<PAGE> 1
- --------------------------------------------------------------------------------
Dear Participant:
- --------------------------------------------------------------------------------
For the six months ended June 30, 1998, Separate Account (B)'s Accumulated
Unit Value increased 15.97% while the dividend-adjusted Standard & Poor's
Composite Index of 500 stocks (S&P 500) increased by 17.71%. The Account's
twelve month gain was 25.46% versus the S&P 500's dividend adjusted return of
30.16%. Although the Account's gain was less than that of the S&P 500, Separate
Account (B) outperformed the 22.62% twelve month increase of the average U.S.
stock fund as reported in the Wall Street Journal.
The powerful stock market rally during the first half of 1998 follows an
unprecedented three straight years of strong double-digit growth. With the S&P
500 closing at 1133.84 on June 30, the effective price/earnings multiple for the
Index was approximately 24 times based on a $47.53 1998 earnings estimate by
Lehman Brothers. In comparison, the average forward price/earnings multiple over
the past 10 years was approximately 16.5 times. The last time we experienced
forward multiples this high was in the 1960's.
The extended stability of the U.S. economy and the attendant low inflation
and low interest rate environment apparently have reduced investor's perception
of stock market risk. This reduction in the perceived risk premium has enabled
the stock market to trade at higher valuations. Although earnings for the
quarter just ended were only about 20% higher than earnings for the fourth
quarter of 1994, the S&P 500 has advanced 150% in 3 1/2 years.
Although equity valuations seem high, the positive economic environment
remains in place. Inflation is muted, long-term interest rates are close to
cyclically low levels, earnings are advancing, the economy continues to grow and
money is flowing into mutual funds. The best performing stocks have the
following characteristics: large capitalization; predictable earnings; low
yield; high earnings growth; and price/earnings ratio above the market average.
The Asian collapse has so far been discounted as an annoyance rather than as an
event that will derail the economy or the stock market. In fact, certain
analysts have pointed out that the problems in Asia will hold down inflation and
therefore interest rates, a positive for the market, and that a lot of Asian
capital has flown to U.S. bond and equity markets seeking a safe haven. At the
current level of valuations, the stock market is priced for perfection and is
vulnerable to disappointment. In our generation, the disappointment has come in
the form of tightening credit and higher interest rates triggered by
inflationary pressures.
Your Separate Account (B) portfolio is structured for growth with primarily
high quality, large capitalization growth companies. The portfolio has a strong
representation in health care and technology sectors, as well as in the
financial area. We generally have avoided stocks of cyclical commodity companies
such as those in the steel, paper and metal industries. Also, we have not been
active in the more traditional income stocks, such as electric utilities and
Real Estate Investment Trusts.
Separate Account (B), as most managed funds, keeps at least a modest cash
reserve to satisfy withdrawals and to take advantage of market opportunities.
This acts as a modest drag on performance during a strong bull market. We have
enhanced our returns by selling call options on certain of the more volatile
stocks in the portfolio. When we sell an option, our goal is a minimum monthly
return of 1.5%, or 18% annualized. During the first half of 1998, Separate
Account (B) generated $711 thousand by executing this strategy. The premiums
received for selling a call option are reported as realized gains, rather than
investment income.
From a long term perspective, it is hard to imagine a better market
environment than we are currently experiencing. If all of the fundamentals --
low inflation, profit growth, and stabilizing monetary and fiscal policy --
continue to be positive, we anticipate no more than a correction in the 10%
range. A major bear market would require a return to either sustained inflation
or a major deflation, neither condition being apparent at this time. Your
investment managers will continue to monitor market conditions and make
portfolio changes that we believe will enhance relative returns.
Cordially,
Marilou R. McGirr
Marilou R. McGirr
Chairman of the Committee
- --------------------------------------------------------------------------------
1
<PAGE> 2
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30
(UNAUDITED) YEAR ENDED DECEMBER 31
----------- ------------------------------------------------------
(PER ACCUMULATION UNIT OUTSTANDING DURING THE PERIOD) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Value at beginning of period $17.69 $14.14 $11.74 $ 8.85 $8.91
--------- --------- --------- --------- ---------
Investment income .10 .23 .19 .19 .19
Fees .08 .13 .10 .09 .07
--------- --------- --------- --------- ---------
INVESTMENT INCOME--NET .02 .10 .09 .10 .12
Net gain (loss) on investments 2.81 3.45 2.31 2.79 (.18)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN PARTICIPANTS' EQUITY
RESULTING FROM OPERATIONS 2.83 3.55 2.40 2.89 (.06)
--------- --------- --------- --------- ---------
VALUE AT END OF PERIOD $20.52 $17.69 $14.14 $11.74 $8.85
========= ========= ========= ========= =========
Ratio of investment income--
net to average participants' equity 0.2%(a) 0.6% 0.7% 1.0% 1.3%
Ratio of fees to average participants' equity .83%(a) .83% .83% .83% .83%
Portfolio turnover rate 17% 45% 53% 46% 52%
Number of accumulation units outstanding at end of
period 8,431,738 8,612,630 8,502,140 8,763,186 9,298,777
</TABLE>
- --------------------------------------------------------------------------------
(a) annualized See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
COMMITTEE FOR SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
MEMBERS
- --------------------------------------------------------------------------------
Marilou R. McGirr, Chairman
Vice President
Continental Assurance Company
Richard W. Dubberke
Vice President and
Portfolio Manager
Continental Assurance Company
Richard T. Fox
Financial Consultant
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
Chase Manhattan Trust Company
of Illinois
Chicago, Illinois
- --------------------------------------------------------------------------------
This report has been prepared for the information of participants in
Continental Assurance Company Separate Account (B) and is not authorized
for distribution to prospective investors unless preceded or accompanied by an
effective prospectus that includes information regarding Separate Account (B)'s
objectives, policies, management, records, sales commissions and other
information.
- --------------------------------------------------------------------------------
2
<PAGE> 3
- --------------------------------------------------------------------------------
RECORD OF ACCUMULATION UNIT VALUES RECORD OF ANNUITY UNIT VALUES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNIT UNIT
VALUATION MARKET VALUATION MARKET
DATE VALUE DATE VALUE
- ------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
1998 June 30 $20.52 1998 July 1 $6.64
1997 December 31 17.69 1998 January 1 6.05
1996 December 31 14.14 1997 January 1 4.88
1995 December 31 11.74 1996 January 1 4.36
1994 December 31 8.85 1995 January 1 3.35
1993 December 31 8.91 1994 January 1 3.39
1992 December 31 7.70 1993 January 1 3.14
1991 December 31 7.29 1992 January 1 2.71
1990 December 31 5.45 1991 January 1 2.36
1989 December 31 5.31 1990 January 1 2.40
1988 December 31 4.56 1989 January 1 2.08
</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.
- --------------------------------------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT IN ONE ACCUMULATION UNIT
- --------------------------------------------------------------------------------
Separate Account (B) does not make distributions of investment income and
realized capital gains; therefore, the unit values include investment income
and capital gains. This chart displays the unit value at December 31 for the
past ten years, and June 30, 1998. 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.
<TABLE>
<CAPTION>
<S> <C>
Unit Value
1988 4.56
1989 5.31
1990 5.45
1991 7.29
1992 7.70
1993 8.91
1994 8.85
1995 11.74
1996 14.14
1997 17.69
June 1998 20.52
</TABLE>
- --------------------------------------------------------------------------------
3
<PAGE> 4
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
JUNE 30, 1998
<TABLE>
<CAPTION>
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES VALUE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS:
AEROSPACE-(3.9%)
The Boeing Company 35,000 $ 1,559,687
Raytheon Company 45,000 2,660,625
United Technologies Corporation 28,200 2,608,500
-----------
6,828,812
-----------
BEVERAGES-(2.6%)
The Robert Mondavi Corporation* 54,000 1,532,250
PepsiCo, Inc. 72,000 2,965,500
-----------
4,497,750
-----------
BROADCASTING-(4.2%)
Emmis Broadcasting Corporation* 45,000 2,151,562
Tele-comm Liberty Media Gr-A* 133,312 5,174,172
-----------
7,325,734
-----------
CHEMICAL-(2.1%)
Monsanto Company 65,000 3,631,875
-----------
COMPUTER SYSTEMS-(4.5%)
Cisco Systems, Inc.* 45,000 4,142,812
EMC Corporation* 80,000 3,585,000
-----------
7,727,812
-----------
COMPUTER TECHNOLOGY-(3.4%)
First Data Corp. 60,000 1,998,750
Hewlett-Packard Company 64,000 3,832,000
-----------
5,830,750
-----------
CONTAINERS-(1.4%)
Crown Cork & Seal Company, Inc. 50,000 2,375,000
-----------
COSMETICS-(2.8%)
The Gillette Company 84,000 4,761,750
-----------
DIVERSIFIED-(3.4%)
American Standard Companies, Inc.* 65,000 2,904,688
Tyco International Ltd. 46,000 2,898,000
-----------
5,802,688
-----------
ELECTRONIC COMPONENTS-(5.3%)
Honeywell, Inc. 35,000 2,924,688
Molex Incorporated/Class A 145,995 3,412,633
Motorola, Inc. 54,000 2,838,375
-----------
9,175,696
-----------
ELECTRICAL EQUIPMENT-(2.4%)
General Electric Company 45,000 4,095,000
-----------
ENERGY-(2.5%)
Enron Corp. 80,000 4,325,000
-----------
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
4
<PAGE> 5
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
JUNE 30, 1998
<TABLE>
<CAPTION>
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES VALUE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS:
FINANCIAL SERVICES-(3.6%)
American Express Company 35,000 $ 3,990,000
Heller Financial, Inc.* 75,700 2,271,000
-----------
6,261,000
-----------
FINANCIAL SERVICES (BANK)-(10.3%)
Banc One Corporation 59,950 3,345,959
Bank United Corp. 70,000 3,351,250
Citicorp 25,500 3,805,875
Nationsbank Corporation 52,200 3,993,300
Norwest Corporation 90,000 3,363,750
-----------
17,860,134
-----------
FOODS-(1.9%)
Bestfoods 57,600 3,344,400
-----------
HEALTH CARE-(6.8%)
Cardinal Health, Inc. 54,750 5,132,812
Healthsouth Corp.* 108,000 2,882,250
Medtronic, Inc. 60,000 3,825,000
-----------
11,840,062
-----------
HOUSEHOLD PRODUCTS-(2.0%)
Procter & Gamble Co. 38,800 3,533,225
-----------
MACHINERY-(2.2%)
Illinois Tool Works, Inc. 56,800 3,787,850
-----------
MERCHANDISING-DRUGS-(1.5%)
Rite Aide Corporation 70,000 2,629,375
-----------
MERCHANDISING-FOODS-(1.9%)
Safeway Inc.* 80,000 3,255,000
-----------
OIL FIELD SERVICES & EQUIPMENT-(4.4%)
Camco International, Inc. 30,000 2,336,250
Santa Fe International 80,000 2,420,000
Schlumberger Limited 41,000 2,800,813
-----------
7,557,063
-----------
PHARMACEUTICAL-(11.2%)
American Home Products Corporation 54,000 2,794,500
Eli Lilly and Company 50,000 3,303,125
Pfizer Inc. 71,000 7,716,813
Schering-Plough Corporation 60,000 5,497,500
-----------
19,311,938
-----------
PUBLISHING-(1.4%)
Tribune Company 35,000 2,408,438
-----------
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
5
<PAGE> 6
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
JUNE 30, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES,
CONTRACTS
OR MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) PAR VALUE VALUE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
SEMICONDUCTOR-(1.5%)
Applied Materials, Inc.* 88,000 $ 2,596,000
------------
TELECOMMUNICATIONS-(2.6%)
Loral Space & Communications* 161,500 4,562,375
------------
UTILITY-(COMMUNICATIONS)-(5.1%)
Intermedia Communications Inc.* 60,000 2,516,250
Sprint Corporation 35,000 2,467,500
Worldcom, Inc.* 80,000 3,875,000
------------
8,858,750
------------
UTILITY-(WATER)-(1.0%)
United States Filter Corporation* 60,000 1,683,750
------------
TOTAL COMMON STOCKS-(95.9%) 165,867,227
------------
OPTIONS:
OIL FIELD SERVICES & EQUIPMENT-(0.0%)
Camco International, Inc. 100 1,499
------------
PHARMACEUTICAL-(0.0%)
American Home Products Corporation 200 (1,751)
------------
TOTAL OPTIONS-(0.0%) (252)
------------
SHORT-TERM NOTES:
FINANCIAL SERVICES-(4.1%)
Heller Financial, Inc., 5.75%, due 7/02/98 $7,181,000 7,179,853
------------
TOTAL SHORT-TERM NOTES-(4.1%) 7,179,853
------------
TOTAL INVESTMENTS-(100.0%) 173,046,828
Cash and Receivables less Liabilities-(0.0%) (51,452)
- ---------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY-NET ASSETS-(100.0%) $172,995,376
=============================================================================================
</TABLE>
*Non-income producing security in 1998.
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
6
<PAGE> 7
- --------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 (IN SHARES) INCREASED DECREASED NOW OWNED
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Advanced Communications Group, Inc. 110,000 110,000 -
American Home Products Corporation 64,000 10,000 54,000
American Standard Companies, Inc. 10,000 - 65,000
Amgen, Inc. - 45,000 -
Banc One Corporation 5,450 - 59,950
Bestfoods 28,800 - 57,600
The Boeing Company 35,000 - 35,000
Burlington Northern Santa Fe - 25,212 -
Camco International, Inc. - 20,000 30,000
Cardinal Health, Inc. 10,000 5,000 54,750
Citicorp - 10,000 25,500
Corn Products International Inc. 7,200 7,200 -
Corning Inc. - 52,700 -
Emmis Broadcasting Corporation 45,000 - 45,000
First Data Corp. - 20,000 60,000
The Gillette Company 42,000 - 84,000
Healthsouth Corp. 10,000 30,000 108,000
Heller Financial, Inc. 75,700 - 75,700
Hewlett-Packard Company 5,000 - 64,000
Intel Corp. - 40,000 -
Intermedia Communications Inc. 60,000 - 60,000
Eli Lilly and Company 10,000 - 50,000
Loral Space & Communications 20,000 - 161,500
Mettler-Toledo Holdings Inc. - 116,200 -
The Robert Mondavi Corporation 5,000 - 54,000
Motorola, Inc. 20,000 10,000 54,000
PepsiCo, Inc. 5,000 - 72,000
Pfizer Inc. - 10,000 71,000
Rite Aid Corporation 35,000 - 70,000
Safeway Inc. 40,000 - 80,000
Santa Fe International 10,000 - 80,000
The Sports Authority, Inc. - 124,750 -
Sprint Corporation 35,000 - 35,000
Tele-comm Liberty Media Gr-A 44,438 1 133,312
Teleport Communications Group Inc. 10,000 45,000 -
Tribune Company - 10,000 35,000
Tyco International Ltd. 46,000 - 46,000
Union Pacific Corp. 20,000 20,000 -
United States Filter Corporation 30,000 - 60,000
United Technologies Corporation - 10,000 28,200
Ziff Davis Inc. 4,000 4,000 -
</TABLE>
- --------------------------------------------------------------------------------
7
<PAGE> 8
- --------------------------------------------------------------------------------
ALLOCATION OF EQUITY INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Consumer Staples 24.9% 23.9%
Technological 22.1 23.0
Financial Services 14.5 14.2
Consumer Services 13.0 11.3
Capital Goods 8.3 8.8
Energy 7.2 8.7
Utilities 6.4 3.6
Basic Industries 3.6 3.6
Transportation -- 1.6
Consumer Cyclicals -- 1.3
----- -------
100% 100%
----- -------
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST COMMON STOCK HOLDINGS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET % OF NET
JUNE 30, 1998 VALUE ASSETS
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Pfizer Inc. $ 7,716,813 4.5%
Schering-Plough Corporation 5,497,500 3.2
Tele-comm Liberty Media Gr-A 5,174,172 3.0
Cardinal Health, Inc. 5,132,812 3.0
The Gillette Company 4,761,750 2.8
Loral Space & Communications 4,562,375 2.6
Enron Corp. 4,325,000 2.5
Cisco Systems, Inc. 4,142,812 2.4
General Electric Company 4,095,000 2.4
Nationsbank Corporation 3,993,300 2.3
- ----------------------------------------------------------------------------------------
$49,401,534 28.7%
========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
8
<PAGE> 9
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities of unaffiliated issuers--Note
1:
Common stocks at market (cost $95,116,579 and
$92,262,123) $165,867,227 $145,406,403
Call options written at market (252) --
Short-term notes at amortized cost (approximates
market) 7,179,853 7,333,814
----------- ------------
TOTAL INVESTMENTS 173,046,828 152,740,217
Cash 126,776 13,730
Dividends receivable--Note 1: 73,415 102,376
Receivable for securities sold 769,374 -
Receivable from Continental Assurance Company for fund
deposits - 58,304
----------- ------------
TOTAL ASSETS 174,016,393 152,914,627
----------- ------------
LIABILITIES
Fees payable to Continental Assurance Company--Note 4: 42,870 40,585
Payable for securities purchased 793,331 --
Deferred income call options written 70,998 --
Payable to Continental Assurance Company for fund
withdrawals 113,818 495,148
----------- ------------
TOTAL LIABILITIES 1,021,017 535,733
- -----------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY--NET ASSETS (8,431,738 and 8,612,630
units issued and outstanding at $20.52 and
$17.69 per unit)--Note 2 $172,995,376 $152,378,894
=========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Investment income:
Dividends $ 660,042 $ 654,564
Interest and other 203,320 488,170
---------- ----------
863,362 1,142,734
---------- ----------
Fees (Continental Assurance Company)--Note 4:
Investment advisory fees 410,072 322,543
Service fees 270,648 212,879
---------- ----------
680,720 535,422
---------- ----------
INVESTMENT INCOME--NET 182,642 607,312
---------- ----------
Investment gain--Note 3:
Net realized gain 6,479,250 6,606,049
Net unrealized gain 17,606,116 12,324,602
---------- ----------
NET GAIN ON INVESTMENTS 24,085,366 18,930,651
- ----------------------------------------------------------------------------------------
NET INCREASE IN PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $24,268,008 $19,537,963
========================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
9
<PAGE> 10
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN PARTICIPANTS' EQUITY
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
From operations:
Investment income--net $ 182,642 $ 607,312
Net realized gain on investments 6,479,250 6,606,049
Net unrealized gain on investments 17,606,116 12,324,602
----------- -----------
Net increase in participants' equity resulting from
operations 24,268,008 19,537,963
----------- -----------
From unit transactions:
Sales 2,268,446 10,285,204
Withdrawals (5,919,972) (6,748,561)
----------- -----------
Net increase (decrease) in participants' equity
resulting from unit transactions (3,651,526) 3,536,643
----------- -----------
TOTAL INCREASE IN PARTICIPANTS' EQUITY 20,616,482 23,074,606
Participants' equity, January 1 152,378,894 120,191,642
- --------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY, JUNE 30 $172,995,376 $143,266,248
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ORGANIZATION
Continental Assurance Company Separate Account (B) (Separate Account (B)) is
registered under the Investment Company Act of 1940, as amended, as an open-end
diversified management investment company. Separate Account (B) is part of
Continental Assurance Company (Assurance), an Illinois life insurance company
which is a wholly-owned subsidiary of Continental Casualty Company (Casualty).
Casualty is wholly-owned by CNA Financial Corporation (CNA). Loews Corporation
owns approximately 84% of the outstanding common stock of CNA.
The operations of Assurance include the sale of certain variable annuity
contracts, the proceeds of which are invested in Separate Account (B). Assurance
also provides investment advisory and administrative services to Separate
Account (B) for a fee.
The assets and liabilities of Separate Account (B) are segregated from those
of Assurance.
INVESTMENTS
Investments in securities traded on national securities exchanges are valued
at the last reported sales price on each business day of the year. Securities
not traded on a national exchange are valued at the bid price of
over-the-counter market quotations. Short-term notes are valued at cost plus
accrued discount or interest (amortized cost) which approximates market.
Separate Account (B) invests from time to time in certain derivative
financial instruments to increase investment returns. Financial instruments used
for such purposes include put and call options on stocks. The gross notional
principal amount of these instruments at June 30, 1998 totaled $1,900,000. No
open derivative positions existed at December 31, 1997.
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. During
the years ended June 30, 1998 and 1997 no investment securities owned by
Separate Account (B) were loaned to brokers under loan agreements.
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>
- ---------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
From operations:
Accumulated investment income--net $ 52,367,806 $52,185,165
Accumulated net realized gain on investment transactions 102,554,199 96,074,948
Accumulated unrealized gain 71,619,305 55,477,008
Accumulated unrealized loss (868,910) (2,332,729)
------------ ------------
Accumulated income 225,672,400 201,404,392
From unit transactions:
Accumulated proceeds from sale of units, net of
withdrawals (52,677,024) (49,025,498)
- ---------------------------------------------------------------------------------------------
TOTAL PARTICIPANTS' EQUITY--NET ASSETS $172,995,376 $152,378,894
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENTS:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET REALIZED GAIN ON INVESTMENTS
SIX MONTHS ENDED JUNE 30 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Aggregate proceeds $395,757,494 $373,481,575
Aggregate cost 389,278,244 366,875,526
- ---------------------------------------------------------------------------------------------
Net realized gain $ 6,479,250 $ 6,606,049
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED GAIN ON INVESTMENTS
SIX MONTHS ENDED JUNE 30 1998 1997
- ---------------------------------------------------------------------------------------------
Unrealized gain on investments:
Balance, June 30 $ 70,750,395 $ 51,317,158
Less balance, January 1 53,144,279 38,992,556
- ---------------------------------------------------------------------------------------------
Change in net unrealized gain $ 17,606,116 $ 12,324,602
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
AGGREGATE COST OF SECURITIES PURCHASED
SIX MONTHS ENDED JUNE 30 1998 1997
- ---------------------------------------------------------------------------------------------
Common stocks $ 26,795,824 $ 30,834,521
Short-term notes 365,178,405 346,327,431
- ---------------------------------------------------------------------------------------------
Total purchases $391,974,229 $377,161,952
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
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11
<PAGE> 12
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NOTE 4. MANAGEMENT FEES:
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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
SIX MONTHS ENDED JUNE 30 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Investment advisory fees $410,072 $322,543
Service fees 270,648 212,879
------- -------
Total fees charged to fund income 680,720 535,422
Sales and administrative fees paid by participants 870 967
- -----------------------------------------------------------------------------------------
Total $681,590 $536,389
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- -----------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 14
B
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
REPORT TO PARTICIPANTS
JUNE 30, 1998
CNA
FOR ALL THE COMMITMENTS YOU MAKE
L 554-921 (06/98) 8/98
