<PAGE>
- --------------------------------------------------------------------------------
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,
Lew H. Nathan
Lew H. Nathan
Chairman of the Committee
Separate Account (B)
- --------------------------------------------------------------------------------
1
<PAGE>
<TABLE>
<CAPTION>
|------------------------------------------------------------------------------------------------------------------|
| |
| FINANCIAL HIGHLIGHTS |
| CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B) |
|------------------------------------------------------------------------------------------------------------------|
| |
| YEAR ENDED DECEMBER 31 |
| ------------------------------------------------------------|
|(PER ACCUMULATION UNIT OUTSTANDING DURING THE PERIOD) 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.
<PAGE>
- --------------------------------------------------------------------------------
COMMITTEE FOR SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
MEMBERS
- --------------------------------------------------------------------------------
Lew H. Nathan, Chairman Richard T. Fox
Vice President and President
Portfolio Manager 21st Century Environmental
Continental Assurance Company Management, Inc.
Richard W. Dubberke William W. Tongue
Group Vice President Professor of Economics
Continental Assurance Company and Finance, Emeritus
University of Illinois at Chicago
Peter J. Wrenn
President
Hudson Technology, Inc.
- --------------------------------------------------------------------------------
SECRETARY AUDITORS CUSTODIAN
Lynne Gugenheim Deloitte & Touche LLP The Chase Manhattan Bank, N.A.
Vice President and Chicago, Illinois New York, New York
Associate General Counsel
Continental Assurance Company
- --------------------------------------------------------------------------------
This report has been prepared for the information of participants in
Continental Assurance Company Separate Account (B) and is not authorized for
distribution to prospective investors unless preceded or accompanied by an
effective prospectus that includes information regarding Separate Account (B)'s
objectives, policies, management, records, sales commissions and other
information.
- --------------------------------------------------------------------------------
2
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
RECORD OF ACCUMULATION UNIT VALUES
- ----------------------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
- ----------------------------------------
RECORD OF ANNUITY UNIT VALUES
- ----------------------------------------
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>
<PAGE>
- --------------------------------------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT IN ONE ACCUMULATION UNIT
- --------------------------------------------------------------------------------
Separate Account (B) does not make distributions of investment income and
realized capital gains; therefore, the unit values include investment income and
capital gains. This chart displays the unit value at December 31 for the past
ten years. This period was one of mixed common stock prices.
The values shown should not be considered representations of values which may
be achieved in the future.
(CHART APPEARS HERE)
Unit Value Bar Graph
1996 $13.06
1995 11.74
1994 8.85
1993 8.91
1992 7.70
1991 7.29
1990 5.45
1989 5.31
1988 4.56
1987 3.91
1986 3.72
- -------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
======================================================================================
ALLOCATION OF EQUITY INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
=====================================================================================
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>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
==============================================================================================
DECEMBER 31, 1996
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
------------
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
<S> <C> <C>
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
------------
See accompanying Notes to Financial Statements.
- ------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
==============================================================================================
DECEMBER 31, 1996
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
------------
==============================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
==============================================================================================
DECEMBER 31, 1996
NUMBER OF MARKET
(All investments are in securities of unaffiliated issuers) SHARES VALUE
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
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
------------
See accompanying Notes to Financial Statements.
- ----------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
==============================================================================================
DECEMBER 31, 1996
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.
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
==============================================================================================
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>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================================
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>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
==============================================================================================
<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>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
TEN LARGEST COMMON STOCK HOLDINGS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
=========================================================================================
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>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
==========================================================================================
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>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
=========================================================================================
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>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN PARTICIPANTS' EQUITY
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
=============================================================================================
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
=============================================================================================
</TABLE>
See accompanying Notes to Financial Statements
<PAGE>
- --------------------------------------------------------------------------------
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>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
NOTE 2. PARTICIPANTS' EQUITY--NET ASSETS:
==========================================================================================
Participants' equity--net assets consisted of the following:
- ------------------------------------------------------------------------------------------
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>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
NOTE 3. INVESTMENTS:
=========================================================================================
NET RELATED 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
=========================================================================================
- -----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED GAIN ON INVESTMENTS
YEAR ENDED DECEMBER 31 1996 1995
- -----------------------------------------------------------------------------------------
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
=========================================================================================
AGGREGATE COST OF SECURITIES PURCHASED
YEAR ENDED DECEMBER 31 1996 1995
- -----------------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
FEES AND EXPENSES PAID TO ASSURANCE
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>
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
================================================================================
The Committee Members and the Participants of
Continental Assurance Company Separate Account (B)
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments as of December 31, 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
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LEFT BLANK
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<PAGE>
[B LOGO]
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
REPORT TO PARTICIPANTS
DECEMBER 31, 1996
[CNA LOGO]
[CA LOGO]
L 554-921 (12/96) 2/97
