<PAGE> 1
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. 44 [X]
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 24 [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
------------------
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on April 30, 1997 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> 2
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
------------------
CROSS REFERENCE SHEET
DATA IN POST-EFFECTIVE AMENDMENT NO. 44 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
<CAPTION>
LOCATION IN
STATEMENT OF
ITEMS REQUIRED IN PART B OF FORM N-3 ADDITIONAL INFORMATION
------------------------------------ ---------------------------------------
<S> <C>
Cover Page
16. Cover Page.........................................
Table of Contents
17. Table of Contents..................................
Description of the Company and the
18. General Information and History.................... Separate Account*; Investment Advisory
Services; Securities Custodian
Description of the Company and the
19. Investment Objectives and Policies................. Separate Account--Investment Policies
and Restrictions*
Management of the Separate Account
20. Management.........................................
Management--Investment Advisory
21. Investment Advisory and Other Services............. Agreement*; Investment Advisory
Services
Brokerage Allocations
22. Brokerage Allocation...............................
Underwriting; Deductions and Expenses*
23. Purchase and Pricing of Securities Being Offered...
Underwriting
24. Underwriters.......................................
Calculation of Performance Data
25. Calculation of Performance Data....................
Annuity Payments*
26. Annuity Payments...................................
Financial Statements; Financial
27. Financial Statements............................... Statements of the Company
</TABLE>
- - - ---------------
* Indicates a location in the Prospectus rather than in the Statement of
Additional Information.
<PAGE> 3
PROSPECTUS
GROUP
VARIABLE
ANNUITY
CONTRACTS [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, 1997, 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 60680-3572, (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, 1997
<PAGE> 4
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> 5
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.
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> 6
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
403(b) PLAN CONTRACT FOR JOINT RETIREMENT BOARD OF THE RABBINICAL ASSEMBLY OF
AMERICA, ET AL
<TABLE>
<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
Service Fee.......................................... 0.33%
Administration Fee (paid to the Joint Retirement Board
of the Rabbinical Assembly of America, et al)......... 0.35%
-----
Total Other Expenses......................................... 0.68%
Total Annual Expenses.......................................... 1.18%
</TABLE>
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: $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> 7
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. Under the administrative service agreement with the Joint Retirement
Board of the Rabbinical Assembly of America, et al, (the "Rabbinical Board")
effective June 28, 1996, an additional fee of .35% of the Contractholder's net
asset value as of August 1 of that year and each August 1 thereafter, is 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>
<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
Service Fee.......................................... 0.33%
-----
Total Other Expenses.......................................... 0.33%
Total Annual Expenses........................................... 0.83%
</TABLE>
5
<PAGE> 8
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: $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>
<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
Service Fee.......................................... 0.33%
-----
Total Other Expenses.......................................... 0.33%
Total Annual Expenses........................................... 0.83%
</TABLE>
6
<PAGE> 9
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 1997, 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> 10
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
Service Fee.......................................... 0.33%
----
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Total Other Expenses................................. 0.33%
Total Annual Expenses.................................. 0.83%
</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: $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 1994, 1995 or 1996. A $10 exchange fee is charged for
the second and succeeding transfer in most of the HR-10 Plan
8
<PAGE> 11
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. Under the administrative service
agreement with the Rabbinical Board effective June 28, 1996, each Participant
under the Rabbinical Plan is charged a fee of .35% of the Participant's net
asset value as of each August 1. That fee is remitted to the Rabbinical Board
for administrative services performed by it on behalf of Rabbinical Plan
Participants.
9
<PAGE> 12
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 1997, 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
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<PAGE> 13
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
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 by written
direction to the Company. However, effective June 1, 1997, under a proposed
amendment to the Rabbinical Plan Contract, a participant must receive written
consent from the Rabbinical Board prior to providing written direction to the
Company. 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 after 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> 14
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
------------------
CONDENSED FINANCIAL INFORMATION
INCOME AND CAPITAL CHANGES PER ACCUMULATION UNIT
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income(a).............. $ .194 $ .187 $ .189 $ .155 $ .164 $ .185 $ .243 $ .299 $ .126 $ .134
Expenses(b)....................... .107 .085 .073 .068 .060 .052 .044 .042 .036 .036
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
Net investment income............. .087 .102 .116 .087 .104 .133 .199 .257 .090 .098
Capital changes
Net realized and unrealized gain
(loss) on investments......... 2.314 2.788 (.181) 1.124 .307 1.707 (.055) .491 .562 .085
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
Net increase (decrease) in net
asset value................... 2.401 2.890 (.065) 1.211 .411 1.840 .144 .748 .652 .183
Accumulation unit value at the
beginning of the period......... 11.737 8.847 8.912 7.701 7.290 5.450 5.306 4.558 3.906 3.723
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
Accumulation unit value at end of
period.......................... $14.138 $11.737 $8.847 $8.912 $7.701 $7.290 $5.450 $5.306 $4.558 $3.906
======= ======= ====== ====== ====== ====== ====== ====== ====== ======
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)........... .67% 1.00% 1.31% 1.05% 1.44% 2.11% 3.74% 5.08% 2.08% 2.26%
Portfolio turnover rate........... 53% 46% 52% 69% 71% 13% 55% 47% 14% 31%
Number of accumulation units
outstanding at end of period
(000 omitted)................... 8,502 8,763 9,299 9,385 9,935 10,486 11,086 11,983 13,477 15,130
</TABLE>
- - - ---------------
(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.
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
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<PAGE> 15
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.
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<PAGE> 16
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 February 23, 1997. 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 31% of the outstanding common stock of Loews
Corporation as of February 23, 1997. 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> 17
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.
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> 18
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 1996 was 53%, for 1995 was 46%, and for
1994 was 52%. 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> 19
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.
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> 20
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.
2. To approve, annually, agreements providing for sales, investment and
administrative services.
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<PAGE> 21
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: 1996, $12,704; 1995,
$13,563; and 1994, $65,144.
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.
SALES AND ADMINISTRATIVE CHARGES--RABBINICAL PLAN CONTRACT WITH THE RABBINICAL
BOARD
Under the administrative service agreement with the Rabbinical Board,
effective June 28, 1996, each Participant under the Rabbinical Plan is charged a
fee of .35% of the Participant's net asset value as of each August 1. That fee
is 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 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
19
<PAGE> 22
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 1997, 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.
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
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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 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
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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.
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 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.
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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 60680-3572
(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 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.
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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 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.
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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 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 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.
However, effective June 1, 1997, under a proposed amendment to the Rabbinical
Plan Contract, a participant must receive written consent from the Rabbinical
Board prior to providing written direction to the Company. 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 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 discussion
of federal income tax consequences of the receipt of such lump sum payments, see
"Federal Taxes--Federal Tax Treatment of Participants".
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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 or, if later and
the participant so elects, by April 1 of the year following the year in which
the participant retires (a different rule may apply with respect to
distributions made in plan years beginning before January 1, 1997 -- consult
your tax advisor). 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.
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
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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, or, if later and the participant so elects, by
April 1 of the year following the year in which the participant retires (a
different rule may apply with respect to distributions made in plan years
beginning before January 1, 1997--consult your tax advisor).
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 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.
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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.
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, 1997 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, 1996 was $13.629930. The total value of
the participant's account was therefore $204,448.95.
(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, $204,448.95 was therefore divided by $1,000 and multiplied
by the annuity rate of $6.34 to obtain the initial monthly payment, $1,296.21.
(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 $4.883395. This was divided into $1,296.21 to obtain the quantity
265.432143, 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 3, 1997, would be found by
multiplying the number of Annuity Units by the monetary value of an Annuity Unit
on that date. This was $5.200049. The dollar amount of the second payment would
have been 265.432143 times $5.200049 or $1,380.26. 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, $204,448.95, was
therefore divided by $1,000 and multiplied by the annuity rate of $6.34 to
obtain the initial monthly payment, $1,296.21. (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 $4.883395. This was
divided into $1,296.21 to obtain the quantity 265.432143, 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 3, 1997, would be found by multiplying the number of Annuity
Units by the monetary value of an Annuity Unit on that date. This was $5.200049.
The dollar amount of the second payment would have been 265.432143 times
$5.200049 or $1,380.26. 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 later of the year in which he reaches age 70 1/2 or the year
in which he retires) 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 and will
generally cease to be available for years beginning after December 31, 1999. 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 payments required under
the Contract to be made, regardless of the
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participant's death, for a term of years, and 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
$160,000 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.
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
$62,500, (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.
For limitation years beginning prior to January 1, 2000, 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 (except the $5,000 exclusion will not be available in years
beginning after December 31, 1999). 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, five year forward
averaging is not available, but 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
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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.
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 beginning on or after January 1,
2000 which exceeds $160,000 ($800,000 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
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plan. Failure to comply with ERISA may result in exposure of the Contractholder
or Employer to civil and criminal sanctions.
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, 1997, 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.
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 1996 Annual Report to Participants: Balance Sheet;
Statement of Operations; Statement of Changes in Participants' Equity; and
Schedule of Investments. Copies of the 1996 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 60680-3572, (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 and operations of the Company and are not financial statements of the
Separate Account.
38
<PAGE> 41
INDEPENDENT AUDITORS' REPORT
The Committee Members
and Participants of
Continental Assurance Company
Separate Account (B)
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, 1996 and 1995 and for each of the two years in the period ended December 31,
1996, and the related schedule of investments as of December 31, 1996, and have
issued our report dated February 12, 1997; such financial statements, schedule
and report are included in the 1996 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, 1996 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.
Deloitte & Touche LLP
Chicago, Illinois
February 12, 1997
39
<PAGE> 42
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> 43
[B LOGO]
GROUP
Variable
Annuity
Contracts
PROSPECTUS
Dated: April 30, 1997
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
[CNA LOGO]
FOR ALL THE COMMITMENTS YOU MAKE(R)
X557-838LL
<PAGE> 44
STATEMENT OF
ADDITIONAL
INFORMATION
GROUP
VARIABLE [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, 1997. 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 60680-3572, (800) 351-3001, in writing or by
telephone.
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
DATED: APRIL 30, 1997
<PAGE> 45
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> 46
MANAGEMENT OF THE SEPARATE ACCOUNT
OFFICERS AND MEMBERS OF THE COMMITTEE
<TABLE>
<CAPTION>
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*........ 59 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.............. 59 Member of Committee Consultant to 21st Century Environmental Management,
661 Sheridan Road Inc. (environmental recycling company) ("21EMI")
Winnetka, Illinois 60093 since 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.
Lew H. Nathan*.............. 47 Chairman of Committee Group Vice President of the Company and Casualty
CNA Plaza and Member of since January 1996; prior thereto, Vice President of
Chicago, Illinois 60685 Committee the Company and Casualty; chairman of the Committee;
Chairman of the Board of Directors and President of
CIS since October, 1996.
William W. Tongue........... 81 Member of Committee Professor Emeritus of Economics and Finance,
212 Shoreline Drive University of Illinois at Chicago.
Park Ridge, Illinois 60068
Lynne Gugenheim*............ 37 Secretary of Manager of Investment Company Administration for the
CNA Plaza Committee 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.............. 61 Member of Committee President of Hudson Technology, Inc. (tooling and
915 Columbian Avenue manufacturing).
Oak Park, Illinois 60302
</TABLE>
- - - ---------------
* An "interested person" (as defined in Section 2(a)(19) of the 1940 Act), by
virtue of his employment with the Company.
(1) Prior to December 27, 1996 CLE, Inc., a wholly owned indirect subsidiary of
Casualty, owned 63% of the non-voting preferred stock of 21EMI. On December
27, 1996, CLE, Inc. sold all of the 21EMI stock that it owned to a third
party unaffiliated with Casualty. Since December 27, 1996, CLE, Inc. has had
no interest in 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. Nathan has received or will receive any such payments. During
1996, there was no reimbursement payable for expenses incurred by Committee
Members.
3
<PAGE> 47
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 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 1996 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.
COMPENSATION TABLE
<TABLE>
<CAPTION>
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
Lew H. Nathan,
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
</TABLE>
- - - ---------------
* An "interested person" (as defined in Section 2(a)(19) of the 1940 Act) by
virtue of his employment with the Company.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of February 28, 1997, 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 February 23, 1997. 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
4
<PAGE> 48
R. Tisch, President, Co-Chief Executive Officer and a director of CNA Financial
and Loews Corporation, owned, in the aggregate, approximately 31% of the
outstanding common stock of Loews Corporation as of February 23, 1997.
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.
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: 1996, $933,963; 1995, $766,950; and 1994, $689,015. 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
5
<PAGE> 49
for each of the years 1996, 1995 and 1994 were $12,704, $13,563, and $65,144
respectively. The agreement covering sales and administrative services does not
cover the services covered by the Investment Advisory Agreement.
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 above-mentioned
changes in the securities laws. There was no such utilization in 1996, 1995 or
1994.
SECURITIES CUSTODIAN
The custodian of the Separate Account's portfolio securities is The Chase
Manhattan Trust Company of Illinois, 10 South LaSalle Street, Chicago, Illinois
60603.
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 Avenue,
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: 1996, $371,335; 1995, $304,932; and 1994, $237,209.
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
6
<PAGE> 50
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 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 1996.
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>
13.22% AVERAGE RETURN FOR 12.76% AVERAGE RETURN FOR 13.58% AVERAGE RETURN FOR
1 YEAR PERIOD 5 YEAR PERIOD 10 YEAR PERIOD
ENDING ON 12-31-96 ENDING ON 12-31-96 ENDING ON 12-31-96
- - - ------------------------- ------------------------- -------------------------
<S> <C> <C>
$1,132.16 $1,823.26 $3,573.01
</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>
11.42% AVERAGE RETURN FOR 10.21% AVERAGE RETURN FOR 11.53% AVERAGE RETURN FOR
1 YEAR PERIOD 5 YEAR PERIOD 10 YEAR PERIOD
ENDING ON 12-31-96 ENDING ON 12-31-96 ENDING ON 12-31-96
- - - ------------------------- ------------------------- -------------------------
<S> <C> <C>
$1,114.21 $1,625.90 $2,976.83
</TABLE>
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>
5.21% AVERAGE RETURN FOR 10.59% AVERAGE RETURN FOR 12.34% AVERAGE RETURN FOR
1 YEAR PERIOD 5 YEAR PERIOD 10 YEAR PERIOD
ENDING ON 12-31-96 ENDING ON 12-31-96 ENDING ON 12-31-96
- - - ------------------------ ------------------------- -------------------------
<S> <C> <C>
$1,052.05 $1,654.15 $3,200.42
</TABLE>
7
<PAGE> 51
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 1996 Annual Report to Participants: Balance Sheet;
Statement of Operations; Statement of Changes in Participants' Equity; and
Schedule of Investments. Copies of the 1996 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 60680-3572, (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 and operations of the Company and are not financial statements of the
Separate Account.
8
<PAGE> 52
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 a wholly-owned subsidiary of CNA Financial Corporation, an affiliate of
Loews Corporation) as of December 31, 1996 and 1995 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, 1996. 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, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 12, 1997
9
<PAGE> 53
The following consolidated financial statements are those of Continental
Assurance Company 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 and operations of the Company.
CONTINENTAL ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- - - ------------------------------------------------------------------------------------------
December 31
(In thousands of dollars) 1996 1995
- - - ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments--Note 2:
Fixed maturities available-for-sale (cost: $4,785,563
and $4,443,956)........................................ $ 4,822,135 $ 4,686,449
Equity securities available-for-sale (cost: $51,884 and
$42,835)............................................... 44,342 56,699
Mortgage loans and real estate (less accumulated
depreciation: $2,973 and $2,923)....................... 35,654 46,139
Policy loans............................................ 174,403 177,192
Other invested assets................................... 3,316 127,145
Short-term investments.................................. 500,039 390,552
----------- -----------
TOTAL INVESTMENTS 5,579,889 5,484,176
Cash...................................................... 39,210 81,804
Insurance receivables:
Reinsurance receivables................................. 162,245 88,332
Premiums and other insurance receivables................ 856,785 826,020
Less allowance for doubtful accounts.................... (526) (479)
Deferred acquisition costs................................ 769,752 524,619
Accrued investment income................................. 104,895 89,475
Federal income taxes recoverable--Note 7.................. 50,613 23,546
Property and equipment at cost (less accumulated
depreciation: $139,468 and $139,710).................... 121,286 119,409
Other assets.............................................. 133,422 23,751
Separate Account business................................. 6,120,874 5,868,097
- - - ------------------------------------------------------------------------------------------
TOTAL ASSETS $13,938,445 $13,128,750
==========================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Insurance reserves:
Future policy benefits.................................. $ 3,808,356 $ 3,217,450
Claims.................................................. 667,053 635,307
Policyholders' funds.................................... 573,830 542,446
Securities sold under repurchase agreements............... -- 188,211
Participating policyholders' equity....................... 118,478 140,135
Payables for securities purchased......................... 99,831 --
Deferred income taxes..................................... 53,614 79,122
Long-term debt--Note 3.................................... 10,000 10,000
Other liabilities......................................... 437,941 397,470
Separate Account business................................. 6,120,874 5,868,097
----------- -----------
TOTAL LIABILITIES................................... 11,889,977 11,078,238
----------- -----------
Stockholder's equity--Note 5:
Common stock.............................................. 21,831 21,831
Additional paid-in capital................................ 335,666 335,666
Retained earnings......................................... 1,634,308 1,408,891
Net unrealized investment gains--Note 2................... 56,663 284,124
----------- -----------
TOTAL STOCKHOLDER'S EQUITY.......................... 2,048,468 2,050,512
- - - ------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $13,938,445 $13,128,750
==========================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
10
<PAGE> 54
CONTINENTAL ASSURANCE COMPANY
STATEMENT OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
- - - ------------------------------------------------------------------------------------------------------
Year Ended December 31
(In thousands of dollars) 1996 1995 1994
- - - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums--Note 8.......................................... $3,373,797 $3,032,333 $2,678,202
Net investment income--Note 2............................. 400,937 369,671 311,907
Realized investment gains (losses)--Note 2................ 163,571 138,985 (81,184)
Other..................................................... 81,551 63,785 42,461
---------- ---------- ----------
4,019,856 3,604,774 2,951,386
---------- ---------- ----------
Benefits and expenses:
Insurance claims and policyholders' benefits--Note 8...... 3,247,556 2,839,940 2,473,639
Amortization of deferred acquisition costs--Note 1........ 12,036 60,682 48,745
Other operating expenses.................................. 396,620 372,986 338,077
Participating policyholders' interest..................... 12,804 14,837 590
---------- ---------- ----------
3,669,016 3,288,445 2,861,051
---------- ---------- ----------
Income before income tax................................ 350,840 316,329 90,335
Income tax expense--Note 7.................................. 125,423 111,034 32,104
- - - ------------------------------------------------------------------------------------------------------
NET INCOME $ 225,417 $ 205,295 $ 58,231
======================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
11
<PAGE> 55
CONTINENTAL ASSURANCE COMPANY
STATEMENT OF CONSOLIDATED STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------------------------------------------------------
NET
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED INVESTMENT
(IN THOUSANDS OF DOLLARS) STOCK CAPITAL EARNINGS GAIN (LOSSES) TOTAL
- - - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993.......................... $21,831 $335,666 $1,145,365 $ 41,844 $1,544,706
Net income........................................ -- -- 58,231 -- 58,231
Change in net unrealized gains/(losses)--Note 2... -- -- -- (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
Change in net unrealized gains/(losses)--Note 2... -- -- -- 398,033 398,033
------- -------- ---------- --------- ----------
BALANCE, DECEMBER 31, 1995.......................... 21,831 335,666 1,408,891 284,124 2,050,512
Net income........................................ -- -- 225,417 -- 225,417
Change in net unrealized gains/(losses)--Note 2... -- -- -- (227,461) (227,461)
- - - ---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $21,831 $335,666 $1,634,308 $ 56,663 $2,048,468
=====================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
12
<PAGE> 56
CONTINENTAL ASSURANCE COMPANY
STATEMENT OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
- - - -----------------------------------------------------------------------------------------------------
Year Ended December 31
(In thousands of dollars) 1996 1995 1994
- - - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 225,417 $ 205,295 $ 58,231
----------- ----------- -----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Pre-tax realized (gains) losses......................... (163,571) (138,985) 81,184
Participating policyholders' interests.................. (5,472) (3,573) (12,017)
Amortization of bond discount........................... (40,238) (16,180) (5,078)
Depreciation............................................ 25,771 18,863 19,702
Changes in:
Insurance receivables................................. (230,618) (45,342) 16,880
Deferred acquisition costs............................ (245,133) (90,564) (10,702)
Accrued investment income............................. (15,420) (16,938) (26,546)
Federal income taxes.................................. (26,022) 22,525 (39,502)
Deferred income taxes................................. 83,531 17,491 18,658
Insurance reserves.................................... 683,690 495,748 283,143
Other, net............................................ 30,402 37,553 (5,848)
----------- ----------- -----------
TOTAL ADJUSTMENTS............................... 96,920 280,598 319,874
----------- ----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES........ 322,337 485,893 378,105
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturities............................. (7,036,670) (3,862,087) (6,599,390)
Proceeds from fixed maturities:
Sales................................................... 6,583,057 3,292,666 4,809,371
Maturities, calls and redemptions....................... 183,038 187,164 410,989
Purchases of equity securities............................ (99,584) (7,863) (3,458)
Proceeds from sale of equity securities................... 92,012 4,417 2,357
Change in short-term investments.......................... (79,981) 407,345 536,254
Purchases of property and equipment....................... (23,888) (26,288) (9,070)
Change in securities sold under repurchase agreements..... (188,211) (354,915) 441,125
Change in other investments............................... 138,778 (112,684) 11,175
Other..................................................... 99,274 57,153 1,357
----------- ----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES........ (332,175) (415,092) (399,290)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts for investment contracts credited to policyholder
account balances........................................ 11,008 22,639 32,779
Return of policyholder account balances in investment
contracts............................................... (40,662) (34,156) (22,382)
Other..................................................... (3,102) 3,102 --
----------- ----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES........ (32,756) (8,415) 10,397
----------- ----------- -----------
NET CASH FLOWS.................................. (42,594) 62,386 (10,788)
Cash at beginning of year................................... 81,804 19,418 30,206
- - - -----------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 39,210 $ 81,804 $ 19,418
=====================================================================================================
Supplemental disclosures of cash flow information:
Cash paid:
Interest expense........................................ $ 374 $ 403 $ 278
Federal income taxes.................................... 18,893 46,135 53,220
=====================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
13
<PAGE> 57
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.
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. Certain
amounts applicable to prior years have been reclassified to conform to
classifications followed in 1996. All significant intercompany amounts have been
eliminated.
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.
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 11%, 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. Interest crediting rates ranged from 5.6% to 6.6% for the three
years ended December 31, 1996.
Reinsurance--Assurance assumes and cedes insurance with other insurers and
reinsurers and members of various reinsurance pools. Assurance utilizes
reinsurance arrangements to limit its maximum loss, provide greater
diversification of risk and 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
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, premium taxes and
14
<PAGE> 58
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 1.--(CONTINUED):
certain underwriting and policy issuance costs. These 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. Based on 1996 evaluations, the
assumed interest rate spreads were adjusted, the effect of which was to reduce
amortization by approximately $30 million in 1996.
Participating business--Participating business represented 0.5%, 0.6% and
0.9% of gross life insurance in force and 0.7%, 0.8% and 1.0% of premium income
for 1996, 1995 and 1994, 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.
In the statement of consolidated operations, revenues and benefits and
expenses include amounts related to participating policies; the net income or
loss allocated to participating policyholders' equity is a component of
insurance claims and policyholder benefits.
Separate Account business--Assurance issues certain investment and annuity
contracts. 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 on approximately 82% of
the Separate Account business. Substantially all assets of the Separate Accounts
are carried at fair value.
INVESTMENTS
Valuation of investments--Assurance classifies its fixed maturities (bonds)
and its equity securities as available-for-sale, and as such, they are carried
at fair value. 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.
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.
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 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.
Securities sold under repurchase agreements--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.
15
<PAGE> 59
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 1.--(CONTINUED):
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 subject to repurchase agreements are recorded at
their contracted repurchase amounts.
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. Such temporary differences
primarily relate to insurance reserves, investment valuation 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.
16
<PAGE> 60
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 2. INVESTMENTS:
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------------------------------------------
Net Investment Income
Year Ended December 31 1996 1995 1994
(In thousands of dollars)
- - - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
Taxable................................................. $364,620 $327,416 $272,488
Tax exempt.............................................. 29 58 58
Equity securities........................................... 36 68 220
Mortgage loans.............................................. 2,402 3,235 4,336
Real estate................................................. 473 672 670
Policy loans................................................ 9,972 11,350 10,218
Short-term investments...................................... 24,026 18,525 13,830
Security repurchase transactions income..................... 26,764 43,087 44,034
Other....................................................... 1,675 10,849 1,392
-------- -------- --------
429,997 415,260 347,246
Investment expense.......................................... (2,981) (4,103) (2,371)
Security repurchase transaction expenses and fees........... (26,079) (41,486) (32,968)
- - - ---------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $400,937 $369,671 $311,907
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- - - ------------------------------------------------------------------------------------------------------------
ANALYSIS OF INVESTMENT GAINS (LOSSES)
YEAR ENDED DECEMBER 31 1996 1995 1994
(In thousands of dollars)
- - - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized investment gains (losses):
Fixed maturities.......................................... $ 63,129 $ 76,119 $ (81,837)
Equity securities......................................... (161) 749 (29)
Real estate............................................... 1,879 9 --
Other, principally Separate Account business.............. 98,724 62,108 682
--------- --------- ---------
163,571 138,985 (81,184)
Allocated to participating policyholders.................. (14,249) (7,835) 10,877
Income tax (expense) benefit.............................. (55,056) (45,882) 24,446
--------- --------- ---------
NET REALIZED INVESTMENT GAINS (LOSSES) 94,266 85,268 (45,861)
--------- --------- ---------
Change in net unrealized investment gains (losses):
Fixed securities.......................................... (205,921) 424,202 (254,693)
Equity securities......................................... (21,406) 7,048 5,321
Other, principally Separate Account business.............. (126,404) 262,182 (56,164)
--------- --------- ---------
(353,731) 693,432 (305,536)
Allocated to participating policyholders.................. 17,988 (44,150) 32,471
Income tax (expense) benefit.............................. 108,282 (251,249) 117,312
--------- --------- ---------
CHANGE IN NET UNREALIZED INVESTMENT GAINS
(LOSSES)........................................ (227,461) 398,033 (155,753)
- - - ------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED INVESTMENT GAINS
(LOSSES) $(133,195) $ 483,301 $(201,614)
============================================================================================================
</TABLE>
17
<PAGE> 61
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED):
<TABLE>
<CAPTION>
- - - -----------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF PRE-TAX GROSS REALIZED INVESTMENT GAINS
(LOSSES) FOR FIXED MATURITIES AND EQUITY SECURITIES
DECEMBER 31
1996 1995 1994
----------------------- ----------------------- -----------------------
FIXED EQUITY FIXED EQUITY FIXED EQUITY
(In thousands of dollars) MATURITIES SECURITIES MATURITIES SECURITIES MATURITIES SECURITIES
- - - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales................................ $6,583,057 $92,012 $3,292,666 $4,417 $4,809,371 $2,357
---------- ------- ---------- ------ ---------- ------
Gross realized gains............................... 110,763 822 94,053 791 18,629 --
Gross realized losses.............................. (47,634) (983) (17,934) (42) (100,466) (29)
- - - -----------------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAINS (LOSSES) $ 63,129 $ (161) $ 76,119 $ 749 $ (81,837) $ (29)
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- - - -----------------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN STOCKHOLDERS' EQUITY 1996 1995
DECEMBER 31 ------------------------------------ --------------------------------------
(In thousands of dollars) GAINS LOSSES NET GAINS LOSSES NET
- - - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities.................................... $ 78,670 $(42,098) $ 36,572 $244,300 $(1,807) $ 242,493
Equity securities................................... 13,747 (21,289) (7,542) 14,774 (910) 13,864
Other, principally Separate Account business........ 46,684 (847) 45,837 172,310 (69) 172,241
-------- -------- -------- -------- ------- ---------
$139,101 $(64,234) 74,867 $431,384 $(2,786) 428,598
======== ======== ======== =======
Allocated to participating policyholders............ 107 (17,881)
Deferred income tax expense......................... (18,311) (126,593)
- - - ------------------------------------------------------------------------------------------------------------------------------------
NET UNREALIZED INVESTMENT GAINS $ 56,663 $ 284,124
====================================================================================================================================
</TABLE>
18
<PAGE> 62
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED):
<TABLE>
<CAPTION>
- - - --------------------------------------------------------------------------------------------------------------------
SUMMARY OF INVESTMENTS IN FIXED MATURITIES GROSS GROSS
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, 1996
United States Treasury securities and obligations of
government agencies....................................... $2,061,906 $ 17,800 $25,638 $2,054,068
Asset-backed securities..................................... 1,178,354 20,975 13,168 1,186,161
States, municipalities and tax exempt political
subdivisions.............................................. 30 -- -- 30
Corporate securities........................................ 1,229,060 26,311 1,601 1,253,771
Other debt securities....................................... 316,213 13,584 1,691 328,105
---------- -------- ------- ----------
Total fixed maturities.................................. 4,785,563 78,670 42,098 4,822,135
Equity securities........................................... 51,884 13,747 21,289 44,342
- - - ------------------------------------------------------------------------------------------------------------------
Total $4,837,447 $ 92,417 $63,387 $4,866,477
====================================================================================================================
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 tax exempt political
subdivisions.............................................. 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
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- - - --------------------------------------------------------------------------------------------------------------------
1996 1995
SUMMARY OF INVESTMENT 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..................................... $ 110,961 $ 111,387 $ 44,638 $ 45,224
Due after one year through five years....................... 1,831,556 1,813,827 1,747,694 1,776,948
Due after five years through ten years...................... 933,637 940,750 1,007,102 1,067,480
Due after ten years......................................... 731,055 770,010 739,622 843,894
Asset-backed securities not due at a single maturity date... 1,178,354 1,186,161 904,900 952,903
---------- ---------- ---------- ----------
Total $4,785,563 $4,822,135 $4,443,956 $4,686,449
====================================================================================================================
</TABLE>
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, other than equity
securities, in the last twelve months. There are no investments in a single
issuer, other than the U.S. Government, that when aggregated exceed 10% of
stockholder's equity.
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 $194 million at December 31, 1996,
compared to $200 million at December 31, 1995. Net unrealized gains on general
account bonds at
19
<PAGE> 63
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED):
December 31, 1996 include net unrealized gains on high yield securities of $4
million, compared to net unrealized gains of $28 million at December 31, 1995.
At December 31, 1996, total Separate Account cash and investments amounted
to $5.7 billion with taxable fixed maturities representing approximately 81% of
the Separate Accounts' portfolio. Approximately 82% 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 are
matched approximately with the corresponding payout pattern of the liabilities
of the GIC contracts. At December 31, 1996, all fixed maturity securities in the
GIC portfolio were carried at fair value and amounted to $3.9 billion. At
December 31, 1996, net unrealized losses on fixed maturity securities amounted
to approximately $1 million. This compares to $63 million in net unrealized
gains at December 31, 1995. The gross unrealized gains and losses for the fixed
maturity securities portfolio at December 31, 1996, were $55 million and $56
million, respectively, compared to $122 million and $59 million, respectively,
at December 31, 1995.
High yield securities in the guaranteed Separate Account portfolio were
carried at fair value and amounted to $472 million at December 31, 1996,
compared with $944 million at December 31, 1995. Net unrealized losses on high
yield securities held in such Separate Accounts were $6 million and $14 million
at December 31, 1996 and 1995, respectively.
NOTE 3. LONG-TERM DEBT:
<TABLE>
<CAPTION>
- - - ----------------------------------------------------------------------------------
DECEMBER 31
(IN THOUSANDS OF DOLLARS) 1996 1995
- - - ----------------------------------------------------------------------------------
<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>
NOTE 4. 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 that 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,
reinsurance receivables, 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.
20
<PAGE> 64
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 4.--(CONTINUED):
The carrying amounts reported in the balance sheet approximate fair value
for cash, short-term investments, premiums and other insurance receivables,
accrued investment income, 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 table below.
The carrying amounts and estimated fair values of Assurance's other
financial instrument assets and liabilities are listed below:
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------------------------------------------------
1996 1995
----------------------- -----------------------
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--Note 2.................................. $4,822,135 $4,822,135 $4,686,449 $4,686,449
Equity securities--Note 2................................. 44,342 44,342 56,699 56,699
Mortgage loans............................................ 35,654 30,718 43,650 45,826
Policy loans.............................................. 174,403 162,706 177,192 166,561
Other invested assets..................................... 3,316 3,316 127,145 130,307
Separate Account assets:
Fixed maturities.......................................... 4,608,262 4,608,262 5,499,330 5,499,330
Equity securities......................................... 169,183 169,183 242,722 242,722
Other..................................................... 1,343,429 1,343,429 126,045 133,176
FINANCIAL LIABILITIES
Premium deposits and annuity contracts...................... 1,064,540 1,017,622 825,468 776,841
Long-term debt.............................................. 10,000 10,000 10,000 10,000
Separate Account liabilities:
Guaranteed investment contracts........................... 3,989,469 4,011,508 4,315,788 4,455,459
Deferred annuities........................................ 73,010 84,110 74,088 108,232
Variable separate accounts................................ 568,555 568,555 228,017 228,017
Other..................................................... 895,595 895,595 585,803 585,803
===============================================================================================================
</TABLE>
The following methods and assumptions were used by Assurance in estimating
its fair value amounts for financial instruments:
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.
Valuation techniques to determine fair value of other invested assets
and other Separate Account business assets 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.
21
<PAGE> 65
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 4.--(CONTINUED):
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
Account business are based on the quoted market values of the underlying
assets of each variable Separate Account. The fair value of other Separate
Account business liabilities approximates carrying value.
NOTE 5. STATUTORY CAPITAL AND SURPLUS:
Statutory capital and surplus and net income for Assurance are determined
in accordance with accounting practices prescribed or permitted 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. Assurance
has no material permitted accounting practices. Statutory net income was $57.7
million, $30.2 million and $65.1 million in 1996, 1995 and 1994, respectively.
Statutory capital and surplus for Assurance was $1.2 billion at December 31,
1996 and 1995. Statutory capital and surplus of $34.5 million at December 31,
1996 and 1995, was appropriated by the Board of Directors, under regulatory
formula, to fund excess group losses due to epidemic or disaster, if necessary.
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,
1996, approximately $116.0 million was not subject to prior Insurance Department
approval.
NOTE 6. BENEFIT PLANS:
Assurance has no employees as it has contracted with Casualty for services
provided by Casualty employees. As Casualty is a wholly-owned subsidiary of CNA,
all Casualty employees are covered by CNA's benefits plans. The plans are
discussed below.
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.
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.
22
<PAGE> 66
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 6.--(CONTINUED):
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.
Net periodic pension cost allocated to Assurance was $7.5 million in 1996,
$4.8 million in 1995 and $4.6 million in 1994.
The following table sets forth the Plan's funded status and amounts
recognized in CNA's consolidated financial statements at December 31, 1996, 1995
and 1994.
<TABLE>
<CAPTION>
- - - ------------------------------------------------------------------------------------------------------------------
1996* 1995* 1994
YEAR ENDED DECEMBER 31 OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED OVERFUNDED
(In thousands of dollars) PLANS PLANS PLANS PLANS PLANS
- - - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulated Benefit Obligation:
Actuarial present value of accumulated plan
benefits:
Vested........................................ $517,221 $ 622,548 $ 491,052 $ 646,017 $ 376,377
Nonvested..................................... 37,718 32,369 28,346 14,126 39,152
-------- --------- --------- --------- ---------
Accumulated benefit obligation.............. $554,939 $ 654,917 $ 519,398 $ 660,143 $ 415,529
======== ========= ========= ========= =========
Net pension asset (liability):
Projected benefit obligation.................... $777,755 $ 788,333 $ 769,999 $ 809,308 $ 651,418
Plan assets at fair value....................... 701,854 503,623 629,673 496,264 495,492
-------- --------- --------- --------- ---------
Plan assets less than projected benefit
obligation................................ (75,901) (284,710) (140,326) (313,044) (155,926)
Unrecognized net asset at January 1, 1986 being
recognized over 12 years...................... (7,099) -- (12,176) -- (17,253)
Unrecognized prior service costs................ 19,077 77,747 21,445 104,042 20,773
Unrecognized net loss........................... 122,173 (11,793) 164,585 13,508 174,039
-------- --------- --------- --------- ---------
Net pension asset (liability)............... $ 58,250 $(218,756) $ 33,528 $(195,494) $ 21,633
======== ========= ========= ========= =========
Net periodic pension cost:
Service cost--benefits attributed to employee
service during the year..................... $ 36,489 $ 18,825 $ 32,118 $ 11,596 $ 32,354
Interest cost on projected benefit
obligation.................................. 53,549 56,771 51,056 32,760 44,666
Actual return on plan assets.................. (31,106) (29,013) (115,363) (43,432) 11,579
Net amortization and deferral................. (16,059) (5,982) 72,415 19,547 (43,265)
- - - ------------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 42,873 $ 40,601 $ 40,226 $ 20,471 $ 45,334
==================================================================================================================
</TABLE>
* The 1996 and 1995 data includes The Continental Corporation Retirement Plans
which are underfunded.
23
<PAGE> 67
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 6.--(CONTINUED):
Actuarial assumptions are set forth in the following table.
<TABLE>
<CAPTION>
- - - -----------------------------------------------------------------------------------------------------------------
ASSUMPTIONS
DECEMBER 31 1996 1995 1994 1993
- - - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate............................................... 7.50% 7.25% 8.50% 7.25%
Rate of increase in compensation levels*.................... 2.75 2.75 4.00 4.50
Expected long-term rate of return on plan assets............ 7.75-8.50 7.50-8.50 8.75 7.50
- - - -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Excludes age/service related merit and productivity increases.
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 continues to fund benefit costs
principally on the basis of current benefit payments.
Net periodic postretirement benefit cost allocated to Assurance was $2.8
million in 1996, $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, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
- - - ------------------------------------------------------------------------------------------------
POSTRETIREMENT PLANS
DECEMBER 31
(IN THOUSANDS OF DOLLARS) 1996* 1995* 1994
- - - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................. $171,950 $185,507 $ 27,088
Fully eligible, active plan participants.................. 89,009 59,173 53,684
Other active plan participants............................ 88,191 62,540 41,106
-------- -------- --------
Total accumulated postretirement benefit obligation..... 349,150 307,220 121,878
Unrecognized prior service cost............................. (70) -- (11,177)
Unrecognized net gain (loss)................................ (12,215) 7,380 19,702
-------- -------- --------
Accrued postretirement benefit cost..................... $336,865 $314,600 $130,403
======== ======== ========
Net periodic postretirement benefit cost:
Service cost-benefits attributed to employee service
during the year......................................... $ 11,935 $ 5,969 $ 8,603
Interest cost on accumulated post retirement benefit
obligation.............................................. 24,146 17,506 10,342
Amortization.............................................. 374 (941) 655
- - - ------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 36,455 $ 22,534 $ 19,600
================================================================================================
</TABLE>
* The 1996 and 1995 data includes postretirement benefit obligations for The
Continental Corporation retirees.
<TABLE>
<CAPTION>
- - - ------------------------------------------------------------------------------------------------
ASSUMPTIONS
DECEMBER 31 1996 1995 1994
- - - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate:
Assumptions used in determining net periodic benefit
cost:................................................... 7.25% 8.50% 7.25%
Assumptions used in determining the projected benefit
obligation (liability):................................. 7.50% 7.25% 8.50%
- - - ------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 68
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 6.--(CONTINUED):
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 12% in 1996, 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 of CNA as
of December 31, 1996 by $24.2 million and CNA's aggregate net periodic
postretirement benefit cost for 1996 by $3.1 million.
SAVINGS PLAN
Assurance is included in the CNA Employees' Savings Plan which is a
contributory plan that allows employees to make regular contributions of up to
6% of their salary. CNA 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 CNA. CNA contributions allocated to and expensed by Assurance
for the Savings Plan were $2.3 million, $1.9 million and $2.0 million in 1996,
1995 and 1994, respectively.
NOTE 7. 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 domestic life insurance subsidiary
were filing its own separate consolidated return.
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, 1996, the amount in the Shareholder's Surplus
Account was $1,305 million. Another tax memorandum account, defined as the
"Policyholders' Surplus Account," totaled $70 million at December 31, 1996. 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.
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.
25
<PAGE> 69
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 7.--(CONTINUED):
Significant components of Assurance's deferred tax assets and liabilities as of
December 31, 1996 and 1995 are shown in the table below.
<TABLE>
<CAPTION>
- - - -----------------------------------------------------------------------------------
COMPONENTS OF DEFERRED TAX ASSETS AND (LIABILITIES)
DECEMBER 31 1996 1995
(In thousands of dollars)
- - - -----------------------------------------------------------------------------------
<S> <C> <C>
Insurance reserves.......................................... $ 168,704 $ 162,201
Deferred acquisition costs.................................. (217,410) (139,767)
Investment valuation........................................ 21,769 34,469
Net unrealized gains........................................ (18,387) (126,669)
Property and equipment...................................... (11,506) (12,841)
Receivables................................................. (5,955) (5,831)
Postretirement benefits other than pensions................. 6,122 6,122
Other, net.................................................. 3,049 3,194
- - - -----------------------------------------------------------------------------------
Net deferred tax liabilities $ (53,614) $ (79,122)
===================================================================================
</TABLE>
At December 31, 1996, gross deferred tax assets and liabilities amounted to
$200.1 million and $253.7 million, respectively. Gross deferred tax assets and
liabilities, at December 31, 1995, amounted to $209.2 million and $288.3
million, respectively.
Assurance has not established a valuation reserve at December 31, 1996 as
it believes that all deferred tax assets are fully realizable. Assurance has a
history of profitability and anticipates future taxable income sufficient to
support its deferred tax balances at December 31, 1996, including but not
limited to the reversal of existing temporary differences and the implementation
of tax planning strategies, if needed.
Significant components of Assurance's income tax provision are as follows:
<TABLE>
<CAPTION>
- - - ----------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAX
YEAR ENDED DECEMBER 31 1996 1995 1994
(In thousands of dollars)
- - - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense on:
Ordinary income........................................... $ (1,839) $ (61,706) $(56,064)
Realized investment (gains) losses........................ (42,163) (31,666) 42,618
--------- --------- --------
Total current tax expense............................... (44,002) (93,372) (13,446)
Deferred tax expense on:
Ordinary income........................................... (68,529) (3,446) (486)
Realized investment gains................................. (12,892) (14,216) (18,172)
--------- --------- --------
Total deferred tax expense.............................. (81,421) (17,662) (18,658)
- - - ----------------------------------------------------------------------------------------------
Total income tax expense $(125,423) $(111,034) $(32,104)
==============================================================================================
</TABLE>
26
<PAGE> 70
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 7.--(CONTINUED):
A reconciliation of the expected income tax (expense) benefit resulting
from the use of statutory tax rates to the effective income tax (expense)
benefit follows:
<TABLE>
<CAPTION>
- - - -----------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF EXPECTED AND EFFECTIVE TAXES % OF % OF % OF
YEAR ENDED DECEMBER 31 PRETAX PRETAX PRETAX
(In thousands of dollars) 1996 INCOME 1995 INCOME 1994 INCOME
- - - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense on ordinary income at statutory
rates............................................. $ (70,531) (35.0)% $ (64,813) (35.0)% $(56,225) (35.0)%
State taxes......................................... (2,343) (1.2) (1,602) (0.9) (1,502) (0.9)
Other items, net.................................... 2,507 1.3 1,263 0.7 1,177 0.7
--------- ------ --------- ------ -------- ------
Income tax expense on ordinary income............. (70,367) (34.9) (65,152) (35.2) (56,550) (35.2)
--------- ------ --------- ------ -------- ------
Expected tax (expense) benefit on realized
investment gains/losses at statutory rates........ (52,262) (35.0) (45,903) (35.0) 24,607 35.0
Other items, net.................................... (2,794) (1.9) 21 -- (161) (0.2)
--------- ------ --------- ------ -------- ------
Income tax (expense) benefit on realized
investments (gains) losses...................... (55,056) (36.9) (45,882) (35.0) 24,446 34.8
- - - ------------------------------------------------------------------------------------------------------------------------------
Income tax expense $(125,423) (35.7)% $(111,034) (35.1)% $(32,104) (35.5)%
==============================================================================================================================
</TABLE>
NOTE 8. REINSURANCE:
The effects of reinsurance on premium revenues are shown in the following
schedule:
<TABLE>
<CAPTION>
- - - ------------------------------------------------------------------------------------------------------------------
PREMIUMS
YEAR ENDED DECEMBER 31 -------------------------------------- ASSUMED/NET
(In millions of dollars) DIRECT ASSUMED CEDED NET %
- - - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Life...................................................... $ 758.2 $120.7 $ 54.9 $ 824.0 14.7%
Accident and Health....................................... 2,449.1 179.5 78.8 2,549.8 7.0
-------- ------ ------ --------
Total................................................... $3,207.3 $300.2 $133.7 $3,373.8 8.9%
======== ====== ====== ========
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%
==================================================================================================================
</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 are net of reinsurance
recoveries of $89.0 million in 1996, $57.0 million in 1995 and $30.0 million in
1994.
27
<PAGE> 71
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 8.--(CONTINUED):
The impact of reinsurance on life insurance in force is shown in the
following schedule:
<TABLE>
<CAPTION>
- - - ------------------------------------------------------------------------------------------------------------------------
LIFE INSURANCE IN FORCE
------------------------------------------ ASSUMED/NET
(IN MILLIONS OF DOLLARS) DIRECT ASSUMED CEDED NET %
- - - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1996.......................................... $171,715 $65,294 $32,561 $204,448 31.9%
December 31, 1995.......................................... 111,917 54,129 8,578 157,468 34.4
December 31, 1994.......................................... 75,419 52,014 5,953 121,480 42.8
- - - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The ceding of insurance does not discharge primary liability of the
original insurer. Assurance's placement of reinsurance with non-affiliated
carriers entails careful review of the nature of the contract and a thorough
assessment of the reinsurers' credit quality and claim settlement performance.
NOTE 9. RELATED PARTIES:
Assurance is party to the CNA Intercompany Expense Agreement whereby
expenses incurred by CNA and each of its subsidiaries are allocated to the
appropriate company. Expenses of Assurance exclude $28.5 million, $21.3 million
and $24.7 million of general and administrative expenses incurred by Assurance
and allocated to CNA for the years December 31, 1996, 1995 and 1994,
respectively. Assurance had a $67.5 million affiliated payable at December 31,
1996 and a $4.9 million affiliated payable at December 31, 1995 for net cash
settlements owed to a subsidiary in the normal course of operations relating to
pooling and general expense reimbursements. There are no interest charges on
intercompany receivables and payables.
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.
28
<PAGE> 72
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 11. BUSINESS SEGMENTS:
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
(IN THOUSANDS OF DOLLARS) 1996 1995 1994
- - - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Individual................................................ $ 903,871 $ 767,224 $ 591,668
Group..................................................... 2,952,414 2,698,565 2,440,902
Realized gains (losses)................................... 163,571 138,985 (81,184)
----------- ----------- -----------
Total............................................... $ 4,019,856 $ 3,604,774 $ 2,951,386
=========== =========== ===========
INCOME BEFORE INCOME TAX
Individual................................................ $ 119,316 $ 78,323 $ 58,928
Group..................................................... 82,202 106,856 101,714
Realized gains (losses)................................... 149,322 131,150 (70,307)
----------- ----------- -----------
Total............................................... $ 350,840 $ 316,329 $ 90,335
=========== =========== ===========
NET INCOME
Individual................................................ $ 78,017 $ 50,927 $ 38,024
Group..................................................... 53,134 69,100 66,068
Realized gains (losses)................................... 94,266 85,268 (45,861)
----------- ----------- -----------
Total............................................... $ 225,417 $ 205,295 $ 58,231
=========== =========== ===========
ASSETS
Individual................................................ $ 4,688,589 $ 4,068,794 $ 3,733,964
Group..................................................... 9,249,856 9,059,956 8,706,268
----------- ----------- -----------
Total............................................... $13,938,445 $13,128,750 $12,440,232
=========== =========== ===========
</TABLE>
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
insurance segments.
Group revenues include $2.1 billion, $1.9 billion and $1.8 billion in 1996,
1995 and 1994, respectively, under contracts covering U.S. government employees
and their dependents.
29
<PAGE> 73
[B LOGO]
Group
Variable
Annuity
Contracts
STATEMENT OF ADDITIONAL INFORMATION
Dated: April 30, 1997
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
[CNA LOGO]
FOR ALL THE COMMITMENTS YOU MAKE(R)
X557-838LL
<PAGE> 74
PART C
OTHER INFORMATION
ITEM 28. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE NUMBERS
IN 1996
ANNUAL REPORT
TO PARTICIPANTS
---------------
<S> <C> <C>
Financial Statements of Continental Assurance Company
Separate Account (B):
Schedule of Investments......................................... 4
Balance Sheet................................................... 9
Statement of Operations......................................... 9
Statement of Changes in Participants' Equity.................... 10
Notes to Financial Statements................................... 10
Independent Auditors' Report.................................... 12
<CAPTION>
PAGE PAGE NUMBERS
NUMBERS IN STATEMENT
IN OF 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>
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
**
(3) Custodian Agreement
**
(11) Administrative Services Agreement with the Joint Retirement Board of the Rabbinical
Assembly of America, et al.
**
(12) Opinion of Lynne Gugenheim.
(13)(a) Consent of Independent Auditors.
(b) Consent of Counsel (included in Exhibit 12).
**
(14) 1996 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> 75
ITEM 29. DIRECTORS AND OFFICERS OF THE INSURANCE COMPANY.
<TABLE>
<CAPTION>
POSITIONS
AND OFFICES
POSITIONS AND WITH THE
OFFICES WITH SEPARATE
NAME AND PRINCIPAL THE COMPANY ACCOUNT
BUSINESS ADDRESS ------------- -----------
<S> <C> <C>
*Dennis H. Chookaszian........................ Director, Chairman of the Board and None
Chief Executive Officer
*Philip L. Engel.............................. Director and President None
*Michael C. Garner............................ Director and Senior Vice President None
Peter E. Jokiel............................... Director, Senior Vice President and None
Acting Chief Financial Officer
*Jonathan D. Kantor........................... Director, Senior Vice President, None
Secretary and General Counsel
*William J. Sharkey, Jr. ..................... Director, Senior Vice President and None
Chief Marketing Officer
*William J. Adamson, Jr. ..................... Senior Vice President None
*James P. Flood............................... Senior Vice President None
*Bernard L. Hengesbaugh....................... Senior Vice President None
*Carolyn L. Murphy............................ Senior Vice President None
*Adrian M. Tocklin............................ Senior Vice President None
*Jae L. Wittlich.............................. Senior Vice President None
*David W. Wroe................................ Senior Vice President None
</TABLE>
- - - ---------------
* The principal business address is CNA Plaza, Chicago, Illinois 60685.
**
ITEM 31. NUMBER OF CONTRACTOWNERS.
As of April 15, 1997, the Separate Account had 197 qualified
Contractholders.
**
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.
**
ITEM 35. LOCATION OF ACCOUNTS AND RECORDS.
Accounts and records are maintained by the Company at CNA Plaza, Chicago,
Illinois 60685.
**
ITEM 37. UNDERTAKINGS.
**
The registrant hereby represents that the fees and charges deducted under
the Contracts, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred and the risks assumed by the
insurance company.
- - - ---------------
** 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-2
<PAGE> 76
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, 1997.
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
By /s/ LEW H. NATHAN
--------------------------------------
Lew H. Nathan, 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 JONATHAN D. KANTOR 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.
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 DATE
INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ LEW H. NATHAN Chairman of Committee and April 29, 1997
- - - ----------------------------------------------------- Member of Committee of
Lew H. Nathan 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 29, 1997
- - - ----------------------------------------------------- Continental Assurance
Richard W. Dubberke Company Separate
Account (B)
/s/ RICHARD T. FOX Member of Committee of April 29, 1997
- - - ----------------------------------------------------- Continental Assurance
Richard T. Fox Company Separate
Account (B)
/s/ WILLIAM W. TONGUE Member of Committee of April 29, 1997
- - - ----------------------------------------------------- Continental Assurance
William W. Tongue Company Separate
Account (B)
</TABLE>
C-3
<PAGE> 77
<TABLE>
<C> <S> <C>
C-4
</TABLE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ PETER J. WRENN Member of Committee of April 29, 1997
- - - ------------------------------------------------------ Continental Assurance
Peter J. Wrenn Company Separate
Account (B)
/s/ DENNIS H. CHOOKASZIAN Director, Chairman of the Board and April 29, 1997
- - - ------------------------------------------------------ Chief Executive Officer of
Dennis H. Chookaszian Continental Assurance Company
(Principal Executive Officer)
Director and Senior Vice President April 29, 1997
- - - ------------------------------------------------------
Michael C. Garner
/s/ PETER E. JOKIEL Director, Senior Vice President and April 29, 1997
- - - ------------------------------------------------------ Acting Chief Financial Officer of
Peter E. Jokiel Continental Assurance Company
/s/ PHILIP L. ENGEL Director and President April 29, 1997
- - - ------------------------------------------------------ of Continental Assurance
Philip L. Engel Company
/s/ JONATHAN D. KANTOR Director, Senior Vice President, April 29, 1997
- - - ------------------------------------------------------ Secretary and General Counsel of
Jonathan D. Kantor Continental
Assurance Company
/s/ WILLIAM H. SHARKEY, JR. Director and Senior Vice President April 29, 1997
- - - ------------------------------------------------------ of Continental
William H. Sharkey, Jr. Assurance Company
</TABLE>
C-5
<PAGE> 78
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT NAME PAGE
------- ------------ ------------
<C> <S> <C>
(3) Custodian Agreement.........................................
(11) Administrative Services Agreement with the Joint Retirement
Board of the Rabbinical Assembly of America, et al........
(12) Opinion of Lynne Gugenheim..................................
(13)(a) Independent Auditors' Consent...............................
(b) Consent of Counsel (included in Exhibit 12).................
(14) 1996 Annual Report to Participants of the Separate
Account...................................................
(16) Calculation of Performance Data.............................
(17) Financial Data Schedule.....................................
</TABLE>
<PAGE> 1
EXHIBIT 3
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT
DOMESTIC CUSTODY AGREEMENT
To: THE CHASE MANHATTAN TRUST COMPANY OF ILLINOIS
10 South LaSalle
Chicago, Illinois 60603
Gentlemen:
We hereby request you to open and to maintain on your records a Custody
Account in our name as entitlement holder and to credit to such account
financial assets (hereinafter defined) and cash as our securities intermediary
upon the following terms and conditions.
Financial assets credited to the Custody Account shall be segregated at
all times from, and shall not become part of, your proprietary assets.
All such financial assets shall be either maintained by you or
deposited into a securities depository through one or more agents who shall be
banks or trust companies and shall be qualified to act as custodians for
investment companies.
DEFINITIONS. As used herein, the following terms shall have the
meaning hereinafter stated:
"Agreement" means this Domestic Custody Agreement.
"Custody Account" means, each securities account on your records to
which a financial asset and cash are or may be credited pursuant to
this Agreement.
"entitlement holder" means the person on the records of a securities
intermediary as the person having a security entitlement against the
securities intermediary.
"financial assets" means securities. As the context requires a
financial asset means either the interest itself or the means by which
a person's claim to it is evidenced, including a certificated or
uncertificated security, a security certificate, or a securities
entitlement.
"securities" means stocks, bonds, rights, warrants and other negotiable
and non-negotiable paper issued in certificated ("certificated
securities") or book entry form ("uncertificated securities") and
commonly traded or dealt in on securities exchanges or financial
markets, and other obligations of an issuer, or shares,
participations and interests in an issuer recognized in an area in
<PAGE> 2
which it is issued or dealt in as a medium for investment and any other
property as shall be acceptable to you for the Custody Account.
"securities entitlement" means the rights and property interest of a
entitlement holder with respect to a financial asset as set forth in
Part 5 of the Uniform Commercial Code.
"Securities intermediary" means, you, The Chase Manhattan Bank, a
Depository, and any other financial institution which in the ordinary
course of business maintains securities accounts for others and acts in
that capacity.
"Uniform Commercial Code" means the Uniform Commercial Code of the
State of Illinois.
TRANSACTIONS. Unless you receive contrary written instructions from
us, and subject to the provisions of this Agreement, you are authorized:
(a) to receive all interest and dividends payable on the financial
assets credited to the Custody Account and credit such interest and dividends
to the Custody Account (except as hereinafter set forth in the section
entitled "Miscellaneous"):
(b) to credit to the Custody Account all proceeds received from
sales and redemptions of financial assets credited to the Custody Account;
(c) to debit cash from the Custody Account for the cost of
acquiring financial assets for the Custody Account as provided in this
Agreement;
(d) to present financial assets (including coupons) for payment
upon maturity, when called for redemption and when income payments are due;
(e) to exchange financial assets for other financial assets where
the exchange is purely ministerial as, for example, the exchange of financial
assets in temporary form for financial assets in definitive form or the
mandatory exchange of financial assets;
(f) to sell financial assets with fractional interests resulting
from a stock split or a stock dividend and to credit the Custody Account with
the proceeds thereof;
(g) to convert moneys received with respect to financial assets of
foreign issue into United States dollars whenever it is practical to do so
through customary banking channels. In effecting such conversion you may use
any method or agency available to you, including the facilities of your own
divisions, subsidiaries or affiliates. You shall incur
<PAGE> 3
no liability on account of any loss suffered or expense incurred as a result of
such conversion, including, without limitation, losses arising from
fluctuations in exchange rates affecting any such conversion;
(h) to execute in our name, whenever you or your agents deem it
appropriate, such ownership and other certificates as may be required to obtain
payments with respect to, or to effect the sale, transfer or other disposition
of, financial assets in the Custody Account and to guarantee as our signature
the signature so affixed; and
(i) to receive and hold in the Custody Account financial assets
which have transfer limitations imposed upon them by the Securities Act of
1933, as amended.
INSTRUCTIONS. You are hereby authorized to rely and act upon all
written instructions which you believe in good faith to have been given by any
two persons from the following classes of officers ("Authorized Officers") and
individuals of our company:
1. The Chairman of the Board
2. The President
3. Any Vice President
4. The Secretary
5. The Treasurer
6. The Assistant Treasurer or the Assistant Secretary
7. Such other individuals who may be authorized in writing
to you (a copy of which shall be delivered to you) by any two of the above
Authorized Officers named in the Classes 1 to 6 inclusive, both of whom may be
in Class 3 and both of whom may not be in Class 6.
You will be entitled to rely conclusively on any certificate of the
Secretary or an Assistant Secretary of ours concerning the individuals duly
elected to the offices listed above and on any certificate of any two
Authorized Officers in Classes 1 to 6 inclusive authorizing any other
individuals to give instructions (i) that the persons listed on such
certificates and any persons added from time to time by supplemental
certificates of the Secretary or any two Authorized Officers in Classes 1,2,3,5
and 6 hereof, remain so authorized until you have received notice from us of
the termination of the authority of any such individuals, and (ii) that any
supplemental instructions or amendments to this Agreement, signed by any two
Authorized Officers in Classes 1 to 6 inclusive are duly authorized and valid.
We will give you signature lists for all individuals authorized to sign
written instructions to transfer funds from the Custody Account and to sign
written instructions to sell, assign, transfer, deliver, purchase or receive
financial assets for the Custody Account (the "Authorized Representatives").
<PAGE> 4
We may give you original written instructions signed in accordance
with the foregoing provisions. You may also rely and act upon original written
instructions which bear or purport to bear the facsimile signatures of any of
the Authorized Representatives or Authorized Officers regardless of by whom or
by what means the actual or purported facsimile signatures thereon may have been
affixed thereto if such facsimile signatures resemble the facsimile specimens
from time to time furnished to you by any of such Authorized Officers as set
forth above.
In addition, you may rely and act upon written instructions received
by you by facsimile transmission which you believe in good faith to have been
given by Authorized Representatives; or electronic instructions transmitted
electronically through your Geopac data entry system or any similar or successor
electronic instruction system acceptable to you which are transmitted with
proper testing or authentication pursuant to terms and conditions which you may
specify from time to time in writing to us. You shall incur no liability to us
or otherwise as a result of any act or omission by you in accordance with
instructions on which you are authorized to rely pursuant to the provisions of
this paragraph. You shall incur no liability for refraining from acting upon
any instructions which for any reason you, in good faith, are unable to verify
to your own satisfaction.
The term "instruction" whether written or electronic, includes,
without limitation, instructions to sell, assign, transfer, deliver, purchase or
receive for the Custody Account, any and all financial assets or to transfer
funds held in the Custody Account. You may deliver financial assets upon
our instructions as set forth herein only against payment therefore and your
delivery orders shall note that the financial assets are being delivered for our
account, except that you may only accept an original written instruction if the
instruction is to deliver financial assets free of any payment.
Funds may be transferred from the Custody Account only upon our
instructions specifying the amount of payment and the payee: (i) against receipt
of financial assets for our account, by you or your agent in good deliverable
form or registered in our name, or to your account or the account of your agent
at a Depository, such transactions being effected upon written instructions
being signed by two Authorized Representatives or by electronic instruction;
(ii) to a properly authorized account of ours or our affiliate under repetitive
wire instructions we will provide you, signed by any two Authorized
Representatives; (iii) to a properly authorized account of ours or our affiliate
with you or your affiliates signed by any two Authorized Representatives, or
(iv) to any properly authorized account of ours at a brokerage firm which is
specified in an original written instruction signed by any two Authorized
Representatives. A "properly authorized account" as used herein means an
account which has been designated to you in writing, signed by any two
Authorized Officers from Classes 1 through 6 hereof. With respect to
instructions received hereunder to transfer funds from the Custody Account
("payment
4
<PAGE> 5
orders"), we agree to implement any callback or other authentication method or
procedure or security device required by you at any time or from time to time.
In executing or paying a payment order you may rely upon the identifying number
(e.g., Fedwire routing number or account number), or any party as instructed in
the payment order. We assume full responsibility for any inconsistency between
the name and identifying number of any party in payment orders issued to you in
our name by Authorized Representatives.
Unless otherwise expressly provided, all authorizations and
instructions shall continue in full force and effect until canceled or
superseded by subsequent authorizations or instructions received by your
safekeeping account administrator with reasonable opportunity to act thereon.
Your authorization to rely and act upon instructions pursuant to this paragraph
shall be in addition to, and shall not limit, any other authorization which we
may give you regarding our accounts with you.
We agree that, if you require test arrangements, authentication
methods or procedures or other security devices to be used with respect to
instructions which we may give hereunder, thereafter instructions given by us
shall be given and processed in accordance with terms and conditions for the use
of such arrangements, methods or procedures or devices as you may put into
effect and modify from time to time. We shall safeguard any identification
codes or other security devices which you make available to us and agree that we
shall be responsible for any loss, liability or damage incurred by you or by us
as a result of your acting in accordance with instructions from any unauthorized
person using the proper security device.
If you are instructed by us to purchase or sell financial assets for
the Custody Account you may enter purchase and sale orders and confirmations,
and perform any other acts incidental or necessary to the performance thereof
with brokers or dealers or similar agents selected by you, including any broker
or dealer or similar agent affiliated with you, for our account and risk in
accordance with accepted industry practices in the relevant market.
Except as may be provided otherwise in this Agreement, you are
authorized to execute our instructions and take other actions pursuant to this
Agreement in accordance with your customary processing practices for customers
similar to us, and in accordance with such practices, you may retain agents,
including The Chase Manhattan Bank and any other subsidiaries or affiliates of
yours, to perform any of your duties and responsibilities under this Agreement.
In acting upon instructions to deliver financial assets against
payment, you and your agents are authorized, in accordance with customary
securities processing practices, to deliver such financial assets to the
purchaser thereof or dealer therefor (including to an agent for any such
purchaser or dealer) against a receipt, with the
5
<PAGE> 6
expectation of collecting payment from the purchaser, dealer or agent to whom
the financial assets were so delivered before the close of business on the same
day.
REGISTRATION. Unless you receive contrary instructions from us, you
and your agents are authorized to keep financial assets in certificated or
uncertificated form registered in your name or your agents' names or in the
names of your or your agents' nominee or nominees or, where financial assets are
eligible for deposit in a Depository (hereinafter defined), you may, and are
hereby authorized to, use any such Depository and permit the registration of
registered financial assets in the name of its nominee or nominees. We agree to
hold you and the nominees harmless from any liability resting solely on their
status as holders of record. We shall accept the return or delivery of
financial assets of the same class and denomination as those deposited with you
by us or otherwise received by you for the Custody Account, and you need not
retain the particular certificates so deposited or received. "Depository" shall
mean a federal reserve bank and any "clearing corporation" as defined in the
Uniform Commercial Code.
If any of our financial assets registered in your or your agent's name
or the name of your or your agent's nominee or credited to your or your agent's
securities account with a Depository and registered in the name of the
Depository's nominee are called for partial redemption by the issuer of such
financial assets, you are authorized to allot the called portion to the
respective entitlement holders of the financial assets in any manner deemed to
be fair and equitable by you in your sole discretion.
STATEMENTS. You shall notify us daily of each financial asset
transaction effected for the Custody Account and of income on and redemptions of
financial assets credited to the Custody Account, as well as furnish us listing
of such financial assets, at such times upon which you and we mutually agree.
Periodic statements shall be rendered to us as we may reasonably require, but
not less frequently than monthly. You shall at all times maintain proper books
and records that shall identify us as the entitlement holder of such financial
assets. Your books and records relating to the Custody Account shall be
available for inspection upon reasonable notice to you during your regular
business hours by duly authorized officers, employees, or agents of ours, or by
legally authorized regulatory officials who are then in the process of reviewing
our financial affairs upon proof to you of such official status. You agree to
use reasonable efforts to maintain records sufficient to enable us to determine
and verify information concerning the financial assets held for our account.
You agree to furnish, upon our request or the request of the Insurance
Department of any state in which we are licensed to do business, a verification
certificate in sufficient detail to permit adequate identification of the
financial assets belonging to us as entitlement holder and held by you under the
terms of this Agreement. Such certificate shall be signed by a responsible
official of yours and furnished to the requester, with a copy to us if the
requester is the Insurance Department.
6
<PAGE> 7
Unless we shall send to you a written exception or objection to any
statement of account within 60 days of our receipt of such statement from you,
we shall be deemed to have approved such statement. In such event, or where we
have otherwise approved such statement, you shall, to the extent permitted by
law, be released, relieved and discharged with respect to all matters set forth
in such statement or reasonably implied therefrom as though it had been settled
by the decree of a court of competent jurisdiction in an action where we and all
persons having or claiming an interest in the Custody Account were parties.
CORPORATE ACTIONS. You shall send us such proxies (signed in blank,
if issued in your name or the name of your nominee or a nominee of a Depository)
and communications with respect to financial assets in the Custody Account as
call for voting or relate to legal proceedings within a reasonable time after
sufficient copies are received by you for forwarding to customers. In addition,
you shall follow coupon payments, redemptions, exchanges or similar matters with
respect to financial assets in the Custody Account and advise us of rights
issued, tender offers or any other discretionary rights with respect to such
financial assets, in each case, of which your or your agents' central corporate
actions department receives notice from the issuer or from the Depository in
which such financial assets are maintained or notice published in publications
and reported in reporting services routinely used by you or your agents for this
purpose.
CUSTODIAN RESPONSIBILITY. You shall be obligated to indemnify us for
any loss of financial assets received for, and credited to, the Custody Account
resulting from (i) the negligence or willful misconduct of you or your officers,
employees or agents (including any Depository retained by you for such financial
assets) or (ii) the burglary, robbery, holdup, theft or mysterious
disappearance, including loss by damage or destruction. In the event of a loss
of financial assets for which you are required to indemnify us pursuant to the
immediately preceding sentence, at your option, you shall promptly replace such
financial assets (by among other means posting appropriate security or bond with
the issuer(s) of such financial assets and obtaining their reissue) or the value
thereof (determined based upon the market value of the financial assets which
are the subject of such loss as of the date of the discovery of such loss) and
the value of any loss of rights or privileges resulting from the loss of such
financial assets. The foregoing indemnity shall be your exclusive liability to
us for your loss of financial assets held for the Custody Account. In respect of
all your other duties and obligations pursuant to the terms of this Agreement,
you shall be liable to us only to the extent of our general damages suffered or
incurred as a result of any act or omission of you or your officers, employees
or agents which constitutes negligence or willful misconduct. General damage
shall mean only those damages as directly and necessarily result from such act
or omission without reference to any special conditions or circumstances of ours
or of any transaction, whether or not you have been advised of any such special
conditions or circumstances. Anything in this Agreement to the contrary
notwithstanding, in no event shall you be liable to us under this Agreement for
special,
7
<PAGE> 8
indirect or consequential loss or damage of any kind whatsoever, whether or not
you are advised as to the possibility of such loss or damage and regardless of
the form of action any such loss or damage may be claimed.
All collection and receipt of funds or financial assets and all
payment and delivery of funds or financial assets under this Agreement shall be
made by you as our agent, at our risk with respect to our actions or omissions
and those of persons other than you, including, without limitation, the risk
associated with the securities processing practice of delivering financial
assets against a receipt and the risk that the counterparty in any transaction
into which we enter will not transfer funds or financial assets or otherwise
perform in accordance with our expectation of its obligations thereunder
(including, without limitation, where, as a result of such nonperformance, a
Depository reverses, or requires repayment of, any credit given in connection
with the transfer of financial assets).
In no event shall you or your agents be responsible or liable for any
loss due to forces beyond your control, including, but not limited to, acts of
God, flood, fire, nuclear fusion, fission or radiation, war (declared or
undeclared), terrorism, insurrection, revolution, riot, strikes or work
stoppages for any reason, embargo, closure or disruption of any market,
government action, including any laws, ordinances, regulations or the like which
restrict or prohibit the providing of the services contemplated by this
Agreement, inability to obtain equipment or communications facilities or the
error in transmission of information caused by any machines or systems or the
failure of equipment or interruption of communications facilities, and other
causes whether or not of the same class or kind as specifically named above. In
the event that you are unable substantially to perform for any of the reasons
described in the immediately preceding sentence, you shall so notify us as soon
as reasonably practicable.
We understand you maintain for your own benefit Bankers' Blanket Bond
insurance coverage with respect to the financial assets you hold in custody.
Furthermore, such insurance is maintained with standard coverage and subject to
deductibles as is customary for insurance typically maintained by banks which
act as custodians. You will continue to maintain such insurance so long as we
maintain our Custody Account with you. You will provide us with such
information as we may reasonably request, and which you customarily provide to
your custody clients, regarding such insurance coverage you maintain. Should we
learn that you have terminated or changed your insurance coverage with respect
to custodied securities you hold, our sole remedy, if we elect to exercise it,
shall be to terminate this Agreement as set forth herein.
You and your agents shall be responsible for only those duties
expressly stated in this Agreement or expressly contained in instructions to
perform the services described herein given to you pursuant to the provisions of
this Agreement and accepted
8
<PAGE> 9
by you and, without limiting the foregoing, you and your agents shall have no
duty or responsibility:
(a) to supervise the investment of, or make recommendations with
respect to the purchase, retention or sale of, financial assets relating to
the Custody Account, or to maintain any insurance on financial assets in
the Custody Account for our benefit;
(b) with regard to any financial assets in the Custody Account as to
which a default in the payment of principal or interest has occurred, to
give notice of default, make demand for payment or take any other action
with respect to such default;
(c) except as otherwise specifically provided in this section under
the heading "Custodian Responsibility", for any act or omission, or for the
solvency or insolvency, or notice to us of the solvency or insolvency, of
any broker or agent which is selected by you with reasonable care or by us
or any other person to effect any transaction for the Custody Account or to
perform any service under this Agreement;
(d) to evaluate, or report to us regarding, the financial condition
of any person, firm or corporation to which you deliver financial assets or
funds pursuant to this Agreement;
(e) for any loss occasioned by delay in the actual receipt of notice
by you of any payment, redemption or other transaction in respect to which
you and your agents are authorized to take some action pursuant to this
Agreement; or
(f) for any errors or omissions made by any securities pricing
services used by you or your agent to value financial assets credited to
the Custody Account as part of any service subscribed to by us from you.
SETTLEMENTS. We agree with you that all credits of financial assets
and proceeds by you to the Custody Account on the settlement or payable date
shall be provisional when made an you shall be entitled to reverse any such
credits subject to actual receipt or collection of immediately available funds.
We shall have sufficient immediately available funds each day in the
Custody Account to pay for the settlement of all financial assets delivered
against payment to you and your agents and credited to the Custody Account.
Should we fail to have sufficient immediately available funds in the Custody
Account to settle these deliveries of financial assets pursuant to the preceding
sentence (a "Deficit"), you, in your sole discretion, may
9
<PAGE> 10
elect (i) to reject the settlement of any or all of the financial assets
delivered to you that day to the Custody Account, (ii) to settle the deliveries
on our behalf and debit the Custody Account (A) for the amount of such Deficit
and (B) for the amount of the funding or other cost or expense incurred or
sustained by you for our failure to have sufficient immediately available funds
in the Custody Account by the applicable settlement deadline for you, or (iii)
to reverse the posting of the financial assets credited to the Custody Account.
You and your agents shall have the right upon 48 hours notice to us,
to reverse any erroneous entries or provisional credit entries for cash to the
Custody Account retroactively to the date upon which the correct entry, or no
entry, should have been made.
The foregoing rights are in addition to and not in limitation of any
other rights or remedies available to you under this Agreement or otherwise. Any
advances made by you or your agents to us in connection with the purchase, sale,
redemption, transfer or other designation of financial assets or in connection
with disbursements of funds to any party, which create or result in an overdraft
in the Custody Account shall be deemed a loan to us, payable on demand, and
subject to the terms of a netting agreement we may have with you, bear interest
on the amount of the loan each day that the loan remains unpaid at The Chase
Manhattan Bank's prime rate in effect as announced by it from time to time, plus
one percent (unless another rate has been separately agreed upon between you and
us) plus the cost of any required reserves. If you or your agents determine
that daylight overdraft charges from the Federal Reserve Bank incurred by you or
your agents, and relating to transactions effected for custody accounts
maintained by you or them, will be charged to custody account clients, you agree
to give us 30 days prior notice, and we agree to bear the portion of any such
overdraft charges allocated to transactions effected for the Custody Account.
No prior action or course of dealing on the part of you or your agents
with respect to the settlement of financial assets transactions on our behalf
shall be used by or give rise to any claim or action by us against you or your
agents for your or their refusal to pay or settle for a securities transaction
we have not timely funded as required herein.
RESPONSIBLE AS PRINCIPAL. We agree that we shall be responsible to
you as a principal for all of our obligations to you arising under or in
connection with this Agreement, notwithstanding that we may be acting on behalf
of other persons, and we warrant our authority to deposit in the Custody Account
any financial assets and funds which you or your agents receive therefor and to
give instructions relative thereto. We further agree that you shall not be
subject to, nor shall your rights and obligations with respect to this Agreement
and the Custody Account be affected by, any agreement between us and any such
person.
10
<PAGE> 11
CREDITING AND DEBITING PROCEDURES. With respect to all transactions
for the Custody Account, including, without limitation, dividend and interest
payments and sales and redemptions of securities, availability of funds credited
to the Custody Account shall be based on the type of funds used in the trade
settlement or payment, including, but not limited to, same day availability for
federal or same day funds and next business day availability for clearing house
or next day funds. Furthermore, with respect to all purchases and sales of
financial assets for the Custody Account, the proceeds from the sale of
financial assets shall be credited to the Custody Account on the date proceeds
are received by you and the cost of financial assets purchased shall be debited
to the Custody Account on the date securities are received by you, unless we
request your contractual settlement service for the Custody Account in which
case the following provisions shall apply with respect to the delivery and
receipt of financial assets for the Custody Account for those financial assets
and transactions as to which you customarily offer this service.
(a) When we instruct you to deliver or receive financial assets, on
the contractual settlement date you shall credit the Custody Account with the
expected proceeds of the transaction and debit the Custody Account for the
financial assets which we have instructed you to deliver, in the case of
deliveries, and debit the Custody Account for the cost of the financial assets
which we have instructed you to receive and credit the Custody Account with such
financial assets, in the case of receives. These credits and debits are
provisional accounting entries which you shall reverse on our written
instructions and which you may reverse, even in the absence of instructions from
us, if the transaction with respect to which they were made fails to settle
within a reasonable period, determined by you in your discretion, after the
contractual settlement date, except that if you deliver financial assets which
are returned by the recipient thereof, you may reverse such credits and debits
at any time. You have no obligation to use this crediting and debiting
procedure with respect to a delivery of financial assets if we do not have
actually in our account sufficient financial assets to make the delivery.
(b) As with other transactions processed by you, your responsibility
with respect to transactions for which you use this crediting and debiting
procedure shall be governed by the provisions of this Custody Agreement,
including the section headed "Custodian Responsibility". We agree that your
using this procedure is not an assurance by you that the transaction will
actually settle on the contractual settlement date and does not impose any
additional responsibility on you with respect to the transaction. Without
limiting your right to reverse credits and debits described above, the account
statements which you furnish to us shall reflect transactions as to which you
use this procedure as if they had actually settled on the contractual
settlement date, unless prior to the date to which the statement relates, you
have reversed such credits and debits.
(c) We agree that you may terminate this contractual settlement
service to us at any time and for any reason.
11
<PAGE> 12
With respect to financial assets or transactions as to which you do not
customarily offer this service, you shall (i) in the case of deliveries of
financial assets, credit the proceeds of the transaction to the Custody Account
on the date they are received by you and debit the financial assets from the
Custody Account on the date they are delivered by you, and (ii) in the case of
financial assets received, debit the Custody Account for the cost of such
financial assets and credit the Custody Account with such financial assets on
the date the financial assets are received by you.
TAXES. Unless we have certified to you our U.S. tax identification
number as provided for below, we shall deliver promptly to you with respect to
each Custody Account established under this Agreement, two duly completed and
executed copies of the proper United States Internal Revenue Service forms: (i)
Form W-9, if we are a U.S. citizen or resident person; and (ii) if we are a
nonresident person, Form 1001, Form 4224, Form W-8 or Form 8709 (as
applicable), certifying our status as a nonresident person, and that we are
entitled to receive United States source payments under or in connection with
this Agreement without deduction as withholding or at a reduced rate of
withholding for United States federal income taxes. We agree to provide duly
executed and completed updates of such form(s) (or successor applicable
forms), on or before the date that such form(s) expire or become obsolete or
after the occurrence of an event requiring a change in the most recent form
previously delivered by us to you. We further agree to pay, indemnify, and
hold you and your agents harmless from and against any and all liabilities,
penalties, interest or additions to tax with respect to, or resulting from,
any delay in, or failure by, you or them (i) to pay, withhold or report any
Federal, state or foreign taxes imposed on, or in respect of, the property held
in the Custody Account, or this Agreement, or (ii) to report interest, dividend
or other income paid or credited to the Custody Account, whether such failure
or delay by you to pay, withhold or report tax or income is a result of (x) our
failure to comply with the terms of this sub-paragraph, or (y) your own acts or
omissions; provided, however, we shall not be liable to you for any penalty or
additions to tax due as a result of your or your agents failure to pay or
withhold tax or to report to us interest, dividend or other income paid or
credited to the Custody Account solely as a result of your or their negligent
acts or omissions.
We hereby certify that 36-0947200 is our correct tax identification
number.
OTHER ACCOUNTS. From time to time we may instruct you to open and
maintain more than one Custody Account for us. Unless we and you otherwise
expressly agree, such accounts will be governed by the provisions of this
Agreement.
FEES, INDEMNIFICATION. We agree to pay you compensation for your
services pursuant to this Agreement at the fees of which you shall notify us
from time to time. Notwithstanding the preceding sentence, you agree that all
fees related to the
12
<PAGE> 13
Custody Account shall remain fixed for a period of three years, beginning
November 1, 1996. All such compensation shall be paid by us within 30 days from
our receipt of your invoice. We also agree to hold you and your officers,
employees and agents harmless from, and to indemnify and reimburse you and them
for, all claims, liabilities, losses, damages and expenses (including
out-of-pocket and incidental expenses and legal fees) incurred by you or them
in connection with or relating to the Custody Account or your acting under this
Agreement, provided that you or they, as the case may be, have not acted with
negligence or willful misconduct with respect to the events resulting in such
claims, liabilities, losses, damages or expenses.
You shall provide us with an itemized invoice for your services at the end
of each month until such time as you and we agree to a quarterly invoice. You
will mail such invoices until further notice from us to the following address:
Asset Management
CNA Plaza 23-South
Chicago, Illinois 60685
SET-OFF. You may, without prior notice to us, setoff any sums held for us
or standing to the credit of any of our cash accounts with you or your
affiliate, The Chase Manhattan Bank, in or towards the satisfaction of any
amounts advanced by you to us or on our behalf in respect of financial assets
transferred from or credited to our Custody Accounts under this Agreement,
notwithstanding that the accounts may be maintained at different branches of
yours and your affiliate and may not be expressed in the same currency.
TERMINATION. Either party may terminate this Agreement at any time upon
thirty days written notice. Our obligations pursuant to the paragraphs under
the headings "Registration", "Settlements", "Liens", "Fees, Indemnification"
and "Taxes" shall survive the termination of this Agreement.
NOTICES. Notices with respect to termination, any disputes hereunder,
specification of Authorized Officers and terms and conditions for instructions
required hereunder shall be in writing, and shall be deemed to have been duly
given if delivered personally, by courier service or by mail, postage prepaid,
to the following addresses (or to such other address as either party hereto
may from time to time designate by notice duly given in accordance with this
paragraph):
To us at: Secretary
Continental Assurance Company Separate Account B
CNA Plaza - 23 South
13
<PAGE> 14
Chicago, Illinois 60685
OTHER COMMUNICATIONS. You should send us other communications to the
following addresses:
Monthly Statements:
Investment Accounting
CNA Plaza - 23 South
Chicago, Illinois 60685
Periodic Asset Lists:
Securities Handling
CNA Plaza - 23 South
Chicago, Illinois 60685
Annual Reports, Proxies and Other Materials:
Asset Management/Investments
CNA Plaza - 23 South
Chicago, Illinois 60685
To you, to the attention of the individual designated by you as the
safekeeping account administrator for our account, at:
The Chase Manhattan Trust Company of Illinois
c/o The Chase Manhattan Bank
Worldwide Insurance Securities Services
3 Chase MetroTech Center, 6th Floor
Brooklyn, New York 11245
with a copy with respect to any termination or disputes, only to:
The Chase Manhattan Trust Company of Illinois
Ten South LaSalle Street
Suite 2300
Chicago, Illinois 60603
GOVERNING LAW, SUCCESSORS AND ASSIGNS, HEADINGS. This Agreement shall be
governed by and construed in accordance with the laws of the State of Illinois,
with regard to laws as to conflicts of laws, and shall be binding on our and
your
14
<PAGE> 15
respective successors and assigns. The headings of the paragraphs hereof are
included for convenience of reference only and do not form a part of this
Agreement.
PRIOR PROPOSALS. This Agreement (including any Riders relating to
additional services in respect of the Custody Account we may request of you)
shall contain the complete agreement of the parties hereto with respect to the
Custody Account (except as may be expressly provided to the contrary herein)
and supersedes and replaces any previously made proposals, representations,
warranties or agreements with respect thereto by either or both of the parties
hereto. This Agreement shall become effective upon execution hereof by us and
acceptance by you.
SEPARABILITY. Any provisions of this Agreement which may be determined by
competent authority to be prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other
jurisdiction.
RESERVATION OF RIGHT. You shall have the right not to accept for deposit
to the Custody Account any financial assets which are in a form or condition
which you, in your sole discretion, determine not to be suitable for the
services you provide under this Agreement.
Your rights and remedies under this Agreement are in addition to, and not
in limitation of, any other rights and remedied available to you under
applicable law.
ADDITIONAL DUTIES. If we shall ask you to perform duties or
responsibilities not specifically set forth in this Agreement and you choose to
perform such additional duties or responsibilities, you shall use reasonable
care and you shall be entitled to all the protective provisions (including but
not limited to limitation of liability and indemnification) set forth herein.
COUNTERPARTS. This Agreement may be executed in several counterparts each
of which shall be deemed to be an original and together shall constitute one
and the same agreement.
MISCELLANEOUS. You will send to us all reports you receive from a
Depository or the Federal Reserve book-entry system concerning their respective
systems of internal accounting control. Upon our request, you will send the
annual report (SAS 70 Report) prepared by your external auditors or your
systems of internal accounting control of custodied financial assets.
15
<PAGE> 16
You are not authorized to disclose, and will not disclose our name, address
or securities position to a requester of such information, except where you or
your subcustodian, The Chase Manhattan Bank, (a) are required to do so by our
regulator or a regulator of yours, or by a subpoena or other order from a court
of competent jurisdiction, or (b) you receive explicit approval from any one of
the individuals identified in the clauses 1 to 6 in the instructions section of
this Agreement.
This Agreement shall be effective as of November 26, 1996.
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
By: /s/ Lew H. Nathan
-------------------------------
Lew H. Nathan
Title: Chairman
By: /s/ Lynne Gugenheim
-------------------------------
Lynne Gugenheim
Title: Secretary
Accepted by:
THE CHASE MANHATTAN TRUST COMPANY OF ILLINOIS
By: /s/ Barbara Barrett
---------------------------------
Title: Vice President
---------------------------------
16
<PAGE> 1
EXHIBIT 11
ADMINISTRATIVE SERVICES AGREEMENT
This Agreement dated this 28th day of June 1996 is by and between Continental
Assurance Company on behalf of its Separate Account (B) (herein called
"Company"), an Investment Company under the Investment Company Act of 1940, and
the Joint Retirement Board of the Rabbinical Assembly of America, et al (herein
called "Joint Retirement Board"), a non-profit organization.
WITNESSETH:
WHEREAS, the Company issues certain group annuity products through its Separate
Account (B);
WHEREAS, the Joint Retirement Board is a contractholder of Group Annuity
products issued by the Company's Separate Account (B) under an Agreement
identified as GP-261-A-2 effective as of September 1, 1968 ("Group Annuity
Contract");
WHEREAS, certain individuals have an interest in the Separate Account by reason
of purchase payments made by such persons pursuant to the Group Annuity
Contract ("Participants");
WHEREAS, the Company has the right to charge Participants for administrative
services relating to contracts such as the Group Annuity Contract;
WHEREAS, the Company has reserved the right in the Prospectus to increase the
rate of deductions to Participants for administrative expenses; and
WHEREAS, Joint Retirement Board and the Company have agreed that the Joint
Retirement Board will perform certain of these administrative services relating
to the Group Annuity Contract on behalf of the Company for the benefit of
participants.
NOW, THEREFORE;
In consideration of the agreements set forth below and other good and valuable
consideration, the receipt of which is hereby acknowledged, Company and Joint
Retirement Board hereby agree as follows:
1. Appointment and Scope of Work.
The Company hereby appoints the Joint Retirement Board, and the Joint
Retirement Board hereby accepts the appointment, effective as of August 1, 1996
as provider of the administrative services listed in Annex A relating to the
Group Annuity Contract on the terms and conditions contained herein. The
duties listed in Annex A may be amended periodically in writing by mutual
agreement of the Company and the Joint Retirement Board.
<PAGE> 2
2. Fee Schedule.
For all of Joint Retirement Board's services to Participant's hereunder,
the Company agrees to pay to the Joint Retirement Board fees out of each
Participant's Net Asset Value(1) as follows:
2.1 The Joint Retirement Board shall be entitled to administrative
fees commencing August 1, 1996, calculated and payable annually at a
rate of 35 basis points of the Net Asset Value of the account of each
participant under the Group Annuity Contract at each August 1.
2.2 The Company shall furnish to the Joint Retirement Board a
statement setting forth the computation of the annual administrative
fees promptly following each August 1. The total annual fees shall be
due and payable within 30 calendar days after each August 1.
2.3 Expenses arising in connection with the Joint Retirement Board's
services to the Company under this Agreement shall be the
responsibility of the Joint Retirement Board.
3. Scope of Liabilities.
3.1 The Joint Retirement Board shall be liable to the Company for any loss,
damage, expense or claim occasioned by any negligent act or omission,
whether by the Joint Retirement Board or its agent, in connection with the
performance of the Joint Retirement Board's services hereunder. The Joint
Retirement Board is responsible for compliance, by the Joint Retirement
Board or its agents, with all applicable laws, including the Insurance Code
of the State of Illinois and applicable securities laws.
4. Independent Contractor.
For all purposes of this Agreement, the Joint Retirement Board shall be an
independent contractor and not an employee or dependent agent of the
Company; nor shall anything herein be construed as making the Company a
partner or co-venturer with the Joint Retirement Board or any of its
associated persons or other Companies. Except as specifically provided in
this Agreement, the Joint Retirement Board shall not have any authority to
bind, obligate or represent the Company.
5. Termination.
This Agreement shall terminate effective upon the Joint Retirement Board or
the Company receiving from the other written notice of termination at least
30 days prior to the termination date. Such termination shall be without
payment of any penalty. All fees otherwise payable by the Company to the
Joint Retirement Board shall be due and payable as of the date of
termination in accordance with the Fees described in Sections 5.1 and 5.2
of this Agreement.
---------------
(1) "Net Asset Value" of each participant's account shall be equal to the
value of the Accumulation Unit multiplied by the number of
Accumulation Units as of the Valuation Date. For purposes of the
calculation of the administrative fees under this Agreement, the Valuation
Date is each August 1. "Accumulation Unit" has the meaning as defined in
the Separate Account (B) current Prospectus.
<PAGE> 3
6. Assignment.
This Agreement may not be assigned, nor may any obligations hereunder be
transferred or delegated, by either party without the prior written consent
of the other.
7. Modifications, Notices, Waiver.
Notices shall be deemed to be effective upon receipt if personally delivered (or
when delivery is refused) or when mailed if properly addressed and sent via U.S.
certified or registered mail or by express delivery service or by confirmed
telecopy, to the Company at Continental Assurance Company, CNA Plaza - 41 South,
Chicago, IL 60685 Attention: Treasurer; or to the Joint Retirement Board at
Seven Penn Plaza, Suite 720, New York, NY 10001 Attention: Nina Rone,
Administrator.
Except as otherwise expressly provided herein, this Agreement shall not be
amended, nor shall any provision of this Agreement be considered modified or
waived, unless evidence by a writing signed by the party to be charged with such
amendment, waiver or notification.
8. Governing Law.
This Agreement shall be governed by, and construed in accordance with, the
laws of Illinois applicable to contracts made and to be performed entirely
therein.
Accepted and agreed:
Joint Retirement Board of the Rabbinical Assembly of America, et al
By: Michael B. Greenbaum
----------------------------------
Title: Chairman of the Board
-------------------------------
Continental Assurance Company
on behalf of its Seperate Account (B)
By: /s/ Donald C. Rycroft
----------------------------------
Donald C. Rycroft
Group Vice President and Treasurer
<PAGE> 4
Annex A
Administrative Services
The Joint Retirement Board will perform the following services for the
participants under the Group Annuity Contract to the reasonable satisfaction
of the Company:
Handling mail and telephone inquiries regarding tax considerations
Producing and disseminating educational materials regarding tax considerations
Producing and disseminating educational materials regarding general investment
considerations
Calculating Required minimum distribution amounts
Checking of statements to monitor correct crediting of contributions
Checking of statements to monitor correct crediting or debiting of transfers
Checking of statements to monitor correct debiting of withdrawals
Testing interest credited and fees debited for accuracy
<PAGE> 1
EXHIBIT 12
[CNA INSURANCE COMPANIES LETTERHEAD]
April 30, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Post-Effective Amendment No. 44 to the Registration
Statement under the Securities Act of 1933 (File No. 2-25483)
and Amendment No.24 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
[CNA LOGO]
<PAGE> 2
Securities and Exchange Commission
April 30, 1997
Page 2
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
<PAGE> 1
EXHIBIT 13(a)
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. 44 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 a wholly-
owned subsidiary of CNA Financial Corporation, an affiliate of Loews
Corporation), of our reports dated February 12, 1997 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, 1996, the financial highlights of Continental Assurance
Company Separate Account (B) for the ten years ended December 31, 1996, and the
financial statements of Continental Assurance Company for the year ended
December 31, 1996. 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.
Deloitte & Touche LLP
Chicago, Illinois
April 30, 1997
<PAGE> 1
EXHIBIT 14
- - - --------------------------------------------------------------------------------
Dear Participant:
- - - --------------------------------------------------------------------------------
Separate Account (B) ended the year with an Accumulated Unit Value increase
of 20.44% while the dividend-adjusted Standard and Poor's Composite Index of 500
stocks (S&P 500) increased by 22.96%. The Wall Street Journal reported that the
average return for diversified U.S. stock funds was 19.47% in 1996.
1996 was the second consecutive year of strong double digit growth for the
stock market, with large capitalization stocks again outperforming small
capitalization stocks. The cumulative two year return of 59.80% was exceeded
during the post World War II era only by the 71.40% return in 1954-1955.
Generally two strong double digit growth years during this period have been
followed by a flat to down year.
Although we were positive entering 1996, the strength of the market surprised
us, as it did most experts. The economy advanced, but alternated by quarter
between moderate and much stronger growth. The Federal Reserve Board took action
only in late January by lowering both the Fed Funds rate and the discount rate
by a quarter of a percentage point to 5.25% and 5.00%, respectively. With
inflation seemingly under control, earnings for many companies continuing to
meet or exceed analysts' projections, a stronger dollar attracting offshore
funds to our financial markets and strong money flows into equity mutual funds,
the market advance is, in hindsight, at least explainable.
Separate Account (B) remained essentially fully invested during the year. The
cash, or short-term invested position, tends to fluctuate between 5% to 10%
reflecting individual stock opportunities rather than taking a higher risk
approach of attempting to adjust the portfolio to market swings. When the market
is up strongly, keeping money invested at 5.00% in money market instruments acts
as a drag on performance. To enhance our cash returns, we have sold call
options, taking in net premium in excess of $895,000 for the year ended December
31. Call options are only sold for stocks owned or stocks specifically purchased
to sell an attendant option.
As with any index, the performance of constituent groups of the S&P 500 was
quite diverse. Separate Account (B) was moderately overweighted in Capital
Goods-Technology and Energy, both groups doing well in 1996. We were slightly
underweighted in the Financial Services area, but did own Boatmen's Bancshares
which performed exceptionally well, reflecting a merger bid from Nationsbank
Corp. Our primary pharmaceutical holdings, Pfizer and Schering Plough, were
strong performers. Several of our weaker performers included Telecommunications,
Inc. and United Health which were ultimately sold and Electronic Data Systems
which announced a slowdown in top line growth. Electric utilities, trucking,
broadcasting, machine tools and steel had poor relative performance, all of
which we avoided.
1997 shapes up as an interesting year for the stock market. As we previously
mentioned, a third year of double digit growth would be extremely unusual. Stock
prices, however, are not excessively high on a price to earnings basis at the
current levels of interest rates and inflation. Equity mutual fund cash flow is
strong and our markets continue to be attractive to foreigners. We believe that
the stock market during 1997 will be quite sensitive to corporate earnings
reports and that volatility will increase. Management will continue to closely
monitor market conditions and make portfolio changes that we believe will
enhance relative returns.
Thank you for your continued support and participation.
Cordially,
/s/ Lew H. Nathan
Lew H. Nathan
Chairman of the Committee
Separate Account (B)
- - - --------------------------------------------------------------------------------
1
<PAGE> 2
FINANCIAL HIGHLIGHTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------
(PER ACCUMULATION UNIT OUTSTANDING DURING THE PERIOD) 1996 1995 1994 1993 1992
- - - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Value at beginning of period $11.74 $ 8.85 $8.91 $7.70 $7.29
-------- -------- -------- -------- --------
Investment income .19 .19 .19 .15 .16
Fees .10 .09 .07 .07 .06
-------- -------- -------- -------- --------
INVESTMENT INCOME--NET .09 .10 .12 .08 .10
Net gain (loss) on investments 2.31 2.79 (.18) 1.13 .31
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN PARTICIPANTS' EQUITY
RESULTING FROM OPERATIONS 2.40 2.89 (.06) 1.21 .41
-------- -------- -------- -------- --------
VALUE AT END OF PERIOD $14.14 $11.74 $8.85 $8.91 $7.70
======== ======== ======== ======== ========
Ratio of investment income--
net to average participants' equity 0.7% 1.0% 1.3% 1.0% 1.4%
Ratio of fees to average participants' equity .83% .83% .83% .83% .83%
Portfolio turnover rate 53% 46% 52% 69% 71%
Number of accumulation units outstanding at end of
period 8,502,140 8,763,186 9,298,777 9,385,475 9,935,498
</TABLE>
See accompanying Notes to Financial Statements.
COMMITTEE FOR SEPARATE ACCOUNT (B)
MEMBERS
Lew H. Nathan, Chairman
Group 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
Vice President and Associate General Counsel
Continental Assurance Company
AUDITORS
Deloitte & Touche LLP
Chicago, Illinois
CUSTODIAN
The Chase Manhattan Bank, N.A.
New York, New York
- - - --------------------------------------------------------------------------------
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> 3
- - - ----------------------------------------
RECORD OF ACCUMULATION UNIT VALUES
- - - ----------------------------------------
<TABLE>
<CAPTION>
UNIT
VALUATION MARKET
DATE VALUE
- - - -------------------------
<S> <C> <C>
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 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. 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]
================================================================================
ALLOCATION OF EQUITY INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
- - - -----------------------------------------------------------------------------------
<S> <C> <C>
Technological 23.4% 22.7%
Consumer Staples 18.2 15.1
Financial Services 13.5 10.9
Consumer Services 13.2 16.9
Energy 10.3 7.6
Capital Goods 9.8 5.0
Basic Industries 5.6 6.7
Consumer Cyclicals 3.7 6.9
Transportation 2.3 2.4
Conglomerates -- 5.8
---- ----
100% 100%
---- ----
</TABLE>
- - - --------------------------------------------------------------------------------
3
<PAGE> 4
- - - --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF MARKET
(All investments are in securities of unaffiliated issuers) SHARES VALUE
- - - ----------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS:
AEROSPACE-(2.1%)
United Technologies Corporation 38,200 $ 2,521,200
------------
BEVERAGES-(3.1%)
The Robert Mondavi Corporation* 49,000 1,788,500
PepsiCo Inc. 67,000 1,959,750
------------
3,748,250
------------
BROADCASTING-(1.4%)
Tele-comm Liberty Media Gr-A* 59,250 1,692,328
------------
CHEMICAL-(3.4%)
Monsanto Company 55,000 2,138,125
Minerals Technologies Inc. 47,300 1,939,300
------------
4,077,425
------------
COMPUTER TECHNOLOGY-(7.2%)
Electronic Data Systems Corporation 57,500 2,486,875
First Data Corp. 80,000 2,920,000
Hewlett-Packard Company 64,000 3,216,000
------------
8,622,875
------------
CONTAINER-(1.8%)
Crown Cork & Seal Company, Inc. 40,000 2,175,000
------------
COSMETICS-(3.4%)
The Gillette Company 52,000 4,043,000
------------
DIVERSIFIED-(2.1%)
Thermo Electron Corp.* 61,625 2,542,031
------------
ELECTRONIC COMPONENTS-(5.0%)
Molex Incorporated/Class A 93,437 3,328,693
Motorola, Inc. 44,000 2,700,500
------------
6,029,193
------------
ELECTRICAL EQUIPMENT-(1.8%)
General Electric Company 22,500 2,224,688
------------
ENERGY-(1.8%)
The Columbia Gas System, Inc. 35,000 2,226,875
------------
ENGINEERING & CONSTRUCTION-(1.7%)
Fluor Corporation 33,000 2,070,750
------------
FINANCIAL SERVICES-(1.4%)
American Express Company 30,000 1,695,000
------------
FINANCIAL SERVICES (BANK)-(9.2%)
Banc One Corporation 54,500 2,343,500
Boatmen's Bancshares Inc. 40,000 2,580,000
Citicorp 40,500 4,171,500
Norwest Corporation 45,000 1,957,500
------------
11,052,500
------------
FOODS-(1.9%)
C P C International Inc. 28,800 2,232,000
------------
</TABLE>
See accompanying Notes to Financial Statements.
- - - --------------------------------------------------------------------------------
4
<PAGE> 5
- - - --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF MARKET
(All investments are in securities of unaffiliated issuers) SHARES VALUE
- - - ----------------------------------------------------------------------------------------------
COMMON STOCKS:
<S> <C> <C>
HEALTH CARE-(9.8%)
Cardinal Health, Inc. 69,750 $ 4,062,938
Healthsouth Corp.* 94,000 3,630,750
Pfizer Inc. 50,500 4,185,187
------------
11,878,875
------------
HOSPITAL MANAGEMENT-(2.1%)
Columbia HCA Healthcare Corp. 62,500 2,546,875
------------
HOUSEHOLD PRODUCTS-(2.5%)
Procter & Gamble Co. 28,300 3,042,250
------------
INSURANCE-(2.1%)
Travelers/Aetna Property Casualty Corporation 70,000 2,476,250
------------
MACHINERY-(3.5%)
Deere & Company 46,600 1,893,125
Illinois Tool Works, Inc. 28,400 2,268,450
------------
4,161,575
------------
NATURAL GAS PIPELINE-(2.9%)
Enron Corp. 80,000 3,450,000
------------
OIL FIELD SERVICES & EQUIPMENT-(1.9%)
Schlumberger Limited 23,000 2,297,125
------------
OIL & GAS EQUIPMENT-(3.1%)
Camco International Inc. 80,000 3,690,000
------------
PHARMACEUTICAL-(2.8%)
Eli Lilly and Company 10,000 730,000
Schering-Plough Corporation 40,000 2,590,000
------------
3,320,000
------------
RAILROADS-(2.2%)
Burlington Northern Santa Fe 30,212 2,609,562
------------
RESTAURANTS/FAST FOOD-(1.9%)
McDonald's Corporation 50,000 2,262,500
------------
RETAIL STORES-(3.5%)
Home Depot Inc. 38,333 1,921,442
The Sports Authority, Inc.* 104,750 2,278,312
------------
4,199,754
------------
SEMICONDUCTOR-(4.2%)
Applied Materials Inc.* 49,000 1,760,938
Intel Corp. 25,000 3,273,437
------------
5,034,375
------------
TELECOMMUNICATIONS-(4.0%)
A T & T Corporation 44,000 1,914,000
Loral Space & Communications* 119,000 2,186,625
Tele-Communications, Inc./Class A* 55,000 728,750
------------
4,829,375
------------
TOTAL COMMON STOCKS--(93.8%) 112,751,631
------------
</TABLE>
See accompanying Notes to Financial Statements.
- - - --------------------------------------------------------------------------------
5
<PAGE> 6
- - - --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS
OR MARKET
(All investments are in securities of unaffiliated issuers) PAR VALUE VALUE
- - - ---------------------------------------------------------------------------------------------
<S> <C> <C>
OPTIONS:
FINANCIAL SERVICES (BANK)-(0.0%)
Citicorp 50 $ 5,374
------------
HEALTH CARE-(0.0%)
Cardinal Health, Inc. 100 (8,625)
Pfizer Inc. 50 7,562
------------
(1,063)
PHARMACEUTICAL-(0.0%)
Eli Lilly and Company 100 14,499
------------
SEMICONDUCTOR-(0.0%)
Applied Materials Inc. 200 (1,000)
Intel Corp. 50 2,249
------------
1,249
------------
TOTAL OPTIONS-(0.0%) 20,059
------------
SHORT-TERM NOTES:
COMMERCIAL SERVICES-(2.9%)
PHH Corp., 5.47%, due 1/10/97 $3,515,000 3,510,193
------------
FINANCE-(3.8%)
Pitney Bowes Credit Corporation, 5.90%, due 1/07/97 4,522,000 4,517,554
------------
TOTAL SHORT-TERM NOTES-(6.7%) 8,027,747
------------
TOTAL INVESTMENTS-(100.5%) 120,799,437
Cash and receivables less liabilities-(-0.5%) (607,795)
- - - ---------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY-NET ASSETS-(100.0%) $120,191,642
=============================================================================================
</TABLE>
*Non-income producing security in 1996.
See accompanying Notes to Financial Statements.
- - - --------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN SHARES) INCREASED DECREASED NOW OWNED
- - - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
AMR Corporation 22,152 22,152 -
A T & T Capital Corp. - 50,000 -
A T & T Corporation 5,000 - 44,000
Aluminum Co. of America 5,000 30,000 -
American Express Company 30,000 - 30,000
Applied Materials Inc. 10,000 10,000 49,000
Banc One Corporation 54,500 - 54,500
</TABLE>
- - - --------------------------------------------------------------------------------
6
<PAGE> 7
- - - --------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN SHARES) INCREASED DECREASED NOW OWNED
- - - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Boatmens Bancshares Inc. - 32,000 40,000
Boise Cascade Office Products Corporation 36,500 96,000 -
Buckeye Cellulose Corp. - 80,000 -
C P C International Inc. - 8,000 28,800
Cardinal Health, Inc. 23,250 - 69,750
Circus Circus Enterprises, Inc. - 43,610 -
Citicorp - 10,000 40,500
Colgate-Palmolive Company 15,000 15,000 -
The Columbia Gas Systems, Inc. 35,000 - 35,000
Columbia HCA Healthcare Corp. 42,500 10,000 62,500
Crown Cork & Seal Company, Inc. 40,000 - 40,000
Deere & Company 46,600 - 46,600
Electronic Data Systems Corporation 57,500 - 57,500
First Data Corp. 40,000 - 80,000
General Electric Company 22,500 - 22,500
General Motors Corporation 37,500 37,500 -
Healthsouth Corp. - 10,000 94,000
Hercules Inc. - 30,000 -
Hewlett-Packard Company 37,000 - 64,000
Home Depot Inc. - 10,000 38,333
ITT Corporation 35,000 35,000 -
Illinois Tool Works, Inc. - 16,000 28,400
Intel Corp. 25,000 25,000 25,000
Eli Lilly and Company 100,000 90,000 10,000
Loral Corp. - 94,000 -
Loral Space & Communications 119,000 - 119,000
Lucent Technologies 14,260 14,260 -
Molex Incorporated/Class A - 10,000 93,437
The Robert Mondavi Corporation 49,000 - 49,000
Monsanto Company 55,000 - 55,000
Norwest Corporation 45,000 - 45,000
PNC Bank Corp. - 70,000 -
PepsiCo, Inc. 67,000 - 67,000
Pfizer Inc. - 8,900 50,500
Procter & Gamble Co. - 10,000 28,300
Schering Plough Corporation - 4,000 40,000
Schlumberger Limited 23,000 - 23,000
The Sports Authority Inc. 43,250 25,000 104,750
Tele-Communications, Inc./Class A 75,000 111,000 55,000
Tele-comm Liberty Media Gr-A 10,000 - 59,250
Tenneco Inc. - 40,000 -
Thermo Electron Corp. 24,875 33,000 61,625
Thermo Optek Corporation 27,200 27,200 -
Travelers/Aetna Property Casualty Corporation 70,000 - 70,000
</TABLE>
- - - --------------------------------------------------------------------------------
7
<PAGE> 8
- - - --------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (IN SHARES) INCREASED DECREASED NOW OWNED
- - - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Trex Medical Corporation 2,500 2,500 -
United HealthCare Corp. - 40,000 -
United Technologies Corporation 38,200 - 38,200
Vastar Resources Inc. - 65,700 -
Xerox Corporation 41,000 56,000 -
===============================================================================================
</TABLE>
- - - --------------------------------------------------------------------------------
TEN LARGEST COMMON STOCK HOLDINGS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
MARKET % OF NET
DECEMBER 31, 1996 VALUE ASSETS
- - - ----------------------------------------------------------------------------------------
<S> <C> <C>
Pfizer Inc. $ 4,185,187 3.5%
Citicorp 4,171,500 3.5
Cardinal Health, Inc. 4,062,938 3.4
The Gillette Company 4,043,000 3.4
Camco International Inc. 3,690,000 3.1
Healthsouth Corp. 3,630,750 3.0
Enron Corp. 3,450,000 2.9
Molex Incorporated/Class A 3,328,693 2.7
Intel Corp. 3,273,437 2.7
Hewlett-Packard Company 3,216,000 2.6
- - - ----------------------------------------------------------------------------------------
$37,051,505 30.8%
========================================================================================
</TABLE>
- - - --------------------------------------------------------------------------------
8
<PAGE> 9
- - - --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
- - - -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities of unaffiliated issuers--Note
1:
Common stocks at market (cost $73,779,133 and
$65,102,944) $112,751,631 $ 96,523,922
Call options written at market (cost $99,747) 20,059 -
Bonds at market (cost $1,763,438) - 1,785,000
Short-term notes at amortized cost (approximates
market) 8,027,747 4,506,013
----------- -----------
TOTAL INVESTMENTS 120,799,437 102,814,935
Cash 188,311 441
Dividends receivable--Note 1 144,192 113,049
Interest receivable - 17,767
Receivable for securities sold 520,198 -
Receivable from Continental Assurance Company for fund
deposits 1,719 -
----------- -----------
TOTAL ASSETS 121,653,857 102,946,192
----------- -----------
LIABILITIES
Fees payable to Continental Assurance Company--Note 4 40,876 37,153
Payable for securities purchased 1,083,750 -
Deferred income call options written 99,747 -
Payable to Continental Assurance Company for fund
withdrawals 237,842 63,955
----------- ----------
TOTAL LIABILITIES 1,462,215 101,108
- - - -----------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY--NET ASSETS (8,502,140 and 8,763,186
units issued and outstanding at $14.14 and $11.74 per
unit)--Note 2 $120,191,642 $102,845,084
=========================================================================================
</TABLE>
- - - --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995
- - - ----------------------------------------------------------------------------------------
<S> <C> <C>
Investment income:
Dividends $ 1,177,681 $ 1,103,176
Interest and other 509,710 586,862
----------- -----------
1,687,391 1,690,038
----------- -----------
Fees (Continental Assurance Company)--Note 4:
Investment advisory fees 562,628 462,018
Service fees 371,335 304,932
----------- -----------
933,963 766,950
----------- -----------
INVESTMENT INCOME--NET 753,428 923,088
----------- -----------
Investment gain--Note 3:
Net realized gain 12,631,639 5,038,356
Net unrealized gain 7,550,017 20,163,632
----------- -----------
NET GAIN ON INVESTMENTS 20,181,656 25,201,988
- - - ----------------------------------------------------------------------------------------
NET INCREASE IN PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $20,935,084 $26,125,076
========================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
- - - --------------------------------------------------------------------------------
9
<PAGE> 10
- - - --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN PARTICIPANTS' EQUITY
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995
- - - --------------------------------------------------------------------------------------------
<S> <C> <C>
From operations:
Investment income--net $ 753,428 $ 923,088
Net realized gain on investments 12,631,639 5,038,356
Net unrealized gain on investments 7,550,017 20,163,632
----------- ----------
Net increase in participants' equity resulting from
operations 20,935,084 26,125,076
----------- ----------
From unit transactions:
Sales 2,182,340 1,920,287
Withdrawals (5,770,866) (7,464,709)
----------- ----------
Net decrease in participants' equity resulting from
unit transactions (3,588,526) (5,544,422)
----------- ----------
TOTAL INCREASE IN PARTICIPANTS' EQUITY 17,346,558 20,580,654
Participants' equity, January 1 102,845,084 82,264,430
- - - --------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY, DECEMBER 31 $120,191,642 $102,845,084
============================================================================================
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.
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 December 31, 1996 totaled $3,841,250.
No open derivative positions existed at December 31, 1995.
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.
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 December 31, 1996 and 1995.
FEDERAL INCOME TAXES
Under existing Federal income tax law, no taxes are payable on net investment
income and net realized capital gains, which are reinvested in Separate Account
(B) and taken into account in determining unit values.
- - - --------------------------------------------------------------------------------
10
<PAGE> 11
- - - --------------------------------------------------------------------------------
NOTE 2. PARTICIPANTS' EQUITY--NET ASSETS:
================================================================================
Participants' equity--net assets consisted of the following:
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------------------------------
DECEMBER 31 1996 1995
- - - ---------------------------------------------------------------------------------------------
<S> <C> <C>
From operations:
Accumulated investment income--net $ 51,281,747 $ 50,528,319
Accumulated net realized gain on investment transactions 79,880,069 67,248,430
Accumulated unrealized gain 39,694,309 31,965,754
Accumulated unrealized loss (701,753) (523,215)
------------ ------------
Accumulated income 170,154,372 149,219,288
From unit transactions:
Accumulated proceeds from sale of units, net of
withdrawals (49,962,730) (46,374,204)
- - - ---------------------------------------------------------------------------------------------
TOTAL PARTICIPANTS' EQUITY--NET ASSETS $120,191,642 $102,845,084
=============================================================================================
</TABLE>
- - - --------------------------------------------------------------------------------
NOTE 3. INVESTMENTS:
================================================================================
<TABLE>
<CAPTION>
NET REALIZED GAIN ON INVESTMENTS
YEAR ENDED DECEMBER 31 1996 1995
- - - ---------------------------------------------------------------------------------------------
<S> <C> <C>
Aggregate proceeds $385,825,919 $318,899,683
Aggregate cost 373,194,280 313,861,327
- - - ---------------------------------------------------------------------------------------------
Net realized gain $ 12,631,639 $ 5,038,356
=============================================================================================
<CAPTION>
CHANGE IN UNREALIZED GAIN ON INVESTMENTS
YEAR ENDED DECEMBER 31 1996 1995
- - - ---------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized gain on investments:
Balance, December 31 $ 38,992,556 $ 31,442,539
Less balance, January 1 31,442,539 11,278,907
- - - ---------------------------------------------------------------------------------------------
Change in net unrealized gain $ 7,550,017 $ 20,163,632
=============================================================================================
<CAPTION>
AGGREGATE COST OF SECURITIES PURCHASED
YEAR ENDED DECEMBER 31 1996 1995
- - - ---------------------------------------------------------------------------------------------
<S> <C> <C>
Common stocks $ 54,207,247 $ 35,759,614
Preferred stocks - 2,103,588
Put options 3,000 -
Bonds 2,346,875 1,763,438
Short-term notes 327,063,972 274,431,387
- - - ---------------------------------------------------------------------------------------------
Total purchases $383,621,094 $314,058,027
=============================================================================================
</TABLE>
- - - --------------------------------------------------------------------------------
11
<PAGE> 12
- - - --------------------------------------------------------------------------------
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>
YEAR ENDED DECEMBER 31 1996 1995
- - - -----------------------------------------------------------------------------------------
<S> <C> <C>
Investment advisory fees $562,628 $462,018
Service fees 371,335 304,932
------- -------
Total fees charged to fund income 933,963 766,950
Sales and administrative fees paid by participants 12,704 13,563
- - - -----------------------------------------------------------------------------------------
Total $946,667 $780,513
=========================================================================================
</TABLE>
- - - --------------------------------------------------------------------------------
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, 1996, 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, 1996 and
1995, and the related statement 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, 1996. 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, 1996 by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Continental Assurance
Company Separate Account (B) as of December 31, 1996 and 1995, the results of
its operations and changes in its participants' equity for the years then ended,
in conformity with generally accepted accounting principles. The financial
highlights present fairly the information set forth therein for each of the five
years in the period ended December 31, 1996.
Deloitte & Touche LLP
Chicago, Illinois
February 12, 1997
- - - --------------------------------------------------------------------------------
12
<PAGE> 13
[B LOGO]
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
REPORT TO PARTICIPANTS
DECEMBER 31, 1996
[CNA LOGO]
<PAGE> 1
EXHIBIT 16
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, 1996.
<TABLE>
<CAPTION>
- - - --------------------------------------------------------------------------------------------------------------
1 Year 5 Years 10 Years
1-1-96 to 12-31-96 1-1-92 to 12-31-96 1-1-87 to 12-31-96
- - - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 $1,132.16 $1,823.26 $3,573.01
- - - --------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN 13.22% 12.76% 13.58%
- - - --------------------------------------------------------------------------------------------------------------
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 $1,114.21 $1,625.90 $2,976.83
- - - --------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN 11.42% 10.21% 11.53%
- - - --------------------------------------------------------------------------------------------------------------
HR-10 PLANS
Investment
Less Sales Load (7%) $1,000 $1,000 $1,000
Less Adm Exp (1.5%) (70) (70) (70)
Net Investment (15) (15) (15)
--- --- ---
Acctg fee: $20 1st yr; $10 ea add'l yr $915 $915 $915
Accounting withdrawal fee $10
Surrender fee $20 (2%)
- - - --------------------------------------------------------------------------------------------------------------
ERV $1,052.05 $1,654.15 $3,200.42
- - - --------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN 5.21% 10.59% 12.34%
- - - --------------------------------------------------------------------------------------------------------------
</TABLE>
n
P(1+T) =ERV
P = a hypothetical initial payment of $1,000
T= Average annual total return
n= numbers of years
ERV = ending redeembable value of a hypothetical $1,000 payment at the beginning
of the one, five and 10-year period, at the end of the one, five, or 10-year
period.
<PAGE> 2
Level Deduction Contract for 403(b) Plans
Ten Year Example
<TABLE>
<CAPTION>
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/86 3.72 1.0000 1,000.00 6 0 48.01 988.01 -1.20
12/31/87 3.91 0.0511 988.01 0 0 164.25 1,152.26 16.62
12/31/88 4.56 0.1662 1,152.26 0 0 189.52 1,341.77 16.45
12/31/89 5.31 0.1645 1,341.77 0 0 35.38 1,377.15 2.64
12/31/90 5.45 0.0264 1,377.15 0 0 464.95 1,842.10 33.76
12/31/91 7.29 0.3376 1,842.10 0 0 103.60 1,945.70 5.62
12/31/92 7.70 0.0562 1,945.70 0 0 305.75 2,251.45 15.71
12/31/93 8.91 0.1571 2,251.45 0 0 -15.16 2,236.29 -0.67
12/31/94 8.85 -0.0067 2,236.29 0 0 730.27 2,966.56 32.66
12/31/95 11.74 0.3266 2,966.56 0 0 606.45 3,573.01 20.44
12/31/96 14.14 0.2044 3,573.01
end 3,573.01
begin 1,000.00
time 10.00
IRR 13.58%
<CAPTION>
Five Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/91 7.29 0.3376 1,000.00 6 0 52.87 992.87 -0.71
12/31/92 7.70 0.0562 992.87 0 0 156.02 1,148.89 15.71
12/31/93 8.91 0.1571 1,148.89 0 0 -7.74 1,141.15 -0.67
12/31/94 8.85 -0.0067 1,141.15 0 0 372.65 1,513.80 32.66
12/31/95 11.74 0.3266 1,513.80 0 0 309.47 1,823.26 20.44
12/31/96 14.14 0.2044 1,823.26
end 1,823.26
begin 1,000.00
time 5.00
IRR 12.76%
<CAPTION>
One Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/95 11.74 0.3266 1,000.00 6 0 192.16 1,132.16 13.22
12/31/96 14.14 0.2044 1,132.16
end 1,132.16
begin 1,000.00
time 1.00
IRR 13.22%
</TABLE>
<PAGE> 3
Graded Deduction Contract for 403(b) Plans
Ten Year Example
<TABLE>
<CAPTION>
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/86 3.72 1.0000 1,000.00 5 30 48.52 968.52 -3.15
12/31/87 3.91 0.0511 968.52 0 30 161.01 1,099.53 13.53
12/31/88 4.56 0.1662 1,099.53 0 30 180.84 1,250.37 13.72
12/31/89 5.31 0.1645 1,250.37 0 30 32.97 1,253.34 0.24
12/31/90 5.45 0.0264 1,253.34 0 30 423.15 1,646.48 31.37
12/31/91 7.29 0.3376 1,646.48 0 30 92.60 1,709.09 3.80
12/31/92 7.70 0.0562 1,709.09 0 30 268.57 1,947.66 13.96
12/31/93 8.91 0.1571 1,947.66 0 30 -13.12 1,904.54 -2.21
12/31/94 8.85 -0.0067 1,904.54 0 30 621.93 2,496.47 31.08
12/31/95 11.74 0.3266 2,496.47 0 30 510.35 2,976.83 19.24
12/31/96 14.14 0.2044 2,976.83 0 30
end 2,976.83
begin 1,000.00
time 10.00
IRR 11.53%
<CAPTION>
Five Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/91 7.29 0.3376 1,000.00 5 30 53.43 973.43 -2.66
12/31/92 7.70 0.0562 973.43 0 30 152.97 1,096.40 12.63
12/31/93 8.91 0.1571 1,096.40 0 30 -7.38 1,059.01 -3.41
12/31/94 8.85 -0.0067 1,059.01 0 30 345.82 1,374.84 29.82
12/31/95 11.74 0.3266 1,374.84 0 30 281.06 1,625.90 18.26
12/31/96 14.14 0.2044 1,625.90
end 1,625.90
begin 1,000.00
time 5.00
IRR 10.21%
<CAPTION>
One Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/95 11.74 0.3266 1,000.00 5 30 194.21 1,114.21 11.42
12/31/96 14.14 0.2044 1,114.21
end 1,114.21
begin 1,000.00
time 1.00
IRR 11.42%
</TABLE>
<PAGE> 4
HR-10 Plans
Ten Year Example
<TABLE>
<CAPTION>
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/86 3.72 1.0000 1,000.00 8.5 20 46.73 941.73 -5.83
12/31/87 3.91 0.0511 941.73 0 10 156.55 1,088.29 15.56
12/31/88 4.56 0.1662 1,088.29 0 10 178.99 1,257.28 15.53
12/31/89 5.31 0.1645 1,257.28 0 10 33.15 1,280.43 1.84
12/31/90 5.45 0.0264 1,280.43 0 10 432.29 1,702.72 32.98
12/31/91 7.29 0.3376 1,702.72 0 10 95.76 1,788.49 5.04
12/31/92 7.70 0.0562 1,788.49 0 10 281.05 2,059.54 15.16
12/31/93 8.91 0.1571 2,059.54 0 10 -13.87 2,035.67 -1.16
12/31/94 8.85 -0.0067 2,035.67 0 10 664.75 2,690.42 32.16
12/31/95 11.74 0.3266 2,690.42 0 10 550.00 3,230.42 20.07
12/31/96 14.14 0.2044 3,230.42 0 30 3,200.42
end 3,200.42
begin 1,000.00
time 10.00
IRR 12.34%
<CAPTION>
Five Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/91 7.29 0.3376 1,000.00 8.5 20 51.46 946.46 -5.35
12/31/92 7.70 0.0562 946.46 0 10 148.73 1,085.19 14.66
12/31/93 8.91 0.1571 1,085.19 0 10 -7.31 1,067.88 -1.59
12/31/94 8.85 -0.0067 1,067.88 0 10 348.72 1,406.60 31.72
12/31/95 11.74 0.3266 1,406.60 0 10 287.55 1,684.15 19.73
12/31/96 14.14 0.2044 1,684.15 0 30 1,654.15
end 1,654.15
begin 1,000.00
time 5.00
IRR 10.59%
<CAPTION>
One Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/95 11.74 0.3266 1,000.00 8.5 20 187.05 1,082.05 8.21
12/31/96 14.14 0.2044 1,082.05 30 1,052.05
end 1,052.05
begin 1,000.00
time 1.00
IRR 5.21%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000023971
<NAME> CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 120,799
<RECEIVABLES> 666
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 121,654
<PAYABLE-FOR-SECURITIES> 1,084
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 378
<TOTAL-LIABILITIES> 1,462
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 8,502,140
<SHARES-COMMON-PRIOR> 8,763,186
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 38,993
<NET-ASSETS> 120,192
<DIVIDEND-INCOME> 1,177
<INTEREST-INCOME> 510
<OTHER-INCOME> 0
<EXPENSES-NET> 934
<NET-INVESTMENT-INCOME> 753
<REALIZED-GAINS-CURRENT> 12,632
<APPREC-INCREASE-CURRENT> 7,550
<NET-CHANGE-FROM-OPS> 20,935
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 166,987
<NUMBER-OF-SHARES-REDEEMED> 428,033
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 17,347
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 563
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 934
<AVERAGE-NET-ASSETS> 112,508
<PER-SHARE-NAV-BEGIN> 11.737
<PER-SHARE-NII> 0.087
<PER-SHARE-GAIN-APPREC> 2.314
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.138
<EXPENSE-RATIO> 0.008
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000023971
<NAME> CONTINENTAL ASSURANCE COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 4,822,135
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 44,342
<MORTGAGE> 29,644
<REAL-ESTATE> 6,010
<TOTAL-INVEST> 5,579,889
<CASH> 39,210
<RECOVER-REINSURE> 162,245
<DEFERRED-ACQUISITION> 769,752
<TOTAL-ASSETS> 13,938,445
<POLICY-LOSSES> 4,475,409
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 573,830
<NOTES-PAYABLE> 10,000
0
0
<COMMON> 21,831
<OTHER-SE> 2,026,637
<TOTAL-LIABILITY-AND-EQUITY> 13,938,445
3,373,797
<INVESTMENT-INCOME> 400,937
<INVESTMENT-GAINS> 163,571
<OTHER-INCOME> 81,551
<BENEFITS> 3,247,556
<UNDERWRITING-AMORTIZATION> 12,036
<UNDERWRITING-OTHER> 396,620
<INCOME-PRETAX> 350,840
<INCOME-TAX> 125,423
<INCOME-CONTINUING> 225,417
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 225,417
<EPS-PRIMARY> 51.63
<EPS-DILUTED> 51.63
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
