income........................................ (16,938) (26,546) 5,317
Federal income taxes............................................. 22,525 (39,502) (16,216)
Deferred income taxes............................................ 17,491 18,658 (35,319)
Insurance reserves............................................... 495,748 283,143 221,435
Other, net....................................................... 37,553 (5,848) (3,589)
----------- ----------- -----------
TOTAL ADJUSTMENTS.......................................... 280,598 319,874 (26,442)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 485,893 378,105 106,591
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturities........................................ (3,862,087) (6,599,390) (8,276,612)
Proceeds from fixed maturities:
Sales.............................................................. 3,292,666 4,809,371 8,147,188
Maturities, calls and redemptions.................................. 187,164 410,989 388,960
Purchases of equity securities....................................... (7,863) (3,458) (20,698)
Proceeds from sale of equity securities.............................. 4,417 2,357 14,348
Change in short-term investments..................................... 407,345 536,254 (184,851)
Purchases of property and equipment.................................. (26,288) (9,070) (4,541)
Change in securities sold under repurchase agreements................ (354,915) 441,125 (208,089)
Change in other investments.......................................... (112,684) 11,175 32,694
Other................................................................ 57,153 1,357 321
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES...................... (415,092) (399,290) (111,280)
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL ASSURANCE COMPANY
STATEMENT OF CONSOLIDATED CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
(In thousands of dollars) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts for investment contracts credited to policyholder account
balances........................................................... 22,639 32,779 47,481
Return of policyholder account balances in investment contracts...... (34,156) (22,382) (18,185)
Other................................................................ 3,102 -- --
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES........ (8,415) 10,397 29,296
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH............................ 62,386 (10,788) 24,607
Cash at beginning of year.............................................. 19,418 30,206 5,599
- ------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 81,804 $ 19,418 $ 30,206
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid:
Interest expense................................................... $ (403) $ (278) $ (315)
Federal income taxes............................................... $ (46,135) $ (53,220) $ (31,948)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
13
<PAGE>
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The Consolidated Financial Statements include Continental Assurance Company
(Assurance) and its operating subsidiaries which consist of Valley Forge Life
Insurance Company and Convida Holdings, Ltd. Assurance is a wholly-owned
subsidiary of Continental Casualty Company (Casualty) which is wholly-owned by
CNA Financial Corporation (CNA). Loews Corporation owns approximately 84% of the
outstanding common stock of CNA.
Expenses of Assurance exclude $21.3, $24.7 and $25.6 million of general and
administrative expenses incurred by Assurance and allocated to CNA in 1995, 1994
and 1993, respectively.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. Certain amounts applicable to prior
years have been reclassified to conform to classifications followed in 1995. All
significant intercompany amounts have been eliminated.
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. In the
opinion of CNA's management, these statements include all adjustments,
consisting of normal recurring accruals, which are necessary for the fair
presentation of the financial position, results of operations and cash flows in
the accompanying consolidated financial statements.
INSURANCE
Premium revenue--Revenues on universal life-type contracts are comprised of
contract charges and fees which are recognized over the coverage period.
Accident and health insurance premiums are earned ratably over the terms of the
policies after provision for estimated adjustments on retrospectively rated
policies and deductions for ceded insurance. Other life insurance premiums are
recognized as revenue when due, after deductions for ceded insurance.
Claim reserves--Claim reserves include provisions for reported claims in
the course of settlement and estimates of unreported losses based upon past
experience.
<PAGE>
Future policy benefit reserves--Reserves for traditional life insurance
products are computed based upon net level premium methods using actuarial
assumptions as to interest rates, mortality, morbidity, withdrawals and
expenses. Actuarial assumptions include a margin for adverse deviation, and
generally vary by plan, age at issue and policy duration. Interest rates range
from 3% to 10.5%, and mortality, morbidity and withdrawal assumptions reflect
Assurance and industry experience prevailing at the time of issue. Expense
estimates include the estimated effects of inflation and expenses beyond the
premium paying period. Reserves for universal life-type contracts are
established using the retrospective deposit method. Under this method,
liabilities are equal to the account balances that accrue to the benefit of the
policyholders.
14
<PAGE>
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 1.--(CONTINUED):
Reinsurance--Assurance assumes and cedes insurance with other insurers and
reinsurers and members of various reinsurance pools and associations. Assurance
utilizes reinsurance arrangements to limit its maximum loss, provide greater
diversification of risk and to minimize exposures on larger risks. The
reinsurance coverages are tailored to the specific risk characteristics of each
product line with Assurance's retained amount varying by type of coverage.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability.
Deferred acquisition costs--Costs of acquiring insurance business which
vary with and are primarily related to the production of such business are
deferred. Such costs include commissions and certain underwriting and policy
issuance costs. Acquisition costs are capitalized and amortized based on
assumptions consistent with those used for computing policy benefit reserves.
Acquisition costs on ordinary life business are amortized over their assumed
premium paying periods. Universal life and annuity acquisition costs are
amortized in proportion to the present value of the estimated gross profits over
the products' assumed durations, which are regularly evaluated and adjusted as
appropriate. To the extent that unrealized gains or losses on available-for-sale
securities would result in an adjustment of deferred policy acquisition costs
had those gains or losses actually been realized, the related unamortized
deferred policy acquisition costs are recorded as an adjustment of the
unrealized gains or losses included in stockholder's equity.
Valuation of investments--Assurance believes it has the ability to hold all
fixed maturity securities until they mature. However, securities may be sold to
take advantage of investment opportunities generated by changing interest rates,
prepayments, tax and credit considerations, as part of Assurance's
asset/liability strategy, or other similar factors. As a result, Assurance
considers its fixed maturity securities (bonds and redeemable preferred stocks)
as available for sale and Assurance also classifies its equity securities as
available-for-sale, and as such, are carried at fair value. Unrealized holding
gains and losses are reflected as a separate component of stockholder's equity,
net of deferred income taxes and participating policyholders' interest. The
amortized cost of fixed maturity securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and accretion
are included in investment income.
Derivative securities are considered held for trading purposes and as such,
derivatives are recorded at fair value at the reporting date.
Mortgage loans are carried at unpaid principal balances, including
unamortized premium or discount. Real estate is carried at depreciated cost.
Policy loans are carried at unpaid balances. Short-term investments are carried
at amortized cost which approximates market value.
<PAGE>
Investment gains and losses--All securities transactions are recorded on
the trade date. Realized investment gains and losses are determined on the basis
of the cost of the specific securities sold. Unrealized investment gains and
losses on fixed maturity and equity securities are reflected as part of
stockholder's equity, net of applicable deferred income taxes, deferred
acquisition costs and participating policyholders' interest. Investments are
written down to estimated fair values and losses are charged to income when a
decline in value is considered to be other than temporary.
15
<PAGE>
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 1.--(CONTINUED):
Securities sold under agreements to repurchase--Assurance has a securities
lending program where securities are loaned to third parties, primarily major
brokerage firms. Borrowers of these securities must deposit 100% of the fair
value of the securities if the collateral is cash, or 102% if the collateral is
securities. Cash deposits from these transactions have been invested in
short-term investments (primarily commercial paper). Assurance continues to
receive the interest on the loaned debt securities, as beneficial owner and,
accordingly, the loaned debt securities are included in fixed maturity
securities. The liabilities for securities sold under repurchase agreements are
recorded at their contracted repurchase amounts.
Participating business--Participating business represented 0.6%, 0.9% and
1.1% of gross life insurance in force and 0.8%, 1.0% and 1.1% of premium income
for 1995, 1994 and 1993, respectively. Participating policyholders' equity is
determined by allocating 90% of net income or loss and unrealized gains or
losses related to such business, less dividends determined by the Board of
Directors as allowed by applicable laws.
Separate Account business--Assurance issues certain investment and annuity
contracts. Through its Separate Accounts the supporting assets and liabilities
of these contracts are legally segregated and reflected in the accompanying
Consolidated Balance Sheet as assets and liabilities of Separate Account
business. Assurance guarantees principal and a specified return to the
contractholders of approximately 85% of the Separate Account business.
Substantially all assets of the Separate Accounts are carried at fair value.
INCOME TAXES
The provision for income taxes includes deferred taxes, resulting from
temporary differences between the financial statement and tax return bases of
assets and liabilities under the liability method as required by Statement of
Financial Accounting Standards 109. Such temporary differences primarily relate
to life insurance reserve differences, net unrealized investment gains/losses
and deferred acquisition costs.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is based on the estimated useful lives of the various classes of
property and equipment and determined principally on accelerated methods. The
cost of maintenance and repairs is charged to income as incurred; major
improvements are capitalized.
<PAGE>
NOTE 2. CHANGE IN ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES:
Effective December 31, 1993, Assurance adopted Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 115,
"Accounting for Certain Investments in Debt and Equity Securities." This
Statement requires that investments in debt and equity securities classified as
available for sale be carried at fair value. (Previously, fixed income
securities classified as available for sale were carried at the lower of
aggregate amortized cost or market value). The effect at December 31, 1993 of
adopting this Statement was to increase stockholder's equity by $39.1 million
(net of $25.5 million in deferred
16
<PAGE>
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED):
taxes and $8.3 million of participating policyholders' interest). The adoption
of this Statement did not impact net income.
NOTE 3. INVESTMENTS:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
YEAR ENDED DECEMBER 31
(In thousands of dollars) 1995 1994 1993
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities...................................................... $327,474 $272,546 $195,904
Equity securities..................................................... 68 220 70
Mortgage loans........................................................ 3,235 4,336 5,387
Real estate........................................................... 672 670 714
Policy loans.......................................................... 11,350 10,218 10,013
Short-term investments................................................ 18,525 13,830 49,648
Security repurchase transactions-income............................... 43,087 44,034 2,088
Other................................................................. 10,849 1,392 1,599
-------- -------- --------
415,260 347,246 265,423
Investment expense.................................................... (4,103) (2,371) (2,399)
Security repurchase transactions-expenses and fees.................... (41,486) (32,968) (1,870)
- ---------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $369,671 $311,907 $261,154
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
ANALYSIS OF INVESTMENT GAINS(LOSSES)
YEAR ENDED DECEMBER 31
(In thousands of dollars) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized investment gains (losses):
Fixed maturities....................................................$ 76,119 $ (81,837) $113,248
Equity securities................................................... 749 (29) 11,940
Real estate......................................................... 9 -- 288
Other, principally Separate Account business........................ 62,108 682 550
--------- --------- --------
138,985 (81,184) 126,026
Allocated to participating policyholders............................ (7,835) 10,877 (13,142)
Income tax (expense) benefit........................................ (45,882) 24,446 (40,320)
--------- --------- --------
NET REALIZED INVESTMENT GAINS (LOSSES) 85,268 (45,861) 72,564
--------- --------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
ANALYSIS OF INVESTMENT GAINS(LOSSES)
YEAR ENDED DECEMBER 31
(In thousands of dollars) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in net unrealized investment gains (losses):
Fixed maturities.................................................... 424,202 (254,693) --
Equity securities................................................... 7,048 5,321 (6,111)
Other, principally Separate Account business........................ 262,182 (56,164) (13)
--------- --------- --------
693,432 (305,536) (6,124)
Allocated to participating policyholders............................ (44,150) 32,471 (13)
Income tax (expense) benefit........................................ (251,249) 117,312 2,152
--------- --------- --------
CHANGE IN NET UNREALIZED INVESTMENT GAINS (LOSSES).......... 398,033 (155,753) (3,985)
Change in accounting for adoption of SFAS 115--Note 2....... -- -- 39,143
- --------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES) $ 483,301 $(201,614) $107,722
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 3.--(CONTINUED):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
SUMMARY OF GROSS REALIZED INVESTMENT GAINS (LOSSES)
FOR FIXED MATURITIES AND EQUITY SECURITIES
DECEMBER 31 1995 1994 1993
---------------------- --------------------- ----------------------
FIXED EQUITY FIXED EQUITY FIXED EQUITY
(In thousands of dollars) MATURITIES SECURITIES MATURITIES SECURITIES SECURITIES SECURITIES
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales....................... $ 3,293 $4,417 $ 4,809 $2,357 $ 8,147 $14,348
--------- ----- --------- ----- --------- -----
Gross realized gains...................... 94,053 791 18,629 -- 120,328 11,940
Gross realized losses..................... (17,934) (42) (100,466) (29) (7,080) --
--------- ----- --------- ----- --------- -----
- --------------------------------------------------------------------------------------------------------------
NET REALIZED GAINS (LOSSES) ON SALES $ 76,119 $ 749 $(81,837) $ (29) $113,248 $11,940
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS(LOSSES)
INCLUDED IN STOCKHOLDER'S EQUITY 1995 1994
DECEMBER 31 ------------------------------ ------------------------------
(In thousands of dollars) GAINS LOSSES NET GAINS LOSSES NET
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities..................................$244,300 $(1,807) $ 242,493 $24,412 $(206,121) $(181,709)
Equity securities................................. 14,774 (910) 13,864 7,622 (806) 6,816
Other, principally Separate Account business...... 172,310 (69) 172,241 -- (89,941) (89,941)
-------- ------- --------- ------- --------- ---------
$431,384 $(2,786) 428,598 $32,034 $(296,868) (264,834)
======== ======= ======= =========
Allocated to participating policyholders and other (17,881) 26,269
Deferred income tax benefit (expense)............. (126,593) 124,656
- ----------------------------------------------------------------------------------------------------------------
NET UNREALIZED INVESTMENT GAINS (LOSSES) $ 284,124 $(113,909)
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 3.--(CONTINUED):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE AMORTIZED UNREALIZED UNREALIZED MARKET
(In thousands of dollars) COST GAINS LOSSES VALUE
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
United States Treasury securities and obligations of government
agencies...................................................... $2,289,863 $110,637 $ 15 $2,400,485
Asset-backed securities......................................... 904,900 48,704 702 952,903
States, municipalities and political subdivisions tax exempt.... 693 52 -- 744
Corporate securities............................................ 957,875 65,749 605 1,023,018
Other debt securities........................................... 290,625 19,158 485 309,299
---------- ---------- ---------- ----------
Total fixed maturities...................................... 4,443,956 244,300 1,807 4,686,449
Equity securities............................................... 42,835 14,774 910 56,699
- ------------------------------------------------------------------------------------------------------------
Total $4,486,791 $259,074 $ 2,717 $4,743,148
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1994
United States Treasury securities and obligations of government
agencies...................................................... $2,285,069 $ 12,565 $144,957 $2,152,677
Asset-backed securities......................................... 1,060,624 6,169 36,977 1,029,816
States, municipalities and political subdivisions tax exempt.... 687 58 2 743
Corporate securities............................................ 380,867 1,108 17,033 364,942
Other debt securities........................................... 254,864 4,512 7,152 252,224
---------- ---------- ---------- ----------
Total fixed maturities...................................... 3,982,111 24,412 206,121 3,800,402
Equity securities............................................... 38,148 7,622 806 44,964
- ------------------------------------------------------------------------------------------------------------
Total $4,020,259 $ 32,034 $206,927 $3,845,366
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
1995 1994
SUMMARY OF INVESTMENTS IN FIXED MATURITIES ---------------------- ----------------------
BY CONTRACTUAL MATURITY AMORTIZED MARKET AMORTIZED MARKET
(In thousands of dollars) COST VALUE COST VALUE
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31
Due in one year or less................................... $ 44,638 $ 45,224 $ 62,460 $ 61,449
Due after one year through five years..................... 1,747,694 1,776,948 1,481,555 1,393,398
Due after five years through ten years.................... 1,007,102 1,067,480 907,531 838,547
Due after ten years....................................... 739,622 843,894 469,941 477,192
Asset-backed securities not due at a single maturity date. 904,900 952,903 1,060,624 1,029,816
- -----------------------------------------------------------------------------------------------------------
Total $4,443,956 $4,686,449 $3,982,111 $3,800,402
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Actual maturities may differ from contractual maturities because securities
may be called or prepaid with or without call or prepayment penalties.
There are no investments that have not produced income for the last twelve
months. There are no investments in a single issuer, other than the U.S.
government, that when aggregated exceed 10% of stockholders' equity.
Assurance has no investment in derivative financial instruments.
High yield securities are bonds rated as below investment grade by bond
rating agencies, plus private placements and other unrated securities which, in
the opinion of management, are below investment grade. Carrying values of high
yield securities in the general account were $200 million at December 31, 1995,
19
<PAGE>
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 3.--(CONTINUED):
compared to $74 million at December 31, 1994. Net unrealized gains on general
account bonds at December 31, 1995 include net unrealized gains on high yield
securities of $28 million, compared to net unrealized losses of $1 million at
December 31, 1994.
At December 31, 1995, total Separate Account cash and investments amounted
to $5.9 billion with taxable fixed maturities representing approximately 94% of
the Separate Account portfolio. Approximately 85% of Separate Account
investments are used to fund guaranteed investment contracts (GIC's) for which
Assurance guarantees principal and a specified return to the contractholders.
The duration of fixed maturity securities included in the GIC portfolio is
matched approximately with the corresponding payout pattern of the liabilities
of the GIC contracts. At December 31, 1995, all fixed maturity securities in the
GIC portfolio were carried at fair value and amounted to $4.8 billion. At
December 31, 1995, net unrealized gains on fixed income securities amounted to
approximately $63 million. This compares to $195 million in net unrealized
losses at December 31, 1994. The gross unrealized gains and losses for the fixed
income securities portfolio at December 31, 1995, were $122 million and $59
million, respectively, compared to $34 million and $229 million, respectively,
at December 31, 1994.
High yield securities in the guaranteed investment portfolio which are
carried at fair value amounted to $944 million at December 31, 1995, compared
with $1.102 billion at December 31, 1994. Net unrealized losses on high yield
securities held in Separate Accounts were $14 million at December 31, 1995,
compared with net unrealized losses of $108 million at December 31, 1994.
NOTE 4. LONG-TERM DEBT:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
DECEMBER 31
(In thousands of dollars) 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Industrial Development Revenue Bonds, due July 1, 2016 at variable interest rates--3.80% to
4.20%..................................................................................... $10,000 $10,000
- -----------------------------------------------------------------------------------------------------------------
Total long-term debt $10,000 $10,000
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTE 5. STATUTORY CAPITAL AND SURPLUS:
Statutory capital and surplus and net income for Assurance are determined
in accordance with accounting practices prescribed by the Illinois Insurance
Department. Prescribed statutory accounting practices are set forth in a variety
of publications of the National Association of Insurance Commissioners as well
as state laws, regulations, and general administrative rules. The Company has no
material permitted accounting practices. Statutory net income was $30.2 million,
$65.1 million and $5.6 thousand in 1995, 1994 and 1993, respectively. Statutory
capital and surplus for Assurance was $1.1 billion at December 31, 1995 and
1994. Statutory capital and surplus of $34.5 million at December 31, 1995 and
1994, was appropriated by the Board of Directors, under regulatory formula, to
fund excess group losses due to epidemic or disaster, if necessary.
20
<PAGE>
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 5.--(CONTINUED):
The payment of dividends by Assurance to Casualty without prior approval of
the Illinois Insurance Department is limited to formula amounts. As of December
31, 1995, approximately $113.0 million was not subject to prior Insurance
Department approval.
NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Fair values are disclosed for all financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values may be
based on estimates using present value or other valuation techniques. These
techniques are significantly affected by the assumptions used, including the
discount rates and estimates of future cash flows. Potential taxes and other
transaction costs have not been considered in estimating fair value. The
estimates presented herein are subjective in nature and are not necessarily
indicative of the amounts Assurance could realize in the current market
exchange. Any difference would not be expected to be material.
All nonfinancial instruments such as deferred acquisition costs, property
and equipment, deferred income taxes and insurance reserves are excluded from
fair value disclosure. Thus, the total fair value amounts cannot be aggregated
to determine the underlying economic value of Assurance.
The carrying amounts and estimated fair values of Assurance's financial
instrument assets and liabilities are listed below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1995 1994
----------------------- -----------------------
DECEMBER 31 CARRYING ESTIMATED CARRYING ESTIMATED
(In thousands of dollars) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Investments:
Fixed maturities available-for-sale--Note 3.......... $4,686,449 $4,686,449 $3,800,402 $3,800,402
Equity securities available-for-sale--Note 3......... 56,699 56,699 44,964 44,964
Mortgage loans....................................... 43,650 45,826 43,669 43,229
Policy loans......................................... 177,192 166,561 176,311 155,154
Other invested assets................................ 127,145 130,307 15,000 15,699
Separate Account assets:
Fixed maturities available-for-sale.................. 5,499,330 5,499,330 5,250,229 5,250,229
Equity securities available-for-sale................. 242,722 242,722 139,515 139,515
Other................................................ 126,045 133,176 690,518 691,761
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1995 1994
----------------------- -----------------------
DECEMBER 31 CARRYING ESTIMATED CARRYING ESTIMATED
(In thousands of dollars) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL LIABILITIES
Premium deposits and annuity contracts................. 825,468 776,841 602,971 593,563
Long-term debt......................................... 10,000 10,000 10,000 10,000
Separate Account liabilities:
Guaranteed investment contracts...................... 4,315,788 4,455,459 4,747,882 4,874,603
Deferred annuities................................... 74,088 108,232 62,527 88,961
Variable separate accounts........................... 228,017 228,017 168,351 168,351
Other................................................ 585,803 585,803 658,605 658,605
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 6.--(CONTINUED):
The following methods and assumptions were used by Assurance in estimating
its fair value disclosures for financial instruments:
The carrying amounts reported in the balance sheet approximate fair
value for cash, short-term investments, other insurance receivables,
accrued investment income, receivables for securities sold, securities sold
under repurchase agreements, payables for securities purchased and certain
other assets and other liabilities because of their short-term nature. As
such, these financial instruments are not shown in the above table.
Fixed maturity securities and equity securities are based on quoted
market prices, where available. For securities not actively traded, fair
values are estimated using values obtained from independent pricing
services, costs to settle, or quoted market prices of comparable
instruments.
The fair values for mortgage loans and policy loans are estimated
using discounted cash flow analyses at interest rates currently offered for
similar loans to borrowers with comparable credit ratings. Loans with
similar characteristics are aggregated for purposes of the calculations.
Other invested assets and other Separate Account assets consist of
investments in limited partnerships and various miscellaneous assets.
Valuation techniques to determine fair value consist of discounted cash
flows and quoted market prices of a) the investments, b) comparable
instruments, or c) underlying assets of the investments.
Premium deposits and annuity contracts are valued based on cash
surrender values and the outstanding fund balances.
Assurance's long-term debt represents floating rate tax exempt bonds
with interest rates determined monthly and thus approximates fair value.
Guaranteed investment contracts and deferred annuities of the Separate
Accounts are estimated using discounted cash flow calculations, based on
interest rates currently being offered for similar contracts with similar
maturities. The fair values of the liabilities for variable Separate
Accounts are based on the quoted market values of the underlying assets of
each variable Separate Account. The fair value of other Separate Account
liabilities approximates carrying value.
NOTE 7. BENEFIT PLANS:
PENSION PLAN
CNA has several noncontributory pension plans covering all full-time
employees age 21 or over who have completed at least one year of service.
Assurance is included in the CNA Employees' Retirement Plan. Plan benefits are
based on years of credited service and the employee's highest sixty consecutive
months of compensation.
22
<PAGE>
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 7.--(CONTINUED):
CNA's funding policy is to make contributions in accordance with applicable
governmental regulatory requirements. The assets of the plan are invested
primarily in U.S. government securities with the balance in short-term
investments, common stocks and other fixed income securities.
Effective January 1, 1996, the retirement plans redefined compensation to
include base pay, overtime and bonuses. This amendment generated an unrecognized
prior service cost of $20.2 million.
In 1994, the plan adopted the rule of 65. This change allows Plan
participants to receive early retirement benefits if their combined years and
months of age and service with CNA equals a minimum of 65. This amendment
generated an unrecognized prior service cost of $1.6 million.
Net periodic pension cost allocated to Assurance was $4.8 million in 1995,
$4.6 million in 1994 and $3.4 million in 1993.
The following table sets forth the Plans' funded status and amounts
recognized in CNA's consolidated financial statements at December 31, 1995, 1994
and 1993.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1995* 1994 1993
DECEMBER 31 OVERFUNDED UNDERFUNDED OVERFUNDED OVERFUNDED
(In thousands of dollars) PLANS PLANS PLANS PLANS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested...................................................... $ 508,506 $ 628,564 $ 376,377 $401,481
Nonvested................................................... 31,180 11,292 39,152 41,585
---------- ----------- ---------- ----------
Accumulated benefit obligation............................ $ 539,686 $ 639,856 $ 415,529 $443,066
========== =========== ========== ==========
Projected benefit obligation.................................. $ 808,289 $ 771,018 $ 651,418 $617,764
Plan assets at fair value..................................... 629,673 496,264 495,492 465,279
---------- ----------- ---------- ----------
Plan assets less than projected benefit obligation........ (178,616) (274,754) (155,926) (152,485)
Unrecognized net asset at January 1, 1986 being recognized
over 12 years............................................... (12,176) -- (17,253) (22,330)
Unrecognized prior service costs.............................. 38,584 86,903 20,773 21,553
Unrecognized net loss......................................... 172,269 5,825 174,039 160,825
---------- ----------- ---------- ----------
Net pension asset (liability)............................. $ 20,061 $(182,026) $ 21,633 $ 7,563
========== =========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
1995* 1994 1993
DECEMBER 31 OVERFUNDED UNDERFUNDED OVERFUNDED OVERFUNDED
(In thousands of dollars) PLANS PLANS PLANS PLANS
- -------------------------------------------------------------------------------------------------------------
Net periodic pension cost:
Service cost--benefits attributed to employee service during
the year.................................................. $ 33,020 $ 10,694 $ 32,354 $ 27,527
Interest cost on projected benefit obligation............... 52,783 31,033 44,666 40,640
Actual return on plan assets................................ (115,363) (43,432) 11,579 (25,609)
Net amortization and deferral............................... 73,312 18,650 (43,265) (13,967)
- ---------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 43,752 $ 16,945 $ 45,334 $ 28,591
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
* The 1995 data includes The Continental Corporation Retirement Plans which are
underfunded. CNA acquired The Continental Corporation on May 10, 1995.
</TABLE>
23
<PAGE>
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 7.--(CONTINUED):
Actuarial assumptions are set forth in the following table.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
ASSUMPTIONS
DECEMBER 31 1995 1994 1993 1992
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate.................................................... 7.25% 8.50% 7.25% 8.25%
Rate of increase in compensation levels*......................... 2.75 4.00 4.50 5.25
Expected long-term rate of return on plan assets................. 7.50 8.75 7.50 9.00
- ---------------------------------------------------------------------------------------------------------
* Excludes age/service related merit and productivity increases.
</TABLE>
The funded status is determined using assumptions at the end of the year.
Pension cost is determined using assumptions at the beginning of the year.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
CNA provides certain health and dental care benefits for eligible retirees,
through age 64, and provides life insurance and reimbursement of Medicare Part B
premiums for all eligible retired persons. CNA funds benefit costs principally
on the basis of current benefit payments.
As described previously, in 1994, the Plan adopted the Rule of 65. For the
postretirement plan, this amendment generated an unrecognized prior service cost
of $11.2 million.
Net periodic postretirement benefit cost allocated to Assurance was $1.8
million in 1995 and $3.0 million in 1994.
The following table sets forth the amounts recognized in CNA's consolidated
financial statements at December 31, 1995, 1994 and 1993.
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
DECEMBER 31
(In thousands of dollars) 1995* 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................................ $185,507 $ 27,088 $ 26,245
Fully eligible, active plan participants................................ 59,173 53,684 24,097
Other active plan participants.......................................... 62,540 41,106 70,804
-------- -------- --------
Total accumulated postretirement benefit obligation................... 307,220 121,878 121,146
Unrecognized prior service cost........................................... -- (11,177) --
Unrecognized net gain (loss).............................................. 7,380 19,702 (5,291)
-------- -------- --------
Accrued postretirement benefit cost..................................... $314,600 $130,403 $115,855
======== ======== ========
Net periodic postretirement benefit cost:
Service cost/benefits attributed to employee service during the year.... $ 5,969 $ 8,603 $ 5,625
Interest cost on accumulated post retirement benefit obligation......... 17,506 10,342 7,742
Amortization............................................................ (941) 655 (104)
- --------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 22,534 $ 19,600 $ 13,263
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
* The 1995 data includes postretirement benefit obligations for The Continental
Corporation retirees.
</TABLE>
24
<PAGE>
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 7.--(CONTINUED):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
ASSUMPTIONS
DECEMBER 31 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assumptions used in determining net periodic benefit cost:
Discount rate.............................................................. 8.50% 7.25% 8.25%
Rate of increase in compensation levels*................................... 4.00 4.50 5.25
Assumptions used in determining the projected benefit obligation (liability):
Discount rate.............................................................. 7.25% 8.50% 7.25%
Rate of increase in compensation levels*................................... 2.75 4.00 4.50
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
* Excludes age/service related merit and productivity increases.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 13% in 1995, declining 1% per year to an
ultimate rate of 5% in 2002. The health care cost trend rate assumption has a
significant effect on the amount of the benefit obligation and periodic cost
reported. An increase in the assumed health care cost trend rate of 1% in each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1995 by $17.5 million and the aggregate net periodic postretirement
benefit cost for 1995 by $1.9 million.
SAVINGS PLAN
Assurance is included in the CNA Employees' Savings Plan which is a
contributory plan which allows employees to make a regular contribution of up to
6% of their salaries. Assurance contributes an additional amount equal to 70% of
the employee's regular contribution. Employees may also make an additional
contribution of up to 10% of their salaries for which there is no additional
contribution by Assurance. Assurance's contributions to the plan were $1.9
million, $2.0 million and $2.3 million in 1995, 1994 and 1993, respectively.
NOTE 8. INCOME TAXES:
Assurance and its domestic life insurance subsidiary are taxed under the
provisions of the Internal Revenue Code, as applicable to life insurance
companies, and are included in the consolidated Federal income tax return with
CNA and its eligible subsidiaries (CNA Tax Group), which in turn is consolidated
in the Loews Federal income tax return. The Federal income tax provision of
Assurance is computed as if Assurance and its life insurance subsidiaries were
filing its own separate consolidated return.
<PAGE>
Assurance and its domestic life insurance subsidiary maintain a special tax
memorandum account designated as the "Shareholder's Surplus Account". Dividends
from this account may be distributed to the shareholder without resulting in any
additional tax. At December 31, 1995, the amount in the Shareholder's Surplus
Account was $1,253 million. Another tax memorandum account, defined as the
"Policyholders' Surplus Account," totaled $70 million at December 31, 1995. No
further additions to this account are allowed. Amounts accumulated in the
Policyholders' Surplus Account are subject to income tax if distributed to the
shareholder. Assurance has not provided for such a tax as Assurance has no plans
for such a distribution.
25
<PAGE>
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 8.--(CONTINUED):
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Assurance's deferred tax assets and liabilities as of December 31, 1995 and 1994
are shown in the table below.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
YEAR ENDED DECEMBER 31
(In thousands of dollars) 1995 1994
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Life insurance reserves............................................................ $ 162,201 $ 124,674
Deferred acquisition costs......................................................... (139,767) (116,818)
Investment valuation............................................................... 34,469 64,574
Unrealized investment (gains) losses............................................... (126,669) 124,581
Property and equipment............................................................. (12,841) (12,841)
Receivables........................................................................ (5,831) (5,335)
Postretirement benefits other than pensions........................................ 6,122 6,122
Other, net......................................................................... 3,194 3,215
- ------------------------------------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ (79,122) $ 188,172
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1995, gross deferred tax assets and liabilities amounted to
$242.6 million and $321.7 million, respectively. Gross deferred tax assets and
liabilities, at December 31, 1994, amounted to $326.9 million and $138.7
million, respectively.
Assurance has not established a valuation reserve at December 31, 1995 as
it believes that all deferred tax assets are fully realizable. Assurance has a
past history of profitability and anticipates future taxable income sufficient
to support its deferred tax balances at December 31, 1995, including but not
limited to the reversal of existing temporary differences and the implementation
of tax planning strategies, if needed.
<PAGE>
Significant components of Assurance's income tax provision are as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAX (EXPENSE) BENEFIT
YEAR ENDED DECEMBER 31
(In thousands of dollars) 1995 1994 1993
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Current tax (expense) benefit on:
Ordinary income.......................................................... $ (61,706) $ (56,064) $ (25,616)
Realized investment (gains) losses....................................... (31,666) 42,618 (82,630)
--------- --------- ---------
Total current tax expense.............................................. (93,372) (13,446) (108,246)
--------- --------- ---------
Deferred tax (expense) benefit on:
Ordinary income.......................................................... (3,446) (486) (5,466)
Realized investment (gains) losses....................................... (14,216) (18,172) 42,309
--------- --------- ---------
Total deferred tax (expense) benefit................................... (17,662) (18,658) 36,843
- --------------------------------------------------------------------------------------------------------------
Total income tax expense $(111,034) $ (32,104) $ (71,403)
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 8.--(CONTINUED):
A reconciliation of the expected income tax benefit (expense) resulting
from the use of statutory tax rates to the effective income tax benefit
(expense) follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
RECONCILIATION OF EXPECTED AND EFFECTIVE TAXES
YEAR ENDED DECEMBER 31
(In thousands of dollars) 1995 1994 1993
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax expense on ordinary income at statutory rates....................... $ (64,813) $(56,225) $(32,043)
State taxes...................................................................... (1,602) (1,502) (882)
Effect of 1% change in tax rate on January 1, 1993 deferred tax balance.......... -- -- 750
Other items, net................................................................. 1,263 1,177 1,093
--------- -------- --------
Income tax expense on ordinary income.......................................... (65,152) (56,550) (31,082)
--------- -------- --------
Expected tax (expense) benefit on realized investment (gains) losses at statutory
rates.......................................................................... (45,903) 24,607 (39,510)
State taxes...................................................................... -- -- (3,085)
Effect of 1% change in tax rate on January 1, 1993 deferred tax balance.......... -- -- 1,091
Other items, net................................................................. 21 (161) 1,183
--------- -------- --------
Income tax (expense) benefit on realized investment (gains) losses............. (45,882) 24,446 (40,321)
- ------------------------------------------------------------------------------------------------------------------
Income tax expense $(111,034) $(32,104) $(71,403)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 9. REINSURANCE:
The effects of reinsurance on premium revenues are shown in the following
schedule:
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
PREMIUMS
YEAR ENDED DECEMBER 31 -------------------------------------- ASSUMED/NET
(In millions of dollars) DIRECT ASSUMED CEDED NET %
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995
Life.................................. $ 721.3 $109.4 $ 20.8 $ 809.9 13.5%
Accident and Health................... 2,169.9 120.0 67.5 2,222.4 5.4
-------- ----- ------ --------
Total............................... $2,891.2 $229.4 $ 88.3 $3,032.3 7.6
======== ===== ====== ========
1994
Life.................................. $ 450.4 $106.9 $ 22.9 $ 534.4 20.0
Accident and Health................... 2,025.4 149.4 31.0 2,143.8 7.0
Total............................... $2,475.8 $256.3 $ 53.9 $2,678.2 9.6
======== ===== ====== ========
1993
Life.................................. $ 340.0 $108.6 $ 20.3 $ 428.3 25.3
Accident and Health................... 1,897.8 135.9 19.8 2,013.9 6.7
-------- ----- ------ --------
Total............................... $2,237.8 $244.5 $ 40.1 $2,442.2 10.0
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
In the table above, the majority of Life premium revenue is from long
duration type contracts, while the Accident and Health premium revenue is
generally short duration.
Insurance claims and policyholders' benefits recoveries were $57.0 million
in 1995, $30.0 million in 1994 and $33.3 million in 1993.
27
<PAGE>
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 9.--(CONTINUED):
The impact of reinsurance on life insurance in force is shown in the
following schedule:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
LIFE INSURANCE IN FORCE
YEAR ENDED DECEMBER 31 ----------------------------------------- ASSUMED/NET
(In millions of dollars) DIRECT ASSUMED CEDED NET %
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995......................................... $111,917 $54,129 $8,578 $157,468 34.4%
1994......................................... 75,419 52,014 5,953 121,480 42.8
1993......................................... 58,978 53,270 5,713 106,535 50.0
- -------------------------------------------------------------------------------------------------------
</TABLE>
The ceding of insurance does not discharge primary liability of the
original insurer. CNA places reinsurance with other carriers only after careful
review of the nature of the contract and a thorough assessment of the
reinsurers' credit quality and claim settlement performance.
NOTE 10. LEGAL:
Assurance is party to litigation arising in the ordinary course of
business. The outcome of this litigation will not, in the opinion of management,
materially affect the results of operations or equity of Assurance.
NOTE 11. BUSINESS SEGMENTS:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
(In thousands of dollars) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Individual.................................................... $ 767,224 $ 591,668 $ 496,410
Group......................................................... 2,698,565 2,440,902 2,240,026
Realized gains (losses)....................................... 138,985 (81,184) 126,026
----------- ----------- -----------
Total................................................... $ 3,604,774 $ 2,951,386 $ 2,862,462
========== ========== ==========
INCOME BEFORE INCOME TAX
Individual.................................................... $ 78,323 $ 58,928 $ 23,752
Group......................................................... 106,856 101,714 67,799
Realized gains (losses)....................................... 131,150 (70,307) 112,885
----------- ----------- -----------
Total................................................... $ 316,329 $ 90,335 $ 204,436
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
(In thousands of dollars) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME
Individual.................................................... $ 50,927 $ 38,024 $ 15,826
Group......................................................... 69,100 66,068 44,641
Realized gains (losses)....................................... 85,268 (45,861) 72,564
----------- ----------- -----------
Total................................................... $ 205,295 $ 58,231 $ 133,033
========== ========== ==========
ASSETS
Individual.................................................... $ 4,068,794 $ 3,733,964 $ 3,309,225
Group......................................................... 9,059,956 8,706,268 8,908,102
----------- ----------- -----------
Total................................................... $13,128,750 $12,440,232 $12,217,327
========== ========== ==========
</TABLE>
28
<PAGE>
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 11.--(CONTINUED):
Assets and investment income are allocated to business segments based on
cash flows after attribution of separately identifiable assets. Income taxes
have been allocated on the basis of taxable operating income of the respective
segments.
Group revenues include $1.9 billion, $1.8 billion and $1.7 billion in 1995,
1994 and 1993, respectively, under contracts covering U.S. government employees
and their dependents.
29
<PAGE>
[Continental Assurance Company Separate Account (B) LOGO]
Group
Variable
Annuity
Contracts
STATEMENT OF ADDITIONAL INFORMATION
Dated: April 30, 1996
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
CNA LOGO
FOR ALL THE COMMITMENTS YOU MAKE(R)
W557-838L
<PAGE>
PART C
OTHER INFORMATION
ITEM 28. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE NUMBERS
IN 1995
ANNUAL REPORT
TO PARTICIPANTS
----------------
<S> <C> <C>
Financial Statements of Continental Assurance Company
Separate Account (B):
Schedule of Investments...................................... 4
Balance Sheet................................................ 8
Statement of Operations...................................... 8
Statement of Changes in Participants' Equity................. 9
Notes to Financial Statements................................ 9
Independent Auditors' Report................................. 11
PAGE
NUMBERS
IN
PAGE STATEMENT
NUMBERS OF
IN ADDITIONAL
PROSPECTUS INFORMATION
--- ----
<S> <C> <C>
Condensed Financial Information of Continental
Assurance Company Separate Account (B)............ 12
Independent Auditors' Report on Condensed Financial
Information of Continental Assurance Company
Separate Account (B).............................. 39
Financial Statements of Continental Assurance Company:
Independent Auditors' Report........................ 9
Consolidated Balance Sheet.......................... 10
Statement of Consolidated Operations................ 11
Statement of Consolidated Stockholder's Equity...... 12
Statement of Consolidated Cash Flows................ 13
Notes to Financial Statements....................... 14
</TABLE>
<PAGE>
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
**
(12) Opinion of Lynne Gugenheim.
(13)(a) Consent of Independent Auditors.
(b) Consent of Counsel (included in Exhibit 12).
**
(14) 1995 Annual Report to Participants of the Separate Account.
**
(16) Calculation of Performance Data.
(17) Financial Data Schedule.
</TABLE>
- ---------------
** Indicates that all or a portion of an item has been omitted because the
omitted information has not changed since it was disclosed in this
Registration Statement or prior amendments hereto.
C-1
<PAGE>
ITEM 29. DIRECTORS AND OFFICERS OF THE INSURANCE COMPANY.
<TABLE>
<CAPTION>
POSITIONS
AND OFFICES
POSITIONS AND WITH THE
NAME AND PRINCIPAL OFFICES WITH SEPARATE
BUSINESS ADDRESS THE COMPANY ACCOUNT
------------------------------ --------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C>
*Dennis H. Chookaszian........................ Director, Chairman of the None
Board and Chief Executive
Officer
*Philip L. Engel.............................. Director and President None
*Peter E. Jokiel.............................. Director, Senior Vice None
President and Chief Financial
Officer
*Donald M. Lowry.............................. Director, Senior Vice None
President, Secretary and
General Counsel
*Donald C. Rycroft............................ Director, Group Vice President Chairman and
and Treasurer Member of the
Committee
*William J. Sharkey, Jr. ..................... Director and Senior Vice None
President
*William J. Adamson, Jr. ..................... Senior Vice President None
*Bruce B. Brodie.............................. Senior Vice President None
*James P. Flood............................... Senior Vice President None
*Michael C. Garner............................ Senior Vice President None
*Bernard L. Hengesbaugh....................... Senior Vice President None
*Jack Kettler................................. Senior Vice President None
*Carolyn L. Murphy............................ Senior Vice President None
*Wayne R. Smith............................... Senior Vice President None
*Adrian M. Tocklin............................ Senior Vice President None
*Jae L. Wittlich.............................. Senior Vice President None
</TABLE>
- ---------------
* The principal business address is CNA Plaza, Chicago, Illinois 60685.
**
ITEM 31. NUMBER OF CONTRACTOWNERS.
As of April 15, 1996, the Separate Account had 197 qualified
Contractholders.
<PAGE>
ITEM 32. INDEMNIFICATION.
Pursuant to its bylaws, CNA Financial shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, (including under certain circumstances, as
determined by the CNA Financial board, proceedings by or in the right of CNA
Financial) by reason of the fact that such person was serving at the request of
CNA Financial as a director, officer, employee or agent of the Registrant,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of CNA
Financial, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
CNA Financial maintains directors and officers insurance covering certain
liabilities of persons serving as directors and officers of CNA Financial or its
affiliates and providing reimbursement to CNA Financial for its indemnity of
such persons.
**
C-2
<PAGE>
ITEM 35. LOCATION OF ACCOUNTS AND RECORDS.
Accounts and records are maintained by the Company at CNA Plaza,
Chicago, Illinois 60685.
**
- ---------------
** Indicates that all or a portion of an item has been omitted because the
omitted information has not changed since it was disclosed in this
Registration Statement or prior amendments hereto.
C-3
<PAGE>
SIGNATURES
AS REQUIRED BY THE SECURITIES ACT OF 1933 AND THE INVESTMENT COMPANY ACT OF
1940, THE REGISTRANT CERTIFIES THAT IT MEETS THE REQUIREMENTS OF SECURITIES ACT
RULE 485(B) FOR EFFECTIVENESS OF THIS POST-EFFECTIVE AMENDMENT TO ITS
REGISTRATION STATEMENT ON FORM N-3 AND HAS CAUSED THIS POST-EFFECTIVE AMENDMENT
TO ITS REGISTRATION STATEMENT ON FORM N-3 TO BE SIGNED ON ITS BEHALF, IN THE
CITY OF CHICAGO, AND STATE OF ILLINOIS, ON THE 30TH DAY OF APRIL, 1996.
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
By /s/ DONALD C. RYCROFT
-------------------------------------
Donald C. Rycroft, Chairman of
Committee
CONTINENTAL ASSURANCE COMPANY
By /s/ DENNIS H. CHOOKASZIAN
--------------------------------------
Dennis H. Chookaszian, Chairman of the
Board and Chief Executive Officer
EACH MEMBER OF THE COMMITTEE OF CONTINENTAL ASSURANCE COMPANY SEPARATE
ACCOUNT (B) WHOSE SIGNATURE APPEARS BELOW AND EACH OFFICER AND DIRECTOR OF
CONTINENTAL ASSURANCE COMPANY WHOSE SIGNATURE APPEARS BELOW HEREBY CONSTITUTES
AND APPOINTS DONALD M. LOWRY AND LYNNE GUGENHEIM, AND EACH OF THEM, HIS TRUE AND
LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF SUBSTITUTION AND
RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL
CAPACITIES, TO SIGN ANY AND ALL POST-EFFECTIVE AMENDMENTS FILED AFTER THE DATE
HEREOF TO THIS REGISTRATION STATEMENT AND TO FILE THE SAME, WITH ALL EXHIBITS
THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND
EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933 AND THE INVESTMENT COMPANY
ACT OF 1940.
<PAGE>
AS REQUIRED BY THE SECURITIES ACT OF 1933, THIS POST-EFFECTIVE AMENDMENT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE 30TH
DAY OF APRIL.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ----------------------------- ---------------
<C> <C> <C>
/s/ DONALD C. RYCROFT Chairman of Committee and April 30, 1996
- --------------------------------------------- Member of Committee of
Donald C. Rycroft Continental Assurance
Company Separate
Account (B) (Principal
Executive Officer,
Principal
Financial Officer and
Principal Accounting
Officer)
/s/ RICHARD W. DUBBERKE Member of Committee of April 30, 1996
- --------------------------------------------- Continental Assurance
Richard W. Dubberke Company Separate
Account (B)
/s/ RICHARD T. FOX Member of Committee of April 30, 1996
- --------------------------------------------- Continental Assurance
Richard T. Fox Company Separate
Account (B)
/s/ WILLIAM W. TONGUE Member of Committee of April 30, 1996
- --------------------------------------------- Continental Assurance
William W. Tongue Company Separate
Account (B)
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ----------------------------- ---------------
<C> <S> <C>
/s/ PETER J. WRENN Member of Committee of April 30, 1996
- --------------------------------------------- Continental Assurance
Peter J. Wrenn Company Separate
Account (B)
/s/ DENNIS H. CHOOKASZIAN Director, Chairman of the April 30, 1996
- --------------------------------------------- Board and Chief Executive
Dennis H. Chookaszian Officer of Continental
Assurance Company
(Principal Executive
Officer)
/s/ PETER E. JOKIEL Director, Senior Vice April 30, 1996
- --------------------------------------------- President and Chief
Peter E. Jokiel Financial Officer of
Continental Assurance
Company (Principal
Financial Officer and
Principal Accounting
Officer)
/s/ PHILIP L. ENGEL Director and President April 30, 1996
- --------------------------------------------- of Continental Assurance
Philip L. Engel Company
/s/ DONALD M. LOWRY Director, Senior Vice April 30, 1996
- --------------------------------------------- President, Secretary and
Donald M. Lowry General Counsel of
Continental
Assurance Company
/s/ DONALD C. RYCROFT Director, Group Vice April 30, 1996
- --------------------------------------------- President and Treasurer of
Donald C. Rycroft Continental Assurance
Company
/s/ WILLIAM J. SHARKEY, JR. Director and Senior Vice April 30, 1996
- --------------------------------------------- President of Continental
William J. Sharkey, Jr. Assurance Company
</TABLE>
C-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT NAME PAGE
-------- -----------------------------------------------------------------------------
<C> <S> <C>
(12 ) Opinion of Lynne Gugenheim........................................
(13 )(a) Independent Auditors' Consent.....................................
(b) Consent of Counsel (included in Exhibit 12).......................
(14 ) 1995 Annual Report to Participants of the Separate Account........
(16 ) Calculation of Performance Data...................................
(17 ) Financial Data Schedule...........................................
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
EXHIBITS
Filed With
POST-EFFECTIVE AMENDMENT NO. 43
Under
THE SECURITIES ACT OF 1933
and
AMENDMENT NO. 23
Under
THE INVESTMENT COMPANY ACT OF 1940
To
FORM N-3
REGISTRATION STATEMENT
------------------
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Securities and Exchange Commission
April 30, 1995
Lynne Gugenhiem
Vice President and
Associate General Counsel
Investment Compliance and Support
Office: (312) 822-4921
Fax: (312) 822-4175
April 30, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Post-Effective Amendment No. 43 to the Registration
Statement under the Securities Act of 1933 (File No. 2-25483)
and Amendment No. 23 to the Registration Statement under the
Investment Company Act of 1940 (File No. 811-1402), on
Form N-3, of Continental Assurance Company Separate
Account (B)
Gentlemen:
I am a Vice President and Associate General Counsel to Continental Assurance
Company, a stock life insurance company organized under the Illinois Insurance
Code (the "Company") and Associate General Counsel to Continental Assurance
Company Separate Account (B), a separate account established by the Company in
1966 in accordance with the provisions of the Illinois Insurance Code (the
"Separate Account").
As such Associate General Counsel, I have examined and am familiar with the
corporate records of the Company, including its charter, by-laws and minutes of
all directors' and stockholders' actions, and with the corporate records of the
Separate Account, including its Regulations for Government and minutes of all
Committee Members' and Participants' Meetings. I have also examined certificates
of public officials and all other documents, records and papers which I deem
relevant or necessary as a basis for giving this opinion, which is being given
in connection with the above-captioned Registration Statement as amended by the
above-captioned Post-Effective Amendment.
Based upon the foregoing, it is my opinion that:
1. The Company is duly organized, validly existing and in good standing
under the laws of Illinois:
2. The sale of the variable annuity contracts described in the
prospectus and statement of additional information forming a part of the
above-captioned Registration Statement as amended by the above-captioned
Post-Effective Amendment has been authorized by all necessary corporate action
of the Company and the Separate Account; and
<PAGE>
3. The execution and delivery by the Company of the variable annuity
contracts which have been executed and delivered heretofore pursuant to the
above-captioned Registration Statement, as amended, have been duly authorized by
all necessary corporate action of the Company, and such contracts are valid
obligations of the Company, enforceable in accordance with their terms, and the
execution and delivery by the Company of variable annuity contracts in the
future pursuant to the above-captioned Registration Statement, as amended, have
been duly authorized by all necessary corporate action of the Company, and such
contracts, when so executed and delivered, will be valid obligations of the
Company, enforceable in accordance with their terms.
I understand that this opinion will be used as an exhibit to the above-captioned
Registration Statement as amended by the above-captioned Post-Effective
Amendment and that I am referred to in the prospectus forming a part of the
above-captioned Registration Statement as amended by the above-captioned
Post-Effective Amendment as Vice President and Associate General Counsel to the
Company. I hereby consent to such use and to such reference.
Very truly yours,
S/LYNNE GUGENHEIM
Lynne Gugenheim
LG:mb
INDEPENDENT AUDITORS' CONSENT
The Committee Members
and Participants of
Continental Assurance Company
Separate Account (B)
We consent to the use in this Post-Effective Amendment No. 43 to
Registration Statement No. 2-25483 on Form N-3 of Continental Assurance Company
Separate Account (B) (a separate account of Continental Assurance Company, a
wholly owned subsidiary of Continental Casualty Company, which is an affiliate
of CNA Financial Corporation, an affiliate of Loews Corporation), of our reports
dated February 14, 1996 appearing in or incorporated by reference in the
Prospectus and Statement of Additional Information, which are parts of such
Registration Statement, on the financial statements of Continental Assurance
Company Separate Account (B) for the year ended December 31, 1995, the financial
highlights of Continental Assurance Company Separate Account (B) for the ten
years ended December 31, 1995, and the financial statements of Continental
Assurance Company for the year ended December 31, 1995. We also consent to the
reference to us under the heading "Independent Auditors" in the Statement of
Additional Information, which is part of this Registration Statement.
S/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chicago, Illinois
April 30, 1996
Continental Assurance Company
Separate Account (B)
Report to Participants
December 31, 1995
CNA
L 554-921 (12/95) 2/96
<PAGE>
- --------------------------------------------------------------------------------
Dear Participant:
- --------------------------------------------------------------------------------
Separate Account (B) ended the year with an Accumulated Unit Value increase
of 32.66% while the dividend-adjusted Standard and Poor's Composite Index (S&P)
increased by 37.53%. Although we trailed the S&P, Separate Account (B) did beat
the 31.11% average gain of domestic stock funds as reported by the Wall Street
Journal.
1995 was an excellent year for financial markets. Not only were domestic
stock funds up 31.11% on average, but taxable bond funds also had a stellar
year, gaining 15.62% on average. Economic conditions throughout the year
remained positive for the markets. Growth continued at a moderate pace and
inflation remained muted. Corporate cash flow remained strong reflecting record
earnings. The Federal Reserve made its last tightening move in February 1995,
raising the federal funds rate on overnight bank loans from 5.50% to 6.00% and
the discount rate from 4.75% to 5.25%. Subsequently, The Federal Reserve dropped
the fed funds rate by .25% each on July 6 and December 19 to 5.50%, but left the
discount rate unchanged at 5.25%. Moderating interest rates, record earnings,
and strong cash flows into equity mutual funds resulted in a banner year for the
stock markets.
Separate Account (B) remained essentially fully invested throughout the
year. Although at times our cash position rose moderately, management did not
intend to make large bets on the direction of the stock market. As we have
commented on in previous reports, we have been moderately overweighted in the
Capital Goods-Technology sector. At mid-year this sector comprised 28.39% of
Separate Account (B)'s portfolio versus 15.59% for the S&P. As the year
developed it became apparent that this sector was going to become more volatile.
We took some profits in stocks of Motorola and Applied Materials while
maintaining core positions in these companies. At the same time, we completely
eliminated positions in less liquid stocks such as Fusion Systems and EMC, both
at very nice gains. We also sold a position in convertible bonds of Magnetek,
Inc. which was clearly underperforming the market and on which we took a loss.
At year end this sector accounted for 22.24% of the portfolio. Our next largest
sector is Consumer-Services at 16.60% of the portfolio, which includes such
diverse industries as cable television, entertainment, hospital management and
restaurants. Some of our holdings here include Tele-Communications, Inc.,
Healthsouth Corporation and McDonald's Corp.
Returns in excess of 35% for the market are rare and have occurred for the
S&P only 10 times in the past 100 years. Although a correction could occur and
probably will occur during 1996, there continues to be certain positives for the
market. Inflation remains moderate, which should temper any potential rise in
interest rates. In fact, if there is another move by the Federal Reserve, we
believe that fed funds could again be lowered. Although the rate of earnings
increase apparently has peaked, absolute earnings should advance during the
year. Generally, the fourth year of a Presidential cycle has a positive effect
on the performance of the market. Also, in 8 of the 10 years the S&P exceeded
35% the market was up the following year--the exceptions being 1929 and 1934.
<PAGE>
We remain guardedly optimistic for 1996. Major market declines are
typically initiated by (1) recession, (2) accelerating inflation and attendant
interest rate increases, and (3) overvaluation of the market in general. We do
not believe these factors are driving forces at this point in time.
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)
================================================================================
YEAR ENDED DECEMBER 31
------------------------------------------------------
(Per accumulation unit outstanding during the period) 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Value at beginning of period $ 8.85 $8.91 $7.70 $7.29 $5.45
------ ----- ----- ----- -----
Investment income .19 .19 .15 .16 .19
Fees .09 .07 .07 .06 .05
------ ----- ----- ----- -----
INVESTMENT INCOME--NET .10 .12 .08 .10 .14
Net gain (loss) on investments 2.79 (.18) 1.13 .31 1.70
------ ----- ----- ----- -----
NET INCREASE (DECREASE) IN PARTICIPANTS' EQUITY
RESULTING FROM OPERATIONS 2.89 (.06) 1.21 .41 1.84
------ ----- ----- ----- -----
VALUE AT END OF PERIOD $11.74 $8.85 $8.91 $7.70 $7.29
====== ===== ===== ===== =====
Ratio of investment income--
net to average participants' equity 1.0% 1.3% 1.0% 1.4% 2.1%
Ratio of fees to average participants' equity .83% .83% .83% .83% .83%
Portfolio turnover rate 46% 52% 69% 71% 13%
Number of accumulation units outstanding
at end of period 8,763,186 9,298,777 9,385,475 9,935,498 10,485,925
- ----------------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
COMMITTEE FOR SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
MEMBERS
- --------------------------------------------------------------------------------
Donald C. Rycroft, Chairman
Senior Vice President
Continental Assurance Company
Richard W. Dubberke
Vice President and Portfolio Manager
Continental Assurance Company
Richard T. Fox
President
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
- --------------------------------------------------------------------------------
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>
<TABLE>
<CAPTION>
- ---------------------------------- -----------------------------
RECORD OF ACCUMULATION UNIT VALUES RECORD OF ANNUITY UNIT VALUES
- ---------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
UNIT
UNIT VALUATION MARKET
VALUATION MARKET DATE VALUE
DATE VALUE -------------------------
- --------------------------- 1996 January 1 $4.36
1995 December 31 $11.74 The Annuity Unit Values shown 1995 January 1 3.35
1994 December 31 8.85 at the right are based on the 1994 January 1 3.39
1993 December 31 8.91 monthly increases or decreases 1993 January 1 3.14
1992 December 31 7.70 in the accumulation unit 1992 January 1 2.71
1991 December 31 7.29 values in excess of an assumed 1991 January 1 2.36
1990 December 31 5.45 annualized rate of 3 1/2% and 1990 January 1 2.40
1989 December 31 5.31 rounded to the nearest cent. 1989 January 1 2.08
1988 December 31 4.56 1988 January 1 1.86
1987 December 31 3.91 1987 January 1 1.94
1986 December 31 3.72
</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. 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
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
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
========================================================================================================
DECEMBER 31, 1995
NUMBER OF MARKET
(All investments are in securities of unaffiliated issuers) SHARES VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS:
AEROSPACE-(3.2%)
Loral Corp. 94,000 $ 3,325,250
------------
BROADCASTING-(1.3%)
Tele-comm Liberty Media Gr-A* 49,250 1,323,594
------------
CHEMICAL-(3.3%)
Hercules Inc. 30,000 1,691,250
Minerals Technologies Inc. 47,300 1,726,450
------------
3,417,700
------------
COMPUTER TECHNOLOGY-(6.8%)
First Data Corp. 40,000 2,675,000
Hewlett-Packard Company 27,000 2,261,250
Xerox Corporation 15,000 2,055,000
------------
6,991,250
------------
COSMETICS-(2.6%)
The Gillette Company 52,000 2,710,500
------------
DIVERSIFIED-(5.5%)
Tenneco Inc. 40,000 1,985,000
Thermo Electron Corp.* 69,750 3,627,000
------------
5,612,000
------------
ELECTRONIC COMPONENTS-(5.5%)
Molex Incorporated/Class A 103,437 3,167,758
Motorola, Inc. 44,000 2,508,000
------------
5,675,758
------------
ENGINEERING & CONSTRUCTION-(2.1%)
Fluor Corporation 33,000 2,178,000
------------
FINANCIAL SERVICES (BANK)-(8.4%)
Boatmens Bancshares Inc. 72,000 2,943,000
Citicorp 50,500 3,396,125
PNC Bank Corp. 70,000 2,257,500
------------
8,596,625
------------
<PAGE>
- --------------------------------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
========================================================================================================
DECEMBER 31, 1995
NUMBER OF MARKET
(All investments are in securities of unaffiliated issuers) SHARES VALUE
- --------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES (LEASING)-(1.9%)
A T & T Capital Corp. 50,000 1,912,500
------------
FOODS-(2.5%)
C P C International Inc. 36,800 2,525,400
------------
HEALTH CARE-(11.5%)
Cardinal Health, Inc. 46,500 2,545,875
Healthsouth Corp.* 104,000 3,029,000
Pfizer Inc. 59,400 3,742,200
United HealthCare Corp. 40,000 2,620,000
------------
11,937,075
------------
HOSPITAL MANAGEMENT-(1.5%)
Columbia HCA Healthcare Corp. 30,000 1,522,500
------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
DECEMBER 31, 1995
(All investments are in securities NUMBER OF MARKET
of unaffiliated issuers) SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS:
HOUSEHOLD PRODUCTS-(3.1%)
Procter & Gamble Co. 38,300 $ 3,178,900
-----------
LEISURE/GAMBLING-(1.2%)
Circus Circus Enterprises, Inc.* 43,610 1,215,629
-----------
MACHINERY-(2.5%)
Illinois Tool Works, Inc. 44,400 2,619,600
-----------
METALS (DIVERSIFIED)-(1.3%)
Aluminum Co. of America 25,000 1,321,875
-----------
NATURAL GAS PIPELINE-(3.0%)
Enron Corp. 80,000 3,050,000
-----------
OFFICE PRODUCTS-(2.5%)
Boise Cascade Office Products Corporation* 59,500 2,543,625
-----------
OIL & GAS EQUIPMENT-(2.2%)
Camco International Inc. 80,000 2,240,000
-----------
OIL & GAS EXPLORATION-(2.0%)
Vastar Resources Inc. 65,700 2,085,975
-----------
PAPER & FOREST PRODUCTS-(1.7%)
Buckeye Cellulose Corp.* 80,000 1,760,000
-----------
PHARMACEUTICAL-(2.3%)
Schering-Plough Corporation 44,000 2,409,000
-----------
RAILROADS-(2.3%)
Burlington Northern Santa Fe 30,212 2,356,536
-----------
RESTAURANTS/FAST FOODS-(2.2%)
McDonald's Corporation 50,000 2,256,250
-----------
RETAIL STORES-(3.9%)
Home Depot Inc. 48,333 2,313,942
The Sports Authority, Inc.* 86,500 1,762,438
-----------
4,076,380
-----------
SEMICONDUCTOR-(3.3%)
Applied Materials Inc.* 49,000 1,929,375
Intel Corp. 25,000 1,418,750
-----------
3,348,125
-----------
TELECOMMUNICATIONS-(4.2%)
A T & T Corporation 39,000 2,525,250
Tele-Communications, Inc./Class A* 91,000 1,808,625
-----------
4,333,875
-----------
TOTAL COMMON STOCKS-(93.8%) 96,523,922
-----------
5
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
DECEMBER 31, 1995
(All investments are in securities MARKET
of unaffiliated issuers) PAR VALUE VALUE
- --------------------------------------------------------------------------------
BONDS:
TRANSPORTATION-(1.7%)
AMR Corporation, Conv. Sub. Deb., 6.125%,
due 11/01/24 $1,750,000 $ 1,785,000
------------
TOTAL BONDS-(1.7%) 1,785,000
------------
SHORT-TERM NOTES:
BANKS-(1.9%)
The First National Bank of Chicago
Eurodollar Time Deposit, 6.0%,
due 1/02/96 1,946,000 1,946,973
------------
U.S. GOVERNMENT-(2.5%)
United States Treasury Bills, 4.5%,
due 1/04/96 2,560,000 2,559,040
------------
TOTAL SHORT-TERM NOTES-(4.4%) 4,506,013
------------
TOTAL INVESTMENTS-(99.9%) 102,814,935
Cash and receivables less liabilities-(0.1%) 30,149
- --------------------------------------------------------------------------------
PARTICIPANTS' EQUITY--NET ASSETS--(100.0%) $102,845,084
================================================================================
* Non-income producing security in 1995.
See accompanying Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
YEAR ENDED DECEMBER 31, 1995 (IN SHARES) INCREASED DECREASED NOW OWNED
- --------------------------------------------------------------------------------
COMMON STOCK:
A T & T Capital Corp. - 30,000 50,000
A T & T Corporation 39,000 - 39,000
AVX Corporation 5,000 5,000 -
Aluminum Co. of America 25,000 - 25,000
Applied Materials Inc. 24,500 34,500 49,000
Boise Cascade Office Products Corporation 69,500 10,000 59,500
Buckeye Cellulose Corp. 80,000 - 80,000
Burlington Northern Santa Fe 30,213 1 30,212
C P C International Inc. 36,800 - 36,800
Cardinal Health, Inc. 21,500 - 46,500
Circus Circus Enterprises, Inc. 63,610 20,000 43,610
Columbia HCA Healthcare Corp. 30,000 - 30,000
Dana Corp. - 62,000 -
E M C Corp. - 123,000 -
Falcon Building Products, Inc. - 30,000 -
Fluor Corporation 33,000 - 33,000
Foster Wheeler Corp. 10,000 10,000 -
Fusion Systems Corporation 20,000 84,800 -
The Gillette Company 29,000 - 52,000
Healthsouth Corp. 59,500 15,000 104,000
Hercules Inc. 30,000 - 30,000
Hewlett-Packard Company 27,000 - 27,000
- --------------------------------------------------------------------------------
6
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
========================================================================================================
YEAR ENDED DECEMBER 31, 1995, (IN SHARES) INCREASED DECREASED NOW OWNED
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Illinois Tool Works, Inc. - 16,500 44,400
Intel Corp. 25,000 - 25,000
Loral Corp. 47,000 - 94,000
Maytag Corporation 90,000 90,000 -
McDonald's Corporation 50,000 - 50,000
Minerals Technologies Inc. - 19,000 47,300
Molex Incorporated/Class A 20,688 8,501 103,437
Morton International Inc. - 61,500 -
Motorola, Inc. - 9,000 44,000
PMI Group Inc. 2,000 2,000 -
PNC Bank Corp. 70,000 - 70,000
Panamerican Beverages, Inc. - 56,500 -
Pfizer Inc. 34,700 15,300 59,400
Qualcomm Inc. 10,000 10,000 -
Schering-Plough Corporation 22,000 - 44,000
The Sports Authority, Inc. 5,000 - 86,500
Tele-Communications, Inc./Class A - 18,000 91,000
Tele-comm Liberty Media Gr-A 49,250 - 49,250
Temple-Inland Inc. - 37,250 -
Thermo Electron Corp. 23,250 - 69,750
USX-U S Steel Group 40,000 40,000 -
Union Carbide Corp. 30,000 30,000 -
United HealthCare Corp. 5,000 - 40,000
Xerox Corporation 15,000 - 15,000
PREFERRED STOCK:
Arkansas Best Corp., $2.875 Conv. Pfd. Series A - 25,000 -
Burlington Northern Inc., $6.25 Conv. Pfd. Series A - 28,400 -
Burlington Northern Santa Fe Corp., $6.25 Conv. Pfd. Series A 28,400 28,400 -
Ford Motor Co., $4.20 conv. Pfd. Series A - 26,000 -
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
TEN LARGEST COMMON STOCK HOLDINGS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
=========================================================================================================
MARKET % OF NET
DECEMBER 31, 1995 VALUE ASSETS
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Pfizer Inc. $3,742,200 3.6%
Thermo Electron Corp. 3,627,000 3.5
Citicorp 3,396,125 3.3
Loral Corp. 3,325,250 3.2
Procter & Gamble Co. 3,178,900 3.1
Molex Incorporated/Class A 3,167,758 3.1
Enron Corp. 3,050,000 3.0
Healthsouth Cop. 3,029,000 2.9
Boatmens Bancshares Inc. 2,943,000 2.9
The Gillette Company 2,710,500 2.6
- ---------------------------------------------------------------------------------------------------------
$32,169,733 31.2%
=========================================================================================================
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
DECEMBER 31 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities of unaffiliated issuers--Note 1:
Common stocks at market (cost $65,102,944 and $50,829,840) $ 96,523,922 $63,213,074
Preferred stocks at market (cost $5,350,658) - 4,932,425
Bonds at market (cost $1,763,438 and $7,858,969) 1,785,000 7,172,875
Short-term notes at amortized cost (approximates market) 4,506,013 7,145,177
------------ -----------
TOTAL INVESTMENTS 102,814,935 82,463,551
Cash 441 -
Dividends receivable--Note 1 113,049 73,775
Interest receivable 17,767 117,138
Receivable from Continental Assurance Company for fund deposits - 2,349
------------ -----------
TOTAL ASSETS 102,946,192 82,656,813
------------ -----------
LIABILITIES
Fees payable to Continental Assurance Company--Note 4 37,153 29,714
Payable for Securities Purchased - 335,793
Payable to Continental Assurance Company for fund withdrawals 63,955 26,876
------------ -----------
TOTAL LIABILITIES 101,108 392,383
- ---------------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY--NET ASSETS (8,763,186 and 9,298,777 units issued
and outstanding at $11.74 and $8.85 per unit)--Note 2 $102,845,084 $82,264,430
===================================================================================================
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
=========================================================================================================
YEAR ENDED DECEMBER 31 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income:
Dividends $ 1,103,176 $ 1,039,107
Interest 586,862 737,444
----------- ------------
1,690,038 1,776,551
----------- ------------
Fees (Continental Assurance Company)--Note 4:
Investment advisory fees 462,018 415,070
Service fees 304,932 273,945
----------- ------------
766,950 689,015
----------- ------------
INVESTMENT INCOME--NET 923,088 1,087,536
----------- ------------
Investment gain (loss)--Note 3:
Net realized gain 5,038,356 8,420,855
Net unrealized gain (loss) 20,163,632 (10,188,758)
----------- ------------
NET GAIN (LOSS) ON INVESTMENTS 25,201,988 (1,767,903)
- ---------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN PARTICIPANTS' EQUITY RESULTING FROM OPERATIONS $26,125,076 $ (680,367)
=========================================================================================================
See accompanying Notes to Financial Statements.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN PARTICIPANTS' EQUITY
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================================================
YEAR ENDED DECEMBER 31 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From operations:
Investment income--net $ 923,088 $ 1,087,536
Net realized gain on investments 5,038,356 8,420,855
Net unrealized gain (loss) on investments 20,163,632 (10,188,758)
------------ ------------
Net increase (decrease) in participants' equity resulting from operations 26,125,076 (680,367)
------------ ------------
From unit transactions:
Sales 1,920,287 2,726,160
Withdrawals (7,464,709) (3,425,130)
------------ ------------
Net decrease in participants' equity resulting from unit transactions (5,544,422) (698,970)
------------ ------------
TOTAL INCREASE (DECREASE) IN PARTICIPANTS' EQUITY 20,580,654 (1,379,337)
Participants' equity, January 1 82,264,430 83,643,767
- ----------------------------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY, DECEMBER 31 $102,845,084 $ 82,264,430
================================================================================================================
See accompanying Notes to Financial Statements
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
================================================================================
ORGANIZATION
Continental Assurance Company Separate Account (B) (Separate Account
(B)) is registered under the Investment Company Act of 1940, as amended, as an
open-end diversified management investment company. Separate Account (B) is part
of Continental Assurance Company (Assurance), an Illinois life insurance company
which is a wholly-owned subsidiary of Continental Casualty Company (Casualty).
Casualty is wholly-owned by CNA Financial Corporation (CNA). Loews Corporation
owns approximately 84% of the outstanding common stock of CNA.
The operations of Assurance include the sale of certain variable annuity
contracts, the proceeds of which are invested in Separate Account (B). Assurance
also provides investment advisory and administrative services to Separate
Account (B) for a fee.
The assets and liabilities of Separate Account (B) are segregated from
those of Assurance.
INVESTMENTS
Investments in securities traded on national securities exchanges are
valued at the last reported sales price on each business day of the year.
Securities not traded on a national exchange are valued at the bid price of
over-the-counter market quotations. Short-term notes are valued at cost plus
accrued discount or interest (amortized cost) which approximates market.
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.
<PAGE>
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. No
loans were outstanding at December 31, 1995 and 1994.
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:
- ----------------------------------------------------------------------------------------------
DECEMBER 31 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
From operations:
Accumulated investment income--net $ 50,528,319 $ 49,605,231
Accumulated net realized gain on investment transactions 67,248,430 62,210,074
Accumulated unrealized gain 31,965,754 14,630,323
Accumulated unrealized loss (523,215) (3,351,416)
------------ ------------
Accumulated income 149,219,288 123,094,212
From unit transactions:
Accumulated proceeds from sale of units, net of withdrawals (46,374,204) (40,829,782)
- ----------------------------------------------------------------------------------------------
TOTAL PARTICIPANTS' EQUITY--NET ASSETS $102,845,084 $ 82,264,430
==============================================================================================
- ----------------------------------------------------------------------------------------------
NOTE 3. INVESTMENTS:
==============================================================================================
NET REALIZED GAIN ON INVESTMENTS
YEAR ENDED DECEMBER 31 1995 1994
- ----------------------------------------------------------------------------------------------
Aggregate proceeds $318,899,683 $574,657,984
Aggregate cost 313,861,327 566,237,129
- ----------------------------------------------------------------------------------------------
Net realized gain $ 5,038,356 $ 8,420,855
==============================================================================================
CHANGE IN UNREALIZED GAIN ON INVESTMENTS
YEAR ENDED DECEMBER 31 1995 1994
- ----------------------------------------------------------------------------------------------
Unrealized gain on investments:
Balance, December 31 $ 31,442,539 $ 11,278,907
Less balance, January 1 11,278,907 21,467,665
- ----------------------------------------------------------------------------------------------
Change in net unrealized gain $ 20,163,632 $(10,188,758)
==============================================================================================
AGGREGATE COST OF SECURITIES PURCHASED
YEAR ENDED DECEMBER 31 1995 1994
- ----------------------------------------------------------------------------------------------
Common stocks $ 35,759,614 $ 31,810,643
Preferred stocks 2,103,588 3,169,213
Bonds 1,763,438 4,815,531
Short-term notes 274,431,387 535,565,058
- ----------------------------------------------------------------------------------------------
Total purchases $314,058,027 $575,360,445
==============================================================================================
</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.
- --------------------------------------------------------------------------------
FEES AND EXPENSES PAID TO ASSURANCE
YEAR ENDED DECEMBER 31 1995 1994
- --------------------------------------------------------------------------------
Investment advisory fees $462,018 $415,070
Service fees 304,932 273,945
-------- --------
Total fees charged to fund income 766,950 689,015
Sales and administrative fees paid by participants 13,563 65,144
- --------------------------------------------------------------------------------
Total $780,513 $754,159
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
================================================================================
The Committee Members and the Participants of
Continental Assurance Company Separate Account (B)
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments as of December 31, 1995, 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, 1995 and
1994, and the related statements of operations and changes in participants'
equity for the years then ended, and the financial highlights for each of the
five years in the period ended December 31, 1995. 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, 1995 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, such 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, 1995 and
1994, the results of its operations, the changes in its participants' equity for
the years then ended, and the 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 14, 1996
11
Continental Assurance Company
Separate Account (B)
The Average Annual Total Return on an investment of $1,000 for one year, five
year and ten year periods ending December 31, 1995.
|------------------------------------------|-----------|----------|----------|
| | 1 Year | 5 Years | 10 Years |
| | 1-1-95 to | 1-1-91 to| 1-1-86 to|
| | 12-31-95 | 12-31-95 | 12-31-95 |
|------------------------------------------|-----------|----------|----------|
|Level Deduction Contract | | | |
| for 403(b) Plans | | | |
|Investment | $1,000| $1,000| $1,000 |
|Less Sales Load (5%) | (50)| (50)| (50) |
|Less Adm Exp (1%) | (10)| (10)| (10) |
| | ----| ----| ---- |
|Net Investment | $940| $940| $940 |
|------------------------------------------|-----------|----------|----------|
| ERV | $1,246.96| $2,024.88|$3,448.63 |
|------------------------------------------|-----------|----------|----------|
|------------------------------------------|-----------|----------|----------|
| Average Annual Total Return | 24.70%| 15.15%| 13.18% |
|------------------------------------------|-----------|----------|----------|
|------------------------------------------|-----------|----------|----------|
|Graded Deduction Contract | | | |
| for 403(b) Plans | | | |
|Investment | $1,000| $1,000| $1,000 |
|Less Sales Load (5%) | (50)| (50)| (50) |
| | ----| ----| ---- |
|Net Investment | $950| $950| $950 |
|Contract fee @ $30/yr | | | |
|------------------------------------------|-----------|----------|----------|
| ERV | $1,230.23| $1,843.04|$2,888.99 |
|------------------------------------------|-----------|----------|----------|
|------------------------------------------|-----------|----------|----------|
| Average Annual Total Return | 23.02%| 13.01%| 11.19% |
|------------------------------------------|-----------|----------|----------|
<PAGE>
|------------------------------------------|-----------|----------|----------|
|HR-10 Plans | | | |
|Investment | $1,000| $1,000| $1,000 |
|Less Sales Load (7%) | (70)| (70)| (70) |
|Less Adm Exp (1.5%) | (15)| (15)| (15) |
| | ----| ----| ---- |
|Net Investment | $915| $915| $915 |
|Acctg fee: $20 1st yr; $10 each add'l yr | | | |
|Accounting withdrawal fee $10 | | | |
|Surrender fee $20 (2%) | | | |
|------------------------------------------|-----------|----------|----------|
| ERV | $1,163.80| $1,857.13|$3,096.57 |
|------------------------------------------|-----------|----------|----------|
|------------------------------------------|-----------|----------|----------|
| Average Annual Total Return | 16.38%| 13.18%| 11.97% |
|------------------------------------------|-----------|----------|----------|
P(1+T)^n=ERV
P = a hypothetical initial payment of $1000
T = Average annual total return
n = numbers of years
ERV = ending redeembable value of a hypothetical $1000 payment made at the
beginning of the one, five and 10-year period, at the end of the one, five, or
10-year period.
<PAGE>
<TABLE>
<CAPTION>
Level Deduction Contract for 403(b) Plans
Ten Year Example
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
12/31/85 3.20 1.0000 1,000.00 6 0 152.75 1,092.75 9.28
12/31/86 3.72 0.1625 1,092.75 0 0 55.81 1,148.56 5.11
12/31/87 3.91 0.0511 1,148.56 0 0 190.94 1,339.50 16.62
12/31/88 4.56 0.1662 1,339.50 0 0 220.31 1,559.81 16.45
12/31/89 5.31 0.1645 1,559.81 0 0 41.13 1,600.94 2.64
12/31/90 5.45 0.0264 1,600.94 0 0 540.50 2,141.44 33.76
12/31/91 7.29 0.3376 2,141.44 0 0 120.44 2,261.88 5.62
12/31/92 7.70 0.0562 2,261.88 0 0 355.44 2,617.31 15.71
12/31/93 8.91 0.1571 2,617.31 0 0 -17.63 2,599.69 -0.67
12/31/94 8.85 -0.0067 2,599.69 0 0 848.94 3,448.63 32.66
12/31/95 11.74 0.3266 3,448.63
end 3,448.63
begin 1,000.00
time 10.00
IRR 13.18%
Five Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
12/31/90 5.45 0.0264 1,000.00 6 0 317.36 1,257.36 25.74
12/31/91 7.29 0.3376 1,257.36 0 0 70.72 1,328.07 5.62
12/31/92 7.70 0.0562 1,328.07 0 0 208.70 1,536.77 15.71
12/31/93 8.91 0.1571 1,536.77 0 0 -10.35 1,526.42 -0.67
12/31/94 8.85 -0.0067 1,526.42 0 0 498.46 2,024.88 32.66
12/31/95 11.74 0.3266 2,024.88
end 2,024.88
begin 1,000.00
time 5.00
IRR 15.15%
One Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
12/31/94 8.85 -0.0067 1,000.00 6 0 306.96 1,246.96 24.70
12/31/95 11.74 0.3266 1,246.96
end 1,246.96
begin 1,000.00
time 1.00
IRR 24.70%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Graded Deduction Contract for 403(b) Plans
Ten Year Example
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
12/31/85 3.20 1.0000 1,000.00 5 30 154.38 1,074.38 7.44
12/31/86 3.72 0.1625 1,074.38 0 30 54.87 1,099.25 2.32
12/31/87 3.91 0.0511 1,099.25 0 30 182.74 1,251.99 13.89
12/31/88 4.56 0.1662 1,251.99 0 30 205.92 1,427.91 14.05
12/31/89 5.31 0.1645 1,427.91 0 30 37.65 1,435.56 0.54
12/31/90 5.45 0.0264 1,435.56 0 30 484.66 1,890.22 31.67
12/31/91 7.29 0.3376 1,890.22 0 30 106.31 1,966.53 4.04
12/31/92 7.70 0.0562 1,966.53 0 30 309.03 2,245.55 14.19
12/31/93 8.91 0.1571 2,245.55 0 30 -15.12 2,200.43 -2.01
12/31/94 8.85 -0.0067 2,200.43 0 30 718.56 2,888.99 31.29
12/31/95 11.74 0.3266 2,888.99
end 2,888.99
begin 1,000.00
time 10.00
IRR 11.19%
Five Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
12/31/90 5.45 0.0264 1,000.00 5 30 320.73 1,240.73 24.07
12/31/91 7.29 0.3376 1,240.73 0 30 69.78 1,280.51 3.21
12/31/92 7.70 0.0562 1,280.51 0 30 201.22 1,451.74 13.37
12/31/93 8.91 0.1571 1,451.74 0 30 -9.78 1,411.96 -2.74
12/31/94 8.85 -0.0067 1,411.96 0 30 461.08 1,843.04 30.53
12/31/95 11.74 0.3266 1,843.04
end 1,843.04
begin 1,000.00
time 5.00
IRR 13.01%
One Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
12/31/94 8.85 -0.0067 1,000.00 5 30 310.23 1,230.23 23.02
12/31/95 11.74 0.3266 1,230.23
end 1,230.23
begin 1,000.00
time 1.00
IRR 23.02%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HR-10 Plans
Ten Year Example
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
12/31/85 3.20 1.0000 1,000.00 8.5 20 148.69 1,043.69 4.37
12/31/86 3.72 0.1625 1,043.69 0 10 53.31 1,086.99 4.15
12/31/87 3.91 0.0511 1,086.99 0 10 180.70 1,257.70 15.70
12/31/88 4.56 0.1662 1,257.70 0 10 206.86 1,454.55 15.65
12/31/89 5.31 0.1645 1,454.55 0 10 38.35 1,482.90 1.95
12/31/90 5.45 0.0264 1,482.90 0 10 500.65 1,973.55 33.09
12/31/91 7.29 0.3376 1,973.55 0 10 111.00 2,074.55 5.12
12/31/92 7.70 0.0562 2,074.55 0 10 326.00 2,390.55 15.23
12/31/93 8.91 0.1571 2,390.55 0 10 -16.10 2,364.45 -1.09
12/31/94 8.85 -0.0067 2,364.45 0 10 772.12 3,126.57 32.23
12/31/95 11.74 0.3266 3,126.57 0 30 3,096.57
end 3,096.57
begin 1,000.00
time 10.00
IRR 11.97%
Five Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
12/31/90 5.45 0.0264 1,000.00 8.5 20 308.92 1,203.92 20.39
12/31/91 7.29 0.3376 1,203.92 0 10 67.71 1,261.63 4.79
12/31/92 7.70 0.0562 1,261.63 0 10 198.26 1,449.88 14.92
12/31/93 8.91 0.1571 1,449.88 0 10 -9.76 1,430.12 -1.36
12/31/94 8.85 -0.0067 1,430.12 0 10 467.01 1,887.13 31.96
12/31/95 11.74 0.3266 1,887.13 0 30 1,857.13
end 1,857.13
begin 1,000.00
time 5.00
IRR 13.18%
One Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
12/31/94 8.85 -0.0067 1,000.00 8.5 20 298.80 1,193.80 19.38
12/31/95 11.74 0.3266 1,193.80 30 1,163.80
end 1,163.80
begin 1,000.00
time 1.00
IRR 16.38%
</TABLE>
<TABLE> <S> <C>
<CAPTION>
<S> <C>
<ARTICLE> 6
<CIK> 0000023971
<NAME> Continental Assurance Company Separate Account B
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-START> Jan-01-1995
<PERIOD-END> Dec-31-1995
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 102,815
<RECEIVABLES> 131
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 102,946
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 101
<TOTAL-LIABILITIES> 101
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 8,763,186
<SHARES-COMMON-PRIOR> 9,298,777
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 31,443
<NET-ASSETS> 102,845
<DIVIDEND-INCOME> 1,103
<INTEREST-INCOME> 587
<OTHER-INCOME> 0
<EXPENSES-NET> 767
<NET-INVESTMENT-INCOME> 923
<REALIZED-GAINS-CURRENT> 5,038
<APPREC-INCREASE-CURRENT> 20,164
<NET-CHANGE-FROM-OPS> 26,125
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 182,269
<NUMBER-OF-SHARES-REDEEMED> 717,860
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 20,581
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 462
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 767
<AVERAGE-NET-ASSETS> 92,189
<PER-SHARE-NAV-BEGIN> 8.847
<PER-SHARE-NII> 0.102
<PER-SHARE-GAIN-APPREC> 2.788
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.737
<EXPENSE-RATIO> 0.008
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
