<PAGE>
- --------------------------------------------------------------------------------
Dear Participant:
- --------------------------------------------------------------------------------
For the six months ending June 30, 1997, Separate Account (B)'s Accumulated
Unit Value increased 15.63% while the dividend-adjusted Standard & Poor's
Composite Index of 500 stocks (S&P 500) increased by 20.67%. The Account's
twelve month gain was 25.29% versus the S&P 500's dividend adjusted return of
34.70%. Although the Account's performance was shy of the large gains set by the
S&P 500, Separate Account (B) outperformed the 22.00% twelve month increase of
the average U.S. stock fund as reported in the Wall Street Journal.
The powerful stock market rally during the first half of 1997 follows strong
double-digit gains registered in 1995 and 1996. If the market continues at this
pace, it will be the only time during the post-World War II era that the S&P 500
has increased by in excess of 10% for three consecutive years. Of course, the
market does not go up in a straight line. The S&P 500 was only slightly positive
at the end of the first quarter, following an increase in interest rates by the
Federal Reserve on March 25. Altogether the market fell by approximately 9%
after the Federal Reserve took action. Rising interest rates create problems for
the equity markets as fixed income returns become more competitive with equity
returns and price/earnings multiples shrink as capitalization rates increase.
When the Federal Reserve did not follow up with additional rate hikes, the
market recovered strongly. The driving forces supporting the current level of
stock prices continue to be solid quarterly earnings gains and the low levels of
reported inflation.
Separate Account (B), as most managed funds, keeps at least a modest cash
reserve to satisfy withdrawals and to take advantage of market opportunities. In
today's interest rate environment, the return on short-term investment funds has
been about 5.50%. To enhance these returns, we have written call options on a
portion of the portfolio. When we write an option, our goal is a minimum monthly
return of 1.5%, or 18% annualized. During the first half of 1997 Separate
Account (B) generated an additional $371 thousand by executing this strategy.
These earnings are consistent with the first half of last year when we generated
approximately $377 thousand from writing call options.
Although the S&P 500 was up strongly in the first half, performance varies
between the constituent groups of the index. Consumer Staples had the largest
gain of 27.2%, and Utilities had the smallest gain of 8.7%. Other strong groups
included Science & Technology and Finance, whereas Consumer Cyclicals and Energy
tended to lag the overall index. We were underweighted in Consumer Staples, but
had no investment in the Utility area. We had slight overweightings in Science &
Technology, Finance and Energy, and were distinctly underweighted in Consumer
Cyclicals.
The market rally has pushed the market's price/earnings ratio to a level
rarely seen since the 1960's. Recently the S&P 500 was trading at 19.5 times the
operating earnings expected over the next four quarters. That compares to a more
comfortable and perhaps a more sustainable level of 16.1 times at the beginning
of the year. The market is trading at these levels even though we are in the
sixth year of an economic recovery. Normally high price/earnings ratios are seen
earlier in the recovery, when earnings are expected to increase at a more rapid
rate and multiples tend to expand. Strong earnings and low inflation have been
two primary factors propelling this market since 1995.
From a long term perspective, it is hard to imagine a better market
environment than we are currently experiencing. If all of the fundamentals --
low inflation, profit growth, and monetary and fiscal policy -- continue to be
positive, then there will probably be no more than a normal correction. There
is, however, little room at this level of market prices for disappointments.
Your investment managers will continue to monitor market conditions and make
portfolio changes that we believe will enhance relative returns.
Thank you for your continued support and participation.
Cordially,
S/LEW H. NATHAN
Lew H. Nathan
Chairman of the Committee
Separate Account (B)
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30
(UNAUDITED) YEAR ENDED DECEMBER 31
----------- ------------------------------------------------------
(Per accumulation unit outstanding during the period) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Value at beginning of period $14.14 $11.74 $8.85 $8.91 $7.70
------ ----- ----- --- ---
Investment income .13 .19 .19 .19 .15
Fees .06 .10 .09 .07 .07
------ ----- ----- --- ---
INVESTMENT INCOME--NET .07 .09 .10 .12 .08
Net gain (loss) on investments 2.14 2.31 2.79 (.18) 1.13
------ ----- ----- --- ---
NET INCREASE (DECREASE) IN PARTICIPANTS' EQUITY
RESULTING FROM OPERATIONS 2.21 2.40 2.89 (.06) 1.21
------ ----- ----- --- ---
VALUE AT END OF PERIOD $16.35 $14.14 $11.74 $8.85 $8.91
====== ===== ===== === ===
Ratio of investment income--
net to average participants' equity 0.9%(a) 0.7% 1.0% 1.3% 1.0%
Ratio of fees to average participants' equity .83%(a) .83% .83% .83% .83%
Portfolio turnover rate 26% 53% 46% 52% 69%
Number of accumulation units outstanding at end of
period 8,761,053 8,502,140 8,763,186 9,298,777 9,385,475
- --------------------------------------------------------------------------------
(a) annualized See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
</TABLE>
COMMITTEE FOR SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
MEMBERS
- --------------------------------------------------------------------------------
<TABLE>
<S><C>
Lew H. Nathan, Chairman Richard T. Fox William W. Tongue
Group Vice President Financial Consultant Professor of Economics
Continental Assurance Company and Finance, Emeritus
University of Illinois at Chicago
Richard W. Dubberke
Vice President and
Portfolio Manager
Continental Assurance Company
Peter J. Wrenn
President
Hudson Technology, Inc.
- -------------------------------------------------------------------------------------------------------------
SECRETARY AUDITORS CUSTODIAN
Lynne Gugenheim Deloitte & Touche LLP Chase Manhattan Trust Company
Vice President and Associate General Counsel Chicago, Illinois of Illinois
Continental Assurance Company Chicago, Illinois
</TABLE>
- --------------------------------------------------------------------------------
This report has been prepared for the information of participants in
Continental Assurance Company Separate Account (B) and is not authorized
for distribution to prospective investors unless preceded or accompanied by an
effective prospectus that includes information regarding Separate Account
(B)'s objectives, policies, management, records, sales commissions and other
information.
- --------------------------------------------------------------------------------
2
<PAGE>
- ----------------------------------------
RECORD OF ACCUMULATION UNIT VALUES
- ----------------------------------------
<TABLE>
<CAPTION>
UNIT
VALUATION MARKET
DATE VALUE
- -------------------------
<S> <C> <C>
1997 June 30 $16.35
1996 December 31 14.14
1995 December 31 11.74
1994 December 31 8.85
1993 December 31 8.91
1992 December 31 7.70
1991 December 31 7.29
1990 December 31 5.45
1989 December 31 5.31
1988 December 31 4.56
1987 December 31 3.91
</TABLE>
The Annuity Unit Values shown at
the right are based on the monthly
increases or decreases in the
accumulation unit values in excess of
an assumed annualized rate of 3 1/2%
and rounded to the nearest cent.
- ----------------------------------------
RECORD OF ANNUITY UNIT VALUES
- ----------------------------------------
<TABLE>
<CAPTION>
UNIT
VALUATION MARKET
DATE VALUE
- -----------------------
<S> <C> <C>
1997 July 1 $5.78
1997 January 1 4.88
1996 January 1 4.36
1995 January 1 3.35
1994 January 1 3.39
1993 January 1 3.14
1992 January 1 2.71
1991 January 1 2.36
1990 January 1 2.40
1989 January 1 2.08
1988 January 1 1.86
</TABLE>
- --------------------------------------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT IN ONE ACCUMULATION UNIT
- --------------------------------------------------------------------------------
Separate Account (B) does not make distributions of investment income and
realized capital gains; therefore, the unit values include
investment income and capital gains. This chart displays the unit value at
December 31 for the past ten years, and June 30, 1997. This period was
one of mixed common stock prices.
The values shown should not be considered representations of values which may
be achieved in the future.
[UNIT VALUE BAR GRAPH]
<TABLE>
<CAPTION>
YEAR UNIT VALUE
<S> <C>
1987 3.91
1988 4.56
1989 5.31
1990 5.45
1991 7.29
1992 7.7
1993 8.91
1994 8.85
1995 11.74
1996 14.14
JUNE 1997 16.35
</TABLE>
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
JUNE 30, 1997
<TABLE>
<CAPTION>
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES VALUE
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS:
AEROSPACE-(2.2%)
United Technologies Corporation 38,200 $ 3,170,600
------------
BEVERAGES-(3.4%)
The Robert Mondavi Corporation* 49,000 2,315,250
PepsiCo Inc. 67,000 2,516,687
------------
4,831,937
------------
BROADCASTING-(1.5%)
Tele-comm Liberty Media Gr-A* 88,875 2,110,781
------------
CHEMICAL-(3.2%)
Minerals Technologies Inc. 47,300 1,773,750
Monsanto Company 65,000 2,799,063
------------
4,572,813
------------
COMPUTER TECHNOLOGY-(5.2%)
First Data Corp. 80,000 3,515,000
Hewlett-Packard Company 69,400 3,886,400
------------
7,401,400
------------
CONTAINER-(1.5%)
Crown Cork & Seal Company, Inc. 40,000 2,137,500
------------
COSMETICS-(3.4%)
The Gillette Company 52,000 4,927,000
------------
DIVERSIFIED-(4.7%)
American Standard Companies, Inc.* 50,000 2,237,500
Corning Inc. 42,700 2,375,187
Thermo Electron Corp.* 61,625 2,118,359
------------
6,731,046
------------
ELECTRONIC COMPONENTS-(6.8%)
Honeywell Inc. 30,000 2,276,250
Molex Incorporated/Class A 116,796 4,073,260
Motorola, Inc. 44,000 3,344,000
------------
9,693,510
------------
ELECTRICAL EQUIPMENT-(2.1%)
General Electric Company 45,000 2,941,875
------------
ENERGY-(4.2%)
The Columbia Gas System, Inc. 35,000 2,283,750
Enron Corp. 90,000 3,673,125
------------
5,956,875
------------
FINANCIAL SERVICES-(1.8%)
American Express Company 35,000 2,607,500
------------
FINANCIAL SERVICES (BANK)-(10.5%)
Banc One Corporation 54,500 2,639,844
Bank United Corp. 60,000 2,280,000
Citicorp 35,500 4,279,969
Nationsbank Corporation 52,200 3,366,900
Norwest Corporation 45,000 2,531,250
------------
15,097,963
------------
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
JUNE 30, 1997
<TABLE>
<CAPTION>
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES VALUE
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS:
FOODS-(1.9%)
CPC International Inc. 28,800 $ 2,658,600
------------
HEALTH CARE-(6.8%)
Cardinal Health, Inc. 64,750 3,706,938
Healthsouth Corp.* 148,000 3,690,750
Medtronic, Inc. 30,000 2,430,000
------------
9,827,688
------------
HOUSEHOLD PRODUCTS-(1.9%)
Procter & Gamble Co. 19,400 2,740,250
------------
INSURANCE-(2.0%)
Travelers/Aetna Property Casualty Corporation 70,000 2,791,250
------------
MACHINERY-(3.7%)
Deere & Company 46,600 2,557,175
Illinois Tool Works, Inc. 56,800 2,836,450
------------
5,393,625
------------
OIL FIELD SERVICES & EQUIPMENT-(3.1%)
Santa Fe International* 45,000 1,530,000
Schlumberger Limited 23,000 2,875,000
------------
4,405,000
------------
OIL & GAS EQUIPMENT-(2.5%)
Camco International Inc. 65,000 3,558,750
------------
PHARMACEUTICAL-(7.2%)
Eli Lilly and Company 25,000 2,732,813
Pfizer Inc. 40,500 4,839,750
Schering-Plough Corporation 60,000 2,872,500
------------
10,445,063
------------
PUBLISHING-(1.5%)
Tribune Company 45,000 2,162,813
------------
RAILROADS-(1.9%)
Burlington Northern Santa Fe 30,212 2,715,304
------------
RETAIL STORES-(1.4%)
The Sports Authority, Inc.* 104,750 2,036,078
------------
SEMICONDUCTOR-(4.4%)
Applied Materials Inc.* 39,000 2,761,688
Intel Corp. 25,000 3,545,312
------------
6,307,000
------------
TELECOMMUNICATIONS-(2.8%)
A T & T Corporation 59,000 2,068,687
Loral Space & Communications* 131,500 1,972,500
------------
4,041,187
------------
TOTAL COMMON STOCKS--(91.6%) 131,263,408
------------
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
JUNE 30, 1997
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS
OR MARKET
(All investments are in securities of unaffiliated issuers) PAR VALUE VALUE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
OPTIONS:
CHEMICAL-(0.0%)
Minerals Technologies Inc. 150 $ (150)
------------
COMPUTER TECHNOLOGY-(0.0%)
Hewlett-Packard Company 54 (608)
------------
SEMICONDUCTOR-(0.0%)
Applied Materials Inc. 100 9,499
Intel Corp. 50 7,562
------------
17,061
------------
TOTAL OPTIONS-(0.0%) 16,303
------------
SHORT-TERM NOTES:
BANKS-(4.6%)
The First National Bank of Chicago Eurodollar Time
Deposit, 6.05%, due 7/01/97 $6,630,000 6,631,114
------------
DIVERSIFIED-(3.5%)
Textron Financial Corp., 5.82%, due 7/24/97 5,000,000 4,981,408
------------
FINANCE-(0.4%)
Pitney Bowes Credit Corporation, 5.57%, due 7/15/97 520,000 518,856
------------
TOTAL SHORT-TERM NOTES-(8.5%) 12,131,378
------------
TOTAL INVESTMENTS-(100.1%) 143,411,089
Cash and receivables less liabilities-(-0.1%) (144,841)
- ---------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY-NET ASSETS-(100.0%) $143,266,248
=============================================================================================
</TABLE>
*Non-income producing security in 1997.
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
6
<PAGE>
STOCK PORTFOLIO CHANGES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 (IN SHARES) INCREASED DECREASED NOW OWNED
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
A T & T Corporation 15,000 - 59,000
American Express Company 15,000 10,000 35,000
American Standard Companies, Inc. 50,000 - 50,000
Applied Materials Inc. 10,000 20,000 39,000
Banc One Corporation 10,000 10,000 54,500
Bank United Corp. 60,000 - 60,000
Boatmen's Bancshares Inc. - 40,000 -
Camco International Inc. 5,000 20,000 65,000
Cardinal Health, Inc. 10,000 15,000 64,750
Citicorp - 5,000 35,500
Cognizant Corp. 25,000 25,000 -
Columbia HCA Healthcare Corp. - 62,500 -
Corning Inc. 42,700 - 42,700
Electronic Data Systems Corporation - 57,500 -
Enron Corp. 10,000 - 90,000
Fluor Corporation - 33,000 -
General Electric Company 22,500 - 45,000
Harman International Industries, Inc. 35,000 35,000 -
Healthsouth Corp. 94,000 40,000 148,000
Hewlett-Packard Company 10,000 4,600 69,400
Honeywell Inc. 30,000 - 30,000
Home Depot Inc. - 38,333 -
Illinois Tool Works, Inc. 28,400 - 56,800
Intel Corp. 15,000 15,000 25,000
Iona Technologies PLC-ADR 10,000 10,000 -
Eli Lilly and Company 40,000 25,000 25,000
Loral Space & Communications 12,500 - 131,500
McDonald's Corporation - 50,000 -
Medtronic, Inc. 30,000 - 30,000
NCR Corporation 2,750 2,750 -
Molex Incorporated/Class A 23,359 - 116,796
Monsanto Company 10,000 - 65,000
Nationsbank Corporation 52,200 - 52,200
Pfizer Inc. - 10,000 40,500
Procter & Gamble Co. - 8,900 19,400
Santa Fe International 45,000 - 45,000
Schering Plough Corporation 40,000 20,000 60,000
Tele-Communications, Inc./Class A - 55,000 -
Tele-comm Liberty Media Gr-A 29,625 - 88,875
Tribune Company 45,000 - 45,000
U. S. Filter Corp. 55,000 55,000 -
- -----------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
- --------------------------------------------------------------------------------
ALLOCATION OF EQUITY INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
JUNE 30 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Technological 23.3% 24.7%
Consumer Staples 19.5 15.3
Financial Services 15.6 9.8
Capital Goods 11.5 3.8
Consumer Services 10.7 15.8
Energy 10.6 7.2
Basic Industries 5.1 5.2
Transportation 2.1 4.2
Consumer Cyclicals 1.6 9.2
Conglomerates -- 4.8
---- ----
100% 100%
---- ----
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST COMMON STOCK HOLDINGS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
MARKET % OF NET
JUNE 30, 1997 VALUE ASSETS
- ----------------------------------------------------------------------------------------
<S> <C> <C>
The Gillette Company $ 4,927,000 3.4%
Pfizer Inc. 4,839,750 3.3
Citicorp 4,279,969 3.0
Molex Incorporated/Class A 4,073,260 2.8
Hewlett-Packard Company 3,886,400 2.7
Cardinal Health, Inc. 3,706,938 2.6
Healthsouth Corp. 3,690,750 2.6
Enron Corp. 3,673,125 2.6
Camco International Inc. 3,558,750 2.5
Intel Corp. 3,545,312 2.5
- ----------------------------------------------------------------------------------------
$40,181,254 28.0%
========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
8
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<CAPTION>
JUNE 30 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities of unaffiliated issuers--Note
1:
Common stocks at market (cost $79,962,552 and
$71,324,249) $131,263,408 $106,703,609
Call options written at market (cost $47,578 and
$14,499) 16,303 9,499
Bonds at market (cost $999,375) - 865,000
Short-term notes at amortized cost (approximates
market) 12,131,378 6,410,752
----------- -----------
TOTAL INVESTMENTS 143,411,089 113,988,860
Cash 682,866 21,329
Dividends receivable--Note 1 85,713 90,102
Interest receivable - 17,688
Receivable for securities sold - 42,386
Receivable from Continental Assurance Company for fund
deposits 97,712 19,665
----------- -----------
TOTAL ASSETS 144,277,380 114,180,030
----------- -----------
LIABILITIES
Fees payable to Continental Assurance Company--Note 4 45,697 36,003
Payable for securities purchased 643,918 35,000
Deferred income call options written 47,578 14,499
Payable to Continental Assurance Company for fund
withdrawals 273,939 312,764
----------- -----------
TOTAL LIABILITIES 1,011,132 398,266
- -----------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY--NET ASSETS (8,761,053 and 8,715,245
units issued and outstanding at
$16.35 and $13.06 per unit)--Note 2 $143,266,248 $113,781,764
=========================================================================================
</TABLE>
<TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<CAPTION>
SIX MONTHS ENDED JUNE 30 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Investment income:
Dividends $ 654,564 $ 555,031
Interest and other 488,170 284,772
---------- ----------
1,142,734 839,803
---------- ----------
Fees (Continental Assurance Company)--Note 4:
Investment advisory fees 322,543 271,392
Service fees 212,879 179,118
---------- ----------
535,422 450,510
---------- ----------
INVESTMENT INCOME--NET 607,312 389,293
---------- ----------
Investment gain--Note 3:
Net realized gain 6,606,049 7,428,145
Net unrealized gain 12,324,602 3,811,944
---------- ----------
NET GAIN ON INVESTMENTS 18,930,651 11,240,089
- ----------------------------------------------------------------------------------------
NET INCREASE IN PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $19,537,963 $11,629,382
========================================================================================
See accompanying Notes to Financial Statements.
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN PARTICIPANTS' EQUITY
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<CAPTION>
SIX MONTHS ENDED JUNE 30 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
From operations:
Investment income--net $ 607,312 $ 389,293
Net realized gain on investments 6,606,049 7,428,145
Net unrealized gain on investments 12,324,602 3,811,944
----------- ----------
Net increase in participants' equity resulting from
operations 19,537,963 11,629,382
----------- ----------
From unit transactions:
Sales 10,285,204 718,953
Withdrawals (6,748,561) (1,411,655)
----------- ----------
Net increase (decrease) in participants' equity
resulting from unit transactions 3,536,643 (692,702)
----------- ----------
TOTAL INCREASE IN PARTICIPANTS' EQUITY 23,074,606 10,936,680
Participants' equity, January 1 120,191,642 102,845,084
- --------------------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY, JUNE 30 $143,266,248 $113,781,764
========================================================================================================
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
================================================================================
ORGANIZATION
Continental Assurance Company Separate Account (B) (Separate Account (B)) is
registered under the Investment Company Act of 1940, as amended, as an open-end
diversified management investment company. Separate Account (B) is part of
Continental Assurance Company (Assurance), an Illinois life insurance company
which is a wholly-owned subsidiary of Continental Casualty Company (Casualty).
Casualty is wholly-owned by CNA Financial Corporation (CNA). Loews Corporation
owns approximately 84% of the outstanding common stock of CNA.
The operations of Assurance include the sale of certain variable annuity
contracts, the proceeds of which are invested in Separate Account (B). Assurance
also provides investment advisory and administrative services to Separate
Account (B) for a fee.
The assets and liabilities of Separate Account (B) are segregated from those
of Assurance.
INVESTMENTS
Investments in securities traded on national securities exchanges are valued
at the last reported sales price on each business day of the year. Securities
not traded on a national exchange are valued at the bid price of
over-the-counter market quotations. Short-term notes are valued at cost plus
accrued discount or interest (amortized cost) which approximates market.
Separate Account (B) invests from time to time in certain derivative
financial instruments to increase investment returns. Financial instruments used
for such purposes include put and call options on stocks. The gross notional
principal amount of these instruments at June 30, 1997 totaled $2,422,000 and
$750,000 at June 30, 1996.
Derivatives are carried at fair value which generally reflects the estimated
amounts that Separate Account (B) would receive or pay upon termination of the
contracts at the reporting date. Dealer quotes are available for all of Separate
Account (B)'s derivatives.
The fair values associated with these instruments are generally affected by
changes in the stock market. The credit risk associated with these instruments
is minimal as all transactions are cleared through security exchanges.
Net realized gains and losses on sales of securities are determined as the
difference between proceeds and cost, using the specific identification method.
There are no differences in cost for financial statement and Federal income tax
purposes.
Security transactions are accounted for on the trade date. Dividend income is
recorded on the ex-dividend date.
<PAGE>
Separate Account (B) may loan securities, up to a maximum of 25% of its net
assets, to brokers under loan agreements which are fully secured by cash or
government securities. Loaned securities are not reported herein as purchases or
sales since Separate Account (B) remains the owner of loaned securities. No
loans were outstanding June 30, 1997 and 1996.
FEDERAL INCOME TAXES
Under existing Federal income tax law, no taxes are payable on net investment
income and net realized capital gains, which are reinvested in Separate Account
(B) and taken into account in determining unit values.
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
NOTE 2. PARTICIPANTS' EQUITY--NET ASSETS:
================================================================================
Participants' equity--net assets consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
JUNE 30 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
From operations:
Accumulated investment income--net $ 51,889,059 $ 50,917,612
Accumulated net realized gain on investment transactions 86,486,118 74,676,575
Accumulated unrealized gain 51,356,282 35,523,994
Accumulated unrealized loss (39,124) (269,510)
------------ ------------
Accumulated income 189,692,335 160,848,671
From unit transactions:
Accumulated proceeds from sale of units, net of
withdrawals (46,426,087) (47,066,907)
- ---------------------------------------------------------------------------------------------------------
TOTAL PARTICIPANTS' EQUITY--NET ASSETS $143,266,248 $113,781,764
=========================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENTS:
================================================================================
<TABLE>
<CAPTION>
NET REALIZED GAIN ON INVESTMENTS
SIX MONTHS ENDED JUNE 30 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Aggregate proceeds $373,481,575 $181,635,609
Aggregate cost 366,875,526 174,207,464
- ---------------------------------------------------------------------------------------------------------
Net realized gain $ 6,606,049 $ 7,428,145
=========================================================================================================
<CAPTION>
CHANGE IN UNREALIZED GAIN ON INVESTMENTS
SIX MONTHS ENDED JUNE 30 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized gain on investments:
Balance, June 30 $ 51,317,158 $ 35,254,483
Less balance, January 1 38,992,556 31,442,539
- ---------------------------------------------------------------------------------------------------------
Change in net unrealized gain $ 12,324,602 $ 3,811,944
=========================================================================================================
<CAPTION>
AGGREGATE COST OF SECURITIES PURCHASED
SIX MONTHS ENDED JUNE 30 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stocks $ 30,834,521 $ 24,205,958
Put options - 3,000
Bonds - 999,375
Short-term notes 346,327,431 156,355,885
- ---------------------------------------------------------------------------------------------------------
Total purchases $377,161,952 $181,564,218
=========================================================================================================
</TABLE>
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11
<PAGE>
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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
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Investment advisory fees $322,543 $271,392
Service fees 212,879 179,118
------- -------
Total fees charged to fund income 535,422 450,510
Sales and administrative fees paid by participants 967 1,589
- -----------------------------------------------------------------------------------------
Total $536,389 $452,099
=========================================================================================
- -----------------------------------------------------------------------------------------
</TABLE>
12
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<PAGE>
[B LOGO]
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
REPORT TO PARTICIPANTS
JUNE 30, 1997
[CNA LOGO]
[CA LOGO]
L 554-921 (06/97) 8/97
