<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. 45 [X]
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 25 [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)
[X] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on April 30, 1998 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.
Title of Securities Being Registered: Group Variable Annuity Contracts
================================================================================
<PAGE> 2
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
------------------
CROSS REFERENCE SHEET
DATA IN POST-EFFECTIVE AMENDMENT NO. 45 TO REGISTRATION STATEMENT
ON FORM N-3 (FILE NO. 2-25483)
<TABLE>
<CAPTION>
ITEMS REQUIRED IN PART A OF FORM N-3 LOCATION IN PROSPECTUS
- ------------------------------------ ----------------------
<S> <C>
1. Cover Page......................................... Cover Page
2. Definitions........................................ Glossary
3. Synopsis or Highlights............................. Synopsis
4. Condensed Financial Information.................... Condensed Financial Information
5. General Description of Registrant and Insurance
Company............................................ Description of the Company and the
Separate Account; Description of Group
Variable Annuity Contracts
6. Management......................................... Management; Synopsis
7. Deductions and Expenses............................ Deductions and Expenses
8. General Description of Variable Annuity
Contracts.......................................... Description of Group Variable
Annuity Contracts
9. Annuity Period..................................... Annuities; Annuity Payments;
Benefits on Death or Withdrawal
10. Death Benefit...................................... Benefits on Death or Withdrawal
11. Purchases and Contract Value....................... Description of Group Variable
Annuity Contracts; Deductions and
Expenses
12. Redemptions........................................ Benefits on Death or Withdrawal
13. Taxes.............................................. Federal Taxes
14. Legal Proceedings.................................. Legal Matters
15. Table of Contents of the Statement of Additional
Information........................................ Table of Contents of the Statement of
Additional Information
LOCATION IN
STATEMENT OF
ITEMS REQUIRED IN PART B OF FORM N-3 ADDITIONAL INFORMATION
------------------------------------ ---------------------------------------
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, 1998, 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, 1998
<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........................................ 37
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 Service 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 "Joint Retirement
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 Joint Retirement 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> <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 1998, 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>
<S> <C>
Contractholder Transaction Expenses
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 1995, 1996 or 1997. 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 Joint Retirement Board, the
Company does not make any deduction from Purchase Payments for sales and
administrative expenses. Under the administrative service agreement with the
Joint Retirement Board effective January 1, 1997, each Participant under the
Joint Retirement Board 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 Joint Retirement
Board for administrative services performed by it on behalf of Joint Retirement
Board 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 1998, 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 January 1, 1997, under the Joint
Retirement Board Contract, a participant must receive written consent from the
Joint Retirement 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").
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
------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income(a)............. $ .238 $ .194 $ .187 $ .189 $ .155 $ .164 $ .185 $ .243 $ .299 $ .126
Expenses(b)...................... .134 .107 .085 .073 .068 .060 .052 .044 .042 .036
------- ------- ------- ------ ------ ------ ------ ------ ------ ------
Net investment income............ .104 .087 .102 .116 .087 .104 .133 .199 .257 .090
Capital changes
Net realized and unrealized
gain (loss) on investments... 3.450 2.314 2.788 (.181) 1.124 .307 1.707 (.055) .491 .562
------- ------- ------- ------ ------ ------ ------ ------ ------ ------
Net increase (decrease) in net
asset value.................. 3.554 2.401 2.890 (.065) 1.211 .411 1.840 .144 .748 .652
Accumulation unit value at the
beginning of the period........ 14.138 11.737 8.847 8.912 7.701 7.290 5.450 5.306 4.558 3.906
------- ------- ------- ------ ------ ------ ------ ------ ------ ------
Accumulation unit value at end of
period......................... $17.692 $14.138 $11.737 $8.847 $8.912 $7.701 $7.290 $5.450 $5.306 $4.558
======= ======= ======= ====== ====== ====== ====== ====== ====== ======
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).......... .64% .67% 1.00% 1.31% 1.05% 1.44% 2.11% 3.74% 5.08% 2.08%
Portfolio turnover rate.......... .45% 53% 46% 52% 69% 71% 13% 55% 47% 14%
Number of accumulation units
outstanding at end of period
(000 omitted).................. 8,613 8,502 8,763 9,299 9,385 9,935 10,486 11,086 11,983 13,477
</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 in 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 December 31, 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 December 31, 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 1997 was 45%, for 1996 was 53%, and for
1995 was 46%. 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: 1997, $11,417; 1996,
$12,704; and 1995, $13,563.
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--403(B) PLAN CONTRACT WITH THE JOINT RETIREMENT
BOARD
Under the administrative service agreement with the Joint Retirement Board,
effective January 1, 1997, each Participant under the Joint Retirement Board
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 Joint Retirement Board for administrative
services performed by it on behalf of its 403(b) 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 1998, 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 January 1, 1997, under the Joint Retirement Board Contract, a
participant must receive written consent from the Joint Retirement 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, 1998 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, 1997 was $17.464104. The total value of
the participant's account was therefore $261,961.56.
(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, $261,961.56 was therefore divided by $1,000 and multiplied
by the annuity rate of $6.34 to obtain the initial monthly payment, $1,660.84.
(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 $6.045526. This was divided into $1,660.84 to obtain the quantity 274.72153,
the number of Annuity Units represented by this benefit. This number of Annuity
Units will remain fixed for the duration of the annuity payments. The second
monthly payment, to be made on February 1, 1998, would be found by multiplying
the number of Annuity Units by the monetary value of an Annuity Unit on that
date. This was $5.905518. The dollar amount of the second payment would have
been 274.72153 times $5.905518 or $1,622.37. 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, $261,961.56, was
therefore divided by $1,000 and multiplied by the annuity rate of $6.34 to
obtain the initial monthly payment, $1,660.84. (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 $6.045526. This was
divided into $1,660.84 to obtain the quantity 274.721553, the number of Annuity
Units represented by this benefit. This number of Annuity Units will remain
fixed for the duration of the annuity payments. The second monthly payment, to
be made on February 1, 1998, would be found by multiplying the number of Annuity
Units by the monetary value of an Annuity Unit on that date. This was $5.905518.
The dollar amount of the second payment would have been 274.721553 times
$5.905518 or $1,622.37. 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.
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.
(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.
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(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 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
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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 $10,000. 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, $130,000 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 $130,000 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.
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
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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
$65,000, (2) one of the 10 employees with annual compensation of more than
$30,000 who owns the largest interests in the Employer, (3) a 5% Owner, or (4)
an owner of 1 percent or more of the stock, profits or capital of the Employer
which owner has annual compensation of more than $150,000.
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). 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. Special five-year averaging ceases to be available for years
beginning after December 31, 1999. 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 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,
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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. There is also 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 20% 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. Additional
withholding will not be made for the 10% additional tax on premature
distributions; however the recipient may be responsible for paying estimated
taxes.
FEDERAL TAX STATUS OF THE SEPARATE ACCOUNT
The Separate Account is not qualified as a "regulated investment company"
under subchapter M of the Internal Revenue Code, as it is not taxed separately
from the Company. While the Separate Account is part of the total operations of
the Company, under existing federal income tax law, no taxes are payable on the
investment income and realized capital gains which are reinvested in the
Separate Account and which are taken into account in determining the value of
the Accumulation Unit and the value of the Annuity Unit and which are not
distributed to participants except as part of annuity payments. (See
"Description of Group Variable Annuity Contracts".)
Both investment income and realized capital gains are accumulated and
reinvested.
The investment results credited to a participant's account are not taxable
to the participant until benefits are received by him. At that time, there is no
distinction made between investment income and realized and unrealized gains in
determining either the amount of the participant's benefits, or the taxes paid
by the participant on these benefits. All payments generally are taxable to the
recipient as ordinary income as received. A participant may wish to consult a
tax adviser for more complete information. See also "Federal Taxes--Federal Tax
Treatment of Participants".
EMPLOYEE RETIREMENT INCOME SECURITY ACT
ERISA contains many provisions which may apply to certain annuity plans
described under Sections 403(b) and 401 of the Internal Revenue Code, including
those offered hereunder. Employers and Contractholders may be subject to many
requirements and duties, including reporting and disclosure requirements,
requirements regarding the form and timing of benefit payments, fiduciary
responsibilities (including investment responsibilities) and prohibitions of
certain transactions involving or affecting the assets of the plan. Failure to
comply with ERISA may result in exposure of the Contractholder or Employer to
civil and criminal sanctions.
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".
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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, 1998, 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.
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 1997 Annual Report to Participants: Balance Sheet;
Statement of Operations; Statement of Changes in Participants' Equity; and
Schedule of Investments. Copies of the 1997 Annual Report to Participants may be
obtained, at no charge, upon request to Continental Assurance
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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 31 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.
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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 a wholly-owned
subsidiary of CNA Financial Corporation, an affiliate of Loews Corporation) as
of December 31, 1997 and 1996 and for each of the two years in the period ended
December 31, 1997, and the related schedule of investments as of December 31,
1997, and have issued our report dated February 13, 1998; such financial
statements, schedule and report are included in the 1997 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, 1997 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 13, 1998
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
Impact of Year 2000 on the Company.......................... 6
Securities Custodian........................................ 6
Independent Auditors........................................ 7
Brokerage Allocations....................................... 7
Calculation of Performance Data............................. 7
Underwriting................................................ 8
Financial Statements........................................ 8
</TABLE>
40
<PAGE> 43
B logo
Group
Variable
Annuity
Contracts
PROSPECTUS
Dated: April 30, 1998
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
CNA LOGO
FOR ALL THE COMMITMENTS YOU MAKE(R)
Y557-838LL
<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, 1998. 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, 1998
<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
Impact of Year 2000 on the Company.......................... 6
Securities Custodian........................................ 6
Independent Auditors........................................ 7
Brokerage Allocations....................................... 7
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*........ 60 Vice President, Vice President and Manager of Corporate Bond
CNA Plaza Treasurer and Investments of the Company and Casualty(1); Vice
Chicago, Illinois 60685 Member of Committee President, Treasurer and Director of CNA Income
Shares, Inc. (closed-end investment company) ("CIS").
Richard T. Fox.............. 60 Member of Committee Financial Consultant since July 1997; Consultant to
661 Sheridan Road 21st Century Environmental Management, Inc.
Winnetka, Illinois 60093 (environmental recycling company) ("21EMI") from
October 1995 through July 1997; Chief Executive
Officer of 21EMI from August 1994 to September
1995(2). President of 21EMI from 1993 to August 1997.
Marilou R. McGirr*.......... 45 Chairman of Committee Vice President of the Company and Casualty since
CNA Plaza and Member of January 1997(1). Assistant Vice President of the
Chicago, Illinois 60685 Committee Company and Casualty from January 1995 to January
1997. Director, Money Desk, of the Company and
Casualty. Vice President and Assistant Treasurer of
CIS since April 1992.
William W. Tongue........... 82 Member of Committee Professor Emeritus of Economics and Finance,
212 Shoreline Drive University of Illinois at Chicago.
Park Ridge, Illinois 60068
Peter J. Wrenn.............. 62 Member of Committee President of Hudson Technology, Inc. (tooling and
915 Columbian Avenue manufacturing).
Oak Park, Illinois 60302
Lynne Gugenheim*............ 38 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(1).
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.
</TABLE>
- ---------------
* An "interested person" (as defined in Section 2(a)(19) of the 1940 Act), by
virtue of his or her employment with the Company.
(1) CNA Financial Corporation, CNA Plaza, Chicago, Illinois 60685, owns all of
the outstanding stock of Casualty, CNA Plaza, Chicago, Illinois 60685,
which, in turns, owns all of the outstanding stock of the Company.
(2) 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
3
<PAGE> 47
companies. Therefore, neither Mr. Dubberke nor Ms. McGirr has received or will
receive any such payments. During 1997, there was no reimbursement payable for
expenses incurred by Committee Members.
The payment of fees to Committee Members is one of the items of expense for
which the Company receives a monthly investment advisory fee (at the annual rate
of 0.5% of the average daily net asset value of 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 1997 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
Marilou R. McGirr(1),
Committee Member*............ None None None None
Lew H. Nathan,
Former 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).
(1) At the 1997 Annual Meeting of Participants, five Committee Members were
elected. Of the five members elected at the 1997 Annual Meeting of
Participants, Lew H. Nathan resigned effective November 3, 1997, and the
Board elected Marilou R. McGirr as his replacement as Committee Member and
Chairman.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of February 23, 1998, 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,
4
<PAGE> 48
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
December 31, 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 December 31, 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: 1997, $1,168,904; 1996, $933,963; and 1995, $766,950. 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
5
<PAGE> 49
income tax consequences for a participant electing to receive a lump sum
settlement since the full amount of the settlement received will be taxable as
ordinary income realized in the year of receipt.
Under separate agreements with the Account, the Company acts as principal
underwriter and performs all sales and administrative functions relative to the
Account and the variable annuity contracts of the Account. The amounts earned by
the Company for sales and administrative functions rendered to the Account for
each of the years 1997, 1996 and 1995 were $11,417, $12,704 and $13,563,
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 1997, 1996 and
1995.
IMPACT OF YEAR 2000 ON THE COMPANY
The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations and
decision making functions may cause computer systems to malfunction when
processing information involving dates after the year 1999. Such malfunctions
could lead to business delays and disruptions. All subsidiaries of CNA
Financial, including the Company, utilize the same systems in conducting
day-to-day operations. The Company is in the process of replacing many of its
legacy systems and is upgrading its systems to accommodate business for the year
2000 and beyond. The Company believes that it is on schedule to resolve the year
2000 issue in a timely manner. The Company's cost to upgrade and replace its
systems will be included as part of the total cost incurred by CNA Financial to
replace and upgrade its systems. Based upon current assessments, CNA Financial
estimates its total cost will be approximately $60 to $70 million. The Company
will be allocated its proportionate share of this cost upon completion of the
upgrade; however, a reasonable estimate of this cost is not currently available.
Due to the interdependent nature of computer systems, the Company may be
adversely impacted depending upon whether it or other entities not affiliated
with the Company (vendors and business partners) address this issue
successfully. To mitigate this impact, CNA Financial is communicating with its
vendors and business partners to coordinate the year 2000 conversion. At this
time, management is unable to determine whether the adverse impact, if any, in
connection with the foregoing circumstances would be material to the Company.
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.
6
<PAGE> 50
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: 1997, $464,745; 1996, $371,335; and 1995, $304,932.
In selecting brokers to execute portfolio transactions, the Company's
primary criterion is the expected ability of such brokers to make the best
possible execution on orders. If several brokers are expected to be able to
provide equally good execution, preference is given to those brokers who provide
statistical research, assistance in pricing portfolio securities or other
services. Commissions on all transactions are negotiated, and the primary basis
of the commission agreed to by the Company is the quality of execution. Research
services, to the extent provided to the Company, may be used by the Company in
servicing its other accounts and not all such services are used in connection
with the Separate Account.
In connection with the purchase and sale of portfolio securities for the
Separate Account, the Company does not bunch orders for such transactions with
orders for other accounts under the management of Loews, CNA Financial, the
Company or other subsidiaries of CNA Financial unless such other accounts are
registered investment companies and unless such bunching would not have adverse
consequences for the Separate Account and such other accounts. Under no
circumstances are orders bunched with orders for the 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 1997.
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>
17.60% AVERAGE RETURN FOR 16.65% AVERAGE RETURN FOR 15.58% AVERAGE RETURN FOR
1 YEAR PERIOD 5 YEAR PERIOD 10 YEAR PERIOD
ENDING ON 12-31-97 ENDING ON 12-31-97 ENDING ON 12-31-97
- ------------------------- ------------------------- -------------------------
<S> <C> <C>
$1,176.00 $2,159.56 $4,252.84
</TABLE>
7
<PAGE> 51
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>
15.85% AVERAGE RETURN FOR 14.29% AVERAGE RETURN FOR 13.70% AVERAGE RETURN FOR
1 YEAR PERIOD 5 YEAR PERIOD 10 YEAR PERIOD
ENDING ON 12-31-97 ENDING ON 12-31-97 ENDING ON 12-31-97
- ------------------------- ------------------------- -------------------------
<S> <C> <C>
$1,158.51 $1,950.27 $3,610.40
</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>
9.47% AVERAGE RETURN FOR 9.45% AVERAGE RETURN FOR 11.84% AVERAGE RETURN FOR
1 YEAR PERIOD 5 YEAR PERIOD 10 YEAR PERIOD
ENDING ON 12-31-97 ENDING ON 12-31-97 ENDING ON 12-31-97
- ------------------------ ------------------------ -------------------------
<S> <C> <C>
$1,094.72 $1,570.51 $3,062.73
</TABLE>
UNDERWRITING
The Company may be deemed to be the principal underwriter for the Separate
Account, but receives no compensation from the Separate Account other than the
fees pursuant to the Investment Advisory Agreement and the Administrative
Service Agreement. See "Investment Advisory Services". The Contracts are offered
by employees and licensed agents and brokers of the Company, who may be deemed
to be "underwriters" under the Securities Act of 1933. Commissions to such
persons on the sale of the Contracts may be considered "underwriting
commissions".
FINANCIAL STATEMENTS
The 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 to the Separate Account's
1997 Annual Report to Participants: Balance Sheet; Statement of Operations;
Statement of Changes in Participants' Equity; and Schedule of Investments.
Copies of the 1997 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 31 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, 1997 and 1996 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, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 18, 1998
9
<PAGE> 53
The following consolidated financial statements are those of Continental
Assurance Company and not those of the Separate Account. They are included 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 1997 1996
- ------------------------------------------------------------------------------------------
(In thousands of dollars except share amounts)
<S> <C> <C>
ASSETS
Investments:
Fixed maturity securities available-for-sale (cost:
$5,598,244 and $4,785,563)............................. $ 5,711,950 $ 4,822,135
Equity securities available-for-sale (cost: $20,519 and
$51,884)............................................... 21,917 44,342
Mortgage loans and real estate (less accumulated
depreciation: $98 and $2,973).......................... 24,721 35,654
Policy loans............................................ 176,513 174,403
Other invested assets................................... 6,465 3,316
Short-term investments.................................. 469,739 500,039
----------- -----------
TOTAL INVESTMENTS................................... 6,411,305 5,579,889
Cash...................................................... 50,072 39,210
Receivables:
Premium and other insurance............................. 1,021,082 856,785
Reinsurance............................................. 173,974 162,245
Less allowance for doubtful accounts.................... (332) (526)
Deferred acquisition costs................................ 971,665 769,752
Accrued investment income................................. 75,474 104,895
Receivables for securities sold........................... 119,425 102,215
Federal income taxes recoverable.......................... 42,709 49,568
Property and equipment at cost (less accumulated
depreciation: $147,294 and $139,468).................... 135,741 121,286
Other assets.............................................. 71,679 94,952
Separate Account business................................. 5,811,613 6,120,874
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $14,884,407 $14,001,145
==========================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Insurance reserves:
Future policy benefits.................................. $ 4,293,426 $ 3,808,356
Claims.................................................. 669,307 667,053
Policyholders' funds.................................... 589,821 573,830
Securities sold under repurchase agreements............... 152,716 --
Participating policyholders' equity....................... 132,418 118,478
Payables for securities purchased......................... 128,218 99,831
Deferred income taxes..................................... 138,002 52,569
Long-term debt............................................ 10,000 10,000
Other liabilities......................................... 620,276 501,686
Separate Account business................................. 5,811,613 6,120,874
----------- -----------
TOTAL LIABILITIES................................... 12,545,797 11,952,677
----------- -----------
Commitments and Contingent Liabilities--Note 8 and Note 10
Stockholder's Equity
Common stock ($5 par value; Authorized 4,500,000 shares;
Issued 4,366,173 shares)................................ 21,831 21,831
Additional paid-in capital................................ 335,666 335,666
Retained earnings......................................... 1,852,591 1,634,308
Net unrealized investment gains........................... 128,522 56,663
----------- -----------
TOTAL STOCKHOLDER'S EQUITY.......................... 2,338,610 2,048,468
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $14,884,407 $14,006,145
==========================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
10
<PAGE> 54
CONTINENTAL ASSURANCE COMPANY
STATEMENT OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Revenues:
Premiums.................................................. $3,435,294 $3,373,797 $3,032,333
Net investment income..................................... 418,395 400,937 369,671
Realized investment gains................................. 163,579 163,571 138,985
Other..................................................... 82,258 81,551 63,785
---------- ---------- ----------
4,099,526 4,019,856 3,604,774
---------- ---------- ----------
Benefits and expenses:
Insurance claims and policyholders' benefits.............. 3,254,223 3,247,556 2,839,940
Amortization of deferred acquisition costs ............... 121,111 12,036 60,682
Other operating expenses.................................. 363,344 396,620 372,986
Participating policyholders' interest..................... 31,647 12,804 14,837
---------- ---------- ----------
3,770,325 3,669,016 3,288,445
---------- ---------- ----------
Income before income tax................................ 329,201 350,840 316,329
Income tax expense.......................................... 110,918 125,423 111,034
- ------------------------------------------------------------------------------------------------------
NET INCOME $ 218,283 $ 225,417 $ 205,295
======================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
11
<PAGE> 55
CONTINENTAL ASSURANCE COMPANY
STATEMENT OF CONSOLIDATED STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
ADDITIONAL NET UNREALIZED
COMMON PAID-IN RETAINED INVESTMENT
STOCK CAPITAL EARNINGS GAINS (LOSSES) TOTAL
- ---------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995............................ $21,831 $335,666 $1,203,596 $(113,909) $1,447,184
Net income........................................ -- -- 205,295 -- 205,295
Change in net unrealized gains/losses............. -- -- -- 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............. -- -- -- (227,461) (227,461)
------- -------- ---------- --------- ----------
BALANCE, DECEMBER 31, 1996.......................... 21,831 335,666 1,634,308 56,663 2,048,468
Net income........................................ -- -- 218,283 -- 218,283
Change in net unrealized gains/losses............. -- -- -- 71,859 71,859
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $21,831 $335,666 $1,852,591 $ 128,522 $2,338,610
=====================================================================================================================
</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 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 218,283 $ 225,417 $ 205,295
----------- ----------- -----------
Adjustments to reconcile net income to net cash flows from
operating activities:
Net realized investment gains, pre-tax.................. (163,579) (163,571) (138,985)
Participating policyholders' interest................... 7,714 (5,472) (3,573)
Amortization of bond discount........................... (25,278) (40,238) (16,180)
Depreciation............................................ 22,713 25,771 18,863
Changes in:
Insurance receivables, net............................ (113,169) (230,618) (45,342)
Deferred acquisition costs............................ (201,914) (245,132) (90,564)
Accrued investment income............................. 29,421 (15,420) (16,938)
Federal income taxes recoverable...................... 6,859 (26,022) 22,525
Insurance reserves.................................... 297,365 367,717 234,948
Deferred income taxes................................. 38,024 83,531 17,491
Other liabilities..................................... 150,503 37,987 49,319
Other, net............................................ (29,387) (7,586) (11,766)
----------- ----------- -----------
TOTAL ADJUSTMENTS............................... 19,272 (219,053) 19,798
----------- ----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES........ 237,555 6,364 225,093
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturities............................. (8,179,284) (7,036,670) (3,862,087)
Proceeds from fixed maturities:
Sales................................................... 6,752,672 6,583,057 3,292,666
Maturities, calls and redemptions....................... 732,884 183,038 187,164
Purchases of equity securities............................ (90,796) (99,584) (7,863)
Proceeds from sale of equity securities................... 138,061 92,012 4,417
Change in short-term investments.......................... 31,970 (79,981) 407,345
Purchases of property and equipment....................... (39,059) (23,888) (26,288)
Change in securities sold under repurchase agreements..... 152,716 (188,211) (354,915)
Change in other investments............................... 13,657 138,778 (112,684)
Other, net................................................ 54,535 99,274 57,153
----------- ----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES........ (432,644) (332,175) (415,092)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts for investment contracts credited to policyholder
account balances........................................ 399,795 459,785 363,951
Return of policyholder account balances in investment
contracts............................................... (193,844) (173,466) (114,668)
Other, net................................................ -- (3,102) 3,102
----------- ----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES........ 205,951 283,217 252,385
----------- ----------- -----------
NET CASH FLOWS.................................. 10,862 (42,594) 62,386
Cash at beginning of year................................... 39,210 81,804 19,418
- -----------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 50,072 $ 39,210 $ 81,804
=====================================================================================================
Supplemental disclosures of cash flow information:
Federal income taxes paid................................. $ 6,009 $ 18,893 $ 46,135
Interest expense paid..................................... 377 374 403
=====================================================================================================
</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
Continental Assurance Company ("Assurance" or the "Company") is a
wholly-owned subsidiary of Continental Casualty Company ("Casualty") which is
wholly-owned by CNA Financial Corporation ("CNAF"). Loews Corporation owns
approximately 84% of the outstanding common stock of CNAF. The operating
subsidiaries of Assurance consist of Valley Forge Life Insurance Company
("VFL"), Convida Holdings, Ltd., CNA Health Partners, Inc. and CNA Life
Insurance Company of Canada.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP"). Certain
amounts applicable to prior years have been reclassified to conform to
classifications followed in 1997. All intercompany amounts have been eliminated.
The preparation of financial statements in conformity with GAAP 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.
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 and
annuities are recognized as revenue when due after deductions for ceded
insurance.
Future policy benefit reserves--Reserves for traditional life insurance
products (whole and term life products) are computed based upon the net level
premium method 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 assumptions include the estimated effects of inflation and
expenses beyond the premium paying period. Reserves for universal life-type
contracts are equal to the account balances that accrue to the benefit of the
policyholders. Interest crediting rates ranged from 4.9% to 7.3% for the three
years ended December 31, 1997.
Claim reserves--Claim reserves include provisions for reported claims in
the course of settlement and estimates of unreported claims based upon past
experience.
Reinsurance--Assurance assumes and cedes insurance with other insurers and
reinsurers. 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. Assurance's reinsurance includes quota share, yearly renewable
term and facultative programs. Amounts recoverable from reinsurers are estimated
in a manner consistent with the claim liability.
14
<PAGE> 58
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 1.--(CONTINUED):
Deferred acquisition costs--Life acquisition costs are capitalized and
amortized based on assumptions consistent with those used for computing policy
benefit reserves. Acquisition costs on traditional life business are amortized
over the 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
cumulatively 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 0.7%, 0.5% and
0.6% of gross life insurance in force and 0.7%, 0.7% and 0.8% of premium income
for 1997, 1996 and 1995, respectively. Participating policyholders' equity is
determined by allocating 90% of net income or loss and unrealized investment
gains or losses related to such business as allowed by applicable laws, less
dividends determined by the Board of Directors. 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 policyholders' benefits.
Separate Account business--Assurance writes certain investment and annuity
contracts. The supporting assets and liabilities of these contracts and policies
are legally segregated and reflected as assets and liabilities of Separate
Account business. Assurance guarantees principal and a specified return to the
contract holders on approximately 74% of the Separate Account business.
Substantially all assets of the Separate Account business are carried at fair
value. Separate account liabilities are carried principally at contract values.
INVESTMENTS
Valuation of investments--Assurance classifies its fixed maturity
securities (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.
Assurance accounts for its derivative securities under the fair value
method. Under this method the derivative securities are recorded at fair value
at the reporting date with changes in fair value reflected in realized
investment gains and losses. Assurance's derivatives are made up of interest
rate caps, futures, forwards, commitments to purchase securities and options and
are classified as other invested assets.
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, which have
an original maturity of one year or less, are carried at amortized cost which
approximates fair 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 amortized cost of the specific securities sold. Unrealized investment
gains and losses on fixed maturity securities and equity securities are
reflected as part of stockholder's equity, net of applicable deferred income
taxes and participating policyholders' interest.
15
<PAGE> 59
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 1.--(CONTINUED):
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. Cash deposits from these transactions are invested in short-term
investments (primarily commercial paper). Assurance continues to receive the
interest on the loaned fixed maturity securities, as beneficial owner and,
accordingly, loaned debt securities are included in fixed maturity securities.
The liabilities for securities sold subject to repurchase agreements are
recorded at their contractual 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. 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 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Fixed maturities:
Taxable bonds............................................. $369,662 $364,620 $327,416
Tax exempt bonds.......................................... -- 29 58
Equity securities........................................... 1,923 36 68
Mortgage loans and real estate.............................. 2,956 2,875 3,907
Policy loans................................................ 10,274 9,972 11,350
Short-term investments...................................... 31,994 24,026 18,525
Security repurchase transactions income..................... 23,578 26,764 43,087
Other....................................................... 3,978 1,675 10,849
-------- -------- --------
444,365 429,997 415,260
Investment expense.......................................... (5,430) (2,981) (4,103)
Security repurchase transaction expenses and fees........... (20,540) (26,079) (41,486)
- ---------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $418,395 $400,937 $369,671
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF INVESTMENT GAINS (LOSSES)
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Realized investment gains (losses):
Fixed maturities.......................................... $ 87,371 $ 63,129 $ 76,119
Equity securities......................................... 19,183 (161) 749
Real estate............................................... 4,955 1,879 9
Other, principally Separate Account business.............. 52,070 98,724 62,108
-------- --------- ---------
163,579 163,571 138,985
Allocated to participating policyholders.................. (14,613) (14,249) (7,835)
Income tax expense........................................ (52,701) (55,056) (45,882)
-------- --------- ---------
NET REALIZED INVESTMENT GAINS 96,265 94,266 85,268
-------- --------- ---------
Change in net unrealized investment gains (losses):
Fixed maturities.......................................... 77,134 (205,921) 424,202
Equity securities......................................... 8,940 (21,406) 7,048
Other, principally Separate Account business.............. 41,280 (126,404) 262,182
-------- --------- ---------
127,354 (353,731) 693,432
Allocated to participating policyholders.................. (3,983) 17,988 (44,150)
Income tax (expense) benefit.............................. (51,512) 108,282 (251,249)
-------- --------- ---------
CHANGE IN NET UNREALIZED INVESTMENT GAINS
(LOSSES)........................................ 71,859 (227,461) 398,033
- -----------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED INVESTMENT GAINS
(LOSSES) $168,124 $(133,195) $ 483,301
===========================================================================================================
</TABLE>
17
<PAGE> 61
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED):
<TABLE>
<CAPTION>
SUMMARY OF GROSS REALIZED INVESTMENT GAINS
(LOSSES) FOR FIXED MATURITY SECURITIES AND EQUITY SECURITIES
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
FIXED EQUITY FIXED EQUITY FIXED EQUITY
YEAR ENDED DECEMBER 31 MATURITIES SECURITIES MATURITIES SECURITIES MATURITIES SECURITIES
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sales............................... $6,752,672 $138,061 $6,583,057 $92,012 $3,292,666 $4,417
---------- -------- ---------- ------- ---------- ------
Gross realized gains.............................. $ 113,008 $ 19,365 $ 110,763 $ 822 $ 94,053 $ 791
Gross realized losses............................. (25,637) (182) (47,634) (983) (17,934) (42)
- -------------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAINS (LOSSES) ON SALES $ 87,371 $ 19,183 $ 63,129 $ (161) $ 76,119 $ 749
===============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN STOCKHOLDER'S EQUITY
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996
------------------------------------ ------------------------------------
DECEMBER 31 GAINS LOSSES NET GAINS LOSSES NET
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities.................................. $134,694 $(20,988) $113,706 $ 78,670 $(42,098) $ 36,572
Equity securities................................. 5,307 (3,909) 1,398 13,747 (21,289) (7,542)
Other, principally Separate Account business...... 89,454 (2,337) 87,117 46,684 (847) 45,837
-------- -------- -------- -------- -------- --------
$229,455 $(27,234) 202,221 $139,101 $(64,234) 74,867
======== ======== ======== ========
Allocated to participating policyholders.......... (3,876) 107
Deferred income tax expense....................... (69,823) (18,311)
- -------------------------------------------------------------------------------------------------------------------------------
NET UNREALIZED INVESTMENT GAINS $128,522 $ 56,663
===============================================================================================================================
</TABLE>
18
<PAGE> 62
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED):
SUMMARY OF INVESTMENTS IN FIXED MATURITY SECURITIES
AND EQUITY SECURITIES AVAILABLE-FOR-SALE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS OF DOLLARS) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
United States Treasury securities and obligations of
government agencies....................................... $2,007,287 $ 19,880 $ 5,924 $2,021,243
Asset-backed securities..................................... 1,359,693 42,543 1,624 1,400,612
Corporate securities........................................ 1,725,044 51,704 7,787 1,768,961
Other debt securities....................................... 506,220 20,567 5,653 521,134
---------- -------- ------- ----------
Total fixed maturity securities......................... 5,598,244 134,694 20,988 5,711,950
Equity securities........................................... 20,519 5,307 3,909 21,917
- --------------------------------------------------------------------------------------------------------------------
TOTAL $5,618,763 $140,001 $24,897 $5,733,867
====================================================================================================================
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 political subdivisions
tax-exempt................................................ 30 -- -- 30
Corporate securities........................................ 1,229,060 26,311 1,601 1,253,770
Other debt securities....................................... 316,213 13,584 1,691 328,106
---------- -------- ------- ----------
Total fixed maturity securities......................... 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
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
SUMMARY OF INVESTMENTS IN FIXED MATURITY SECURITIES AMORTIZED MARKET AMORTIZED MARKET
BY CONTRACTUAL MATURITY COST VALUE COST VALUE
- --------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
DECEMBER 31
Due in one year or less..................................... $ 152,088 $ 152,496 $ 110,961 $ 111,387
Due after one year through five years....................... 2,090,301 2,086,615 1,831,556 1,813,827
Due after five years through ten years...................... 1,072,178 1,097,869 933,637 940,750
Due after ten years......................................... 923,985 974,358 731,055 770,010
Asset-backed securities not due at a single maturity date... 1,359,692 1,400,612 1,178,354 1,186,161
- --------------------------------------------------------------------------------------------------------------------
TOTAL $5,598,244 $5,711,950 $4,785,563 $4,822,135
====================================================================================================================
</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, other than equity securities, that have not
produced income for the years ended December 31, 1997 and 1996. 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 and other unrated securities which, in the opinion of
management, are below investment grade (below BBB). Carrying values of high
yield securities in the general account were $407.0 million and $193.5 million
at December 31,
19
<PAGE> 63
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED):
1997 and 1996, respectively. Net unrealized gains on high yield securities,
included in the general account, were $2.5 million and $3.7 million at December
31, 1997 and 1996, respectively.
At December 31, 1997, total Separate Account cash and investments amounted
to $5.7 billion with taxable fixed maturities representing approximately 83% of
the Separate Accounts' portfolio. Approximately 74%, at December 31, 1997, of
the Separate Account investments were used to fund guaranteed investment
contracts (GICs) for which Assurance guarantees principal and a specified return
to the contract holders. The duration of fixed maturities included in the GIC
portfolio are matched to approximate the corresponding payout pattern of the
liabilities of the GIC contracts.
At December 31, 1997, all fixed maturities in the GIC portfolio were
carried at fair value and amounted to $3.8 billion, compared to $3.9 billion at
December 31, 1996. At December 31, 1997, net unrealized gains on fixed
maturities in the GIC portfolio amounted to approximately $71.2 million,
compared to $0.7 million of net unrealized losses at December 31, 1996. The
gross unrealized gains and losses for the fixed maturities portfolios at
December 31, 1997, were $86.7 million and $15.5 million, respectively, compared
to $55.0 million and $55.7 million, respectively, at December 31, 1996.
High yield securities in the guaranteed Separate Account portfolio were
carried at fair value and amounted to $310.3 million and $471.6 million at
December 31, 1997 and 1996, respectively. Net unrealized losses on high yield
securities held in such Separate Accounts were $1.2 million and $6.4 million at
December 31, 1997 and 1996, respectively.
NOTE 3. LONG-TERM DEBT:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
DECEMBER 31 1997 1996
- ----------------------------------------------------------------------------------
(In thousands of dollars)
<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 required to be disclosed for all financial instruments,
whether or not recognized in the consolidated balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values may be based on estimates using present value or other
valuation techniques. These techniques are significantly affected by the
assumptions used, including the discount rates and estimates of future cash
flows. Potential taxes and other transaction costs have not been considered in
estimating fair value. The estimates presented herein are subjective in nature
and are not necessarily indicative of the amounts Assurance could realize in the
current market exchange. Any difference would not be expected to be material.
20
<PAGE> 64
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 4.--(CONTINUED):
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.
The carrying amounts reported in the consolidated balance sheet approximate
fair value for cash, short-term investments, premium and other insurance
receivables, accrued investment income, receivables for securities sold,
securities sold under repurchase agreements, payables for securities purchased
and certain other assets and other liabilities because of their short-term
nature. Accordingly, these financial instruments are not listed in the table
below.
The carrying amounts and estimated fair values of Assurance's other
financial instrument assets and liabilities are listed below. Derivative
instruments are shown in a separate table.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1997 1996
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
DECEMBER 31 AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ---------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Investments:
Fixed maturities.......................................... $5,711,950 $5,711,950 $4,822,135 $4,822,135
Equity securities......................................... 21,917 21,917 44,342 44,342
Mortgage loans............................................ 20,553 21,685 29,644 30,718
Policy loans.............................................. 176,513 172,377 174,403 162,706
Other invested assets..................................... 4,330 4,330 3,316 3,316
Separate Account assets:
Fixed maturities.......................................... 4,768,843 4,768,843 4,608,262 4,608,262
Equity securities......................................... 206,353 206,353 169,183 169,183
Other..................................................... 116,700 116,700 437,004 437,004
FINANCIAL LIABILITIES
Premium deposits and annuity contracts...................... 1,194,295 1,144,850 1,064,540 1,017,622
Long-term debt.............................................. 10,000 10,000 10,000 10,000
Separate Account liabilities:
Guaranteed investment contacts............................ 3,413,504 3,448,002 3,989,469 4,011,508
Deferred annuities........................................ 73,479 90,236 73,010 84,110
Variable separate accounts................................ 996,847 996,847 568,555 568,555
Other..................................................... 614,448 614,448 895,595 895,595
===============================================================================================================
</TABLE>
The following methods and assumptions were used by Assurance in estimating
the fair value for the above 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.
21
<PAGE> 65
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 4.--(CONTINUED):
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.
Assurance's long-term debt represents floating rate tax exempt bonds
with interest rates determined monthly and thus approximates fair value.
The fair values for guaranteed investment contracts and deferred
annuities of the Separate Account business 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
their carrying value.
DERIVATIVE FINANCIAL INSTRUMENTS
Assurance invests from time to time in derivative financial instruments
primarily to reduce its exposure to market risk. Financial instruments used for
such purposes may include interest rate caps, put and call options, commitments
to purchase securities, futures and forwards. Assurance generally does not hold
or issue these instruments for trading purposes. Assurance also uses derivatives
to mitigate the risk associated with its indexed group annuity contracts by
purchasing S&P 500 futures contracts in a notional amount equal to the original
customer deposit.
The gross notional principal or contractual amounts of derivative financial
instruments in the general account at December 31, 1997 totaled $500.0 million.
There were no derivative financial instrument holdings in the general account at
December 31, 1996. The gross notional principal or contractual amounts of
derivative financial instruments in the Separate Accounts totaled $859.9 million
and $394.5 million at December 31, 1997 and 1996, respectively. The contract or
notional amounts are used to calculate the exchange of contractual payments
under the agreements and are not representative of the potential for gain or
loss on these agreements.
The fair values associated with derivative financial instruments are
generally affected by interest rates, equity stock prices and foreign exchange
rates. The credit exposure associated with these instruments is generally
limited to the unrealized fair value of the instruments and will vary based on
the credit worthiness of the counterparties. Although Assurance is exposed to
the aforementioned credit risk, it does not expect any counterparty to fail to
perform as contracted based on the creditworthiness of the counterparties. Due
to the nature of the derivative securities, Assurance does not require
collateral.
The fair value of derivatives generally reflects the estimated amounts that
Assurance would receive or pay upon termination of the contracts at the
reporting date. Dealer quotes are available for substantially all of
22
<PAGE> 66
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 4.--(CONTINUED):
Assurance's derivatives. 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.
A summary of the aggregate notional or contractual amounts and estimated
fair values of these instruments at December 31, 1997 and 1996, is presented
below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 CONTRACTUAL/ ASSET/(LIABILITY) REALIZED
(IN THOUSANDS OF DOLLARS) NOTIONAL AMOUNT FAIR VALUE GAIN/(LOSS)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
General Account
Commitments to purchase government and municipal
securities.............................................. $-- $-- $ 1,404
Options purchased......................................... -- -- 586
Interest rate caps........................................ 500,000 4,330 (1,466)
- ---------------------------------------------------------------------------------------------------------------
TOTAL $500,000 $ 4,330 $ 524
===============================================================================================================
Separate Accounts
Futures................................................... $614,675 $ (208) $111,879*
Forwards.................................................. 1,122 71 296
Commitments to purchase government and municipal
securities.............................................. 79,600 (64) 1,111
Options purchased......................................... 91,278 444 (1,221)
Options written........................................... 73,196 (439) 1,872
- ---------------------------------------------------------------------------------------------------------------
TOTAL $859,871 $ (196) $113,937
===============================================================================================================
</TABLE>
* This amount is offset by an increase in the liability to participants.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 CONTRACTUAL/ ASSET/(LIABILITY)
(IN THOUSANDS OF DOLLARS) NOTIONAL AMOUNT FAIR VALUE GAIN/(LOSS)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
General Account
Options written........................................... $-- $-- $ 1,195
- ---------------------------------------------------------------------------------------------------------------
TOTAL $-- $-- $ 1,195
===============================================================================================================
Separate Accounts
Futures................................................... $318,621 $(6,207) $ 28,988*
Forwards.................................................. 7,290 -- 142
Commitments to purchase government and municipal
securities.............................................. 17,434 -- 119
Options purchased......................................... 26,241 -- (172)
Options written........................................... 24,865 -- 943
- ---------------------------------------------------------------------------------------------------------------
TOTAL $394,451 $(6,207) $ 30,020
===============================================================================================================
</TABLE>
* This amount is offset by an increase in the liability to participants.
Futures are contracts to buy or sell a standard quantity and quality of a
commodity, financial instrument or index at a specified future date and price.
Forwards are contracts between two parties to purchase and sell a specific
quantity of a commodity, government security, foreign currency or other
financial instrument at a price specified at contract inception, with delivery
and settlement at a specified future date.
Commitments to purchase government and municipal securities are a
commitment to purchase securities in the future at a predetermined price.
Options are contracts that grant the purchaser, for a premium payment, the
right, but not the obligation, to either purchase or sell a financial instrument
at a specified price within a specified period of time.
23
<PAGE> 67
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 4.--(CONTINUED):
An interest rate cap consists of a guarantee given by the issuer to the
purchaser in exchange for the payment of a premium. This guarantee states that
if interest rates rise above a specified rate, the issuer will pay to the
purchaser the difference between the then current market rate and the specified
rate on the notional principal amount. The notional principal amount is not
actually borrowed or repaid.
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
("NAIC") as well as state laws, regulations and general administrative rules.
Assurance has no material permitted accounting practices. Statutory net income
was $42.6 million, $57.7 million and $30.2 million for the years ended December
31, 1997, 1996 and 1995, respectively. Statutory capital and surplus for
Assurance was $1.2 billion at December 31, 1997 and 1996. Statutory capital and
surplus of $34.5 million at December 31, 1997 and 1996, was appropriated by the
Board of Directors, under regulatory formula, to fund excess group losses due to
an 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. Approximately $122.4 million and $116.0 million at December
31, 1997 and 1996, respectively, 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
CNAF, all Casualty employees are covered by CNAF's benefits plans. The plans of
CNAF are discussed below.
PENSION PLAN
CNAF has noncontributory pension plans covering all full-time employees age
21 or over who have completed at least one year of service. Casualty is included
in the CNA Employees' Retirement Plan and Assurance is allocated their
proportionate share of these expenses. While the benefits for the plans vary,
they are generally based on years of credited service and the employee's highest
sixty consecutive months of compensation.
CNAF'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.
The funded status is determined using assumptions at the end of the year.
Underfunded plans are those plans for which the accumulated benefit obligation
is in excess of plan assets. Overfunded plans are those plans for which plan
assets exceed the accumulated benefit obligations. Pension cost is determined
using assumptions at the beginning of the year.
24
<PAGE> 68
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 6.--(CONTINUED):
Net pension cost allocated to Assurance was $7.8 million, $7.5 million and
$4.8 million for the years ended December 31, 1997, 1996 and 1995, respectively.
The following table sets forth the Plan's funded status and amounts
recognized in CNAF's consolidated financial statements at December 31, 1997,
1996 and 1995:
<TABLE>
<CAPTION>
ACCUMULATED BENEFIT OBLIGATION
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ------------------------ ------------------------
UNDERFUNDED OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
DECEMBER 31 PLANS PLANS PLANS PLANS PLANS
- -------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Actuarial present value of accumulated plan
benefits:
Vested........................................ $1,339,708 $517,221 $ 622,548 $ 491,052 $ 646,017
Nonvested..................................... 76,992 37,718 32,369 28,346 14,126
- -------------------------------------------------------------------------------------------------------------------
ACCUMULATED BENEFIT OBLIGATION.............. $1,416,700 $554,939 $ 654,917 $ 519,398 $ 660,143
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NET PENSION ASSET (LIABILITY)
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ------------------------ ------------------------
UNDERFUNDED OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
DECEMBER 31 PLANS PLANS PLANS PLANS PLANS
- -------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Projected benefit obligation.................... $1,779,799 $777,755 $ 788,333 $ 769,999 $ 809,308
Plan assets at fair value....................... 1,312,592 701,854 503,623 629,673 496,264
- -------------------------------------------------------------------------------------------------------------------
Plan assets less than projected benefit
obligation................................ (467,207) (75,901) (284,710) (140,326) (313,044)
Unrecognized net asset at January 1, 1986 being
recognized over 12 years...................... (2,124) (7,099) -- (12,176) --
Unrecognized prior service costs................ 88,006 19,077 77,747 21,445 104,042
Unrecognized net gain (loss).................... 218,204 122,173 (11,793) 164,585 13,508
- -------------------------------------------------------------------------------------------------------------------
NET PENSION (LIABILITY) ASSET............... $ (163,121) $ 58,250 $(218,756) $ 33,528 $(195,494)
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NET PERIODIC PENSION COST
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ------------------------ ------------------------
UNDERFUNDED OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
DECEMBER 31 PLANS PLANS PLANS PLANS PLANS
- -------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Service cost--benefits attributed to employee
service during the year..................... $ 54,321 $ 36,489 $ 18,825 $ 32,118 $ 11,596
Interest cost on projected benefit
obligation.................................. 118,668 53,549 56,771 51,056 32,760
Actual return on plan assets.................. (102,950) (31,106) (29,013) (115,363) (43,432)
Net amortization and deferral................. 17,370 (16,059) (5,982) 72,415 19,547
- -------------------------------------------------------------------------------------------------------------------
NET PERIODIC PENSION COST $ 87,409 $ 42,873 $ 40,601 $ 40,226 $ 20,471
===================================================================================================================
</TABLE>
25
<PAGE> 69
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 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate............................................... 7.25% 7.50% 7.25% 8.50%
Rate of increase in compensation levels*.................... 2.75 2.75 2.75 4.00
Expected long-term rate of return on plan assets............ 7.50 7.75-8.50 7.50-8.50 8.75
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* Excludes age/service and productivity increases.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
CNAF provides certain health care benefits for eligible retirees, through
age 64, and provides life insurance and reimbursement of Medicare Part B
premiums for all eligible retired persons. CNAF funds benefit costs principally
on the basis of current benefit payments.
Net postretirement benefit cost allocated to Assurance was $4.3 million,
$2.8 million and $1.8 million for the years ended December 31, 1997, 1996 and
1995, respectively.
The following table sets forth the amounts recognized in CNAF's
consolidated financial statements at December 31, 1997, 1996 and 1995:
ACCRUED POSTRETIREMENT BENEFIT COST
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Accumulated postretirement benefit obligation:
Retirees.................................................. $201,985 $171,950 $185,507
Fully eligible, active plan participants.................. 72,818 89,009 59,173
Other active plan participants............................ 87,207 88,191 62,540
-------- -------- --------
Total accumulated postretirement benefit obligation..... 362,010 349,150 307,220
Plan assets at fair value................................... (509) -- --
Unrecognized prior service cost............................. (203) (70) --
Unrecognized net (loss) gain................................ (8,197) (12,215) 7,380
- ------------------------------------------------------------------------------------------------
ACCRUED POSTRETIREMENT BENEFIT COST $353,101 $336,865 $314,600
================================================================================================
</TABLE>
NET PERIODIC POSTRETIREMENT BENEFIT COST
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995*
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands of dollars)
Net periodic postretirement benefit cost:
Service cost-benefits attributed to employee service
during the year......................................... $10,156 $11,935 $ 5,969
Interest cost on accumulated postretirement benefit
obligation.............................................. 25,135 24,146 17,506
Expected return on assets................................. (25) -- --
Amortization.............................................. (322) 374 (941)
- ---------------------------------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT COST $34,944 $36,455 $22,534
=============================================================================================
</TABLE>
* The 1995 data includes The Continental Corporation Retirement Plans from
acquisition date.
26
<PAGE> 70
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 6.--(CONTINUED):
ASSUMPTIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate:
Assumptions used in determining net periodic benefit
cost.................................................... 7.50% 7.25% 8.50%
Assumptions used in determining the projected benefit
obligation (liability).................................. 7.25% 7.50% 7.25%
- ------------------------------------------------------------------------------------------------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9% in 1997, 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 CNAF as
of December 31, 1997 by $23.9 million and the aggregate net periodic
postretirement benefit cost for 1997 by $2.9 million.
SAVINGS PLAN
Casualty 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. CNAF 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 CNAF. Assurance is allocated its proportionate share of CNA
Employees' Savings Plan expenses. CNAF contributions allocated to and expensed
by Assurance for the Savings Plan were $2.0 million, $2.3 million and $1.9
million for the years ended December 31, 1997, 1996 and 1995, 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
CNAF and its eligible subsidiaries (CNA Tax Group), which in turn is included in
the consolidated Federal income tax return of Loews and its eligible
subsidiaries. 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. The amount in the Shareholder's Surplus Account was $1,419.9
million and $1,305.0 million at December 31, 1997 and 1996, respectively.
Another tax memorandum account, defined as the "Policyholders' Surplus Account,"
totaled $70.4 million at both December 31, 1997 and 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.
27
<PAGE> 71
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, 1997 and 1996 and are shown in the table below:
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
DECEMBER 31 1997 1996
- ------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C>
Insurance reserves.......................................... $ 197,487 $ 168,704
Deferred acquisition costs.................................. (278,292) (217,410)
Investment valuation........................................ 8,810 21,769
Net unrealized gains........................................ (68,129) (18,387)
Property and equipment...................................... (8,569) (11,506)
Receivables................................................. (6,031) (5,955)
Postretirement benefits other than pensions................. 10,969 9,712
Other, net.................................................. 5,753 504
- ------------------------------------------------------------------------------------
NET DEFERRED TAX (LIABILITIES) $(138,002) $ (52,589)
====================================================================================
</TABLE>
At December 31, 1997, gross deferred tax assets and liabilities amounted to
$274.9 million and $412.9 million, respectively. At December 31, 1996, gross
deferred tax assets and liabilities amounted to $200.1 million and $253.7
million, respectively. Assurance has not established a valuation reserve as
management believes that all deferred tax assets are fully realizable.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Current tax expense......................................... $ 77,545 $ 44,002 $ 93,372
Deferred tax expense........................................ 33,373 81,421 17,662
- ----------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $110,918 $125,423 $111,034
==============================================================================================
</TABLE>
The components of total income tax expense are allocated between operating
income and realized capital gains and losses in the following table.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Income tax expense on:
Operating income.......................................... $ 58,217 $ 70,367 $ 65,152
Realized investment gains................................. 52,701 55,056 45,882
- ------------------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $ 110,918 $ 125,423 $111,034
======================================================================================================
</TABLE>
28
<PAGE> 72
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 7.--(CONTINUED):
A reconciliation of the statutory federal income tax rate to the effective
income tax rate on income is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
YEAR ENDED DECEMBER 31 1997 INCOME 1996 INCOME 1995 INCOME
- --------------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Income taxes at statutory rates..................... $115,221 35.0% $122,793 35.0% $110,716 35.0%
Other items, net.................................... (4,303) (1.3) 2,630 0.7 318 0.1
- --------------------------------------------------------------------------------------------------------------------------
INCOME TAX AT EFFECTIVE RATES $110,918 33.7% $125,423 35.7% $111,034 35.1%
==========================================================================================================================
</TABLE>
NOTE 8. -- REINSURANCE:
The ceding of insurance does not discharge the primary liability of the
original insurer. Assurance places reinsurance with other carriers only after
careful review of the nature of the contract and a thorough assessment of the
reinsurers' credit quality and claim settlement performance. Further, for
carriers that are not authorized reinsurers in its states of domicile, Assurance
receives collateral, primarily in the form of bank letters of credit. Such
collateral totaled approximately $10.1 million and $5.1 million at December 31,
1997 and 1996, respectively.
In the following table, the majority of life premium revenue is from long
duration type contracts, while the majority of accident and health earned
premiums are from short duration contracts.
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>
1997
Life...................................................... $ 907.9 128.6 $131.1 $ 905.4 14.2%
Accident and Health....................................... 2,501.8 96.0 67.9 2,529.9 3.8
-------- ------ ------ --------
Total premiums.......................................... $3,409.7 $224.6 $199.0 $3,435.3 6.5%
======== ====== ====== ========
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 premiums.......................................... $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 premiums.......................................... $2,891.2 $229.4 $ 88.3 $3,032.3 7.6%
==================================================================================================================
</TABLE>
Premium revenues ceded to non-affiliated companies were $199.0 million,
$133.7 million and $88.3 million for the years ended December 31, 1997, 1996 and
1995, respectively. Additionally, insurance claims and
29
<PAGE> 73
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 8.--(CONTINUED):
policyholders' benefits are net of reinsurance recoveries of $128.4 million,
$89.0 million and $57.0 million for years ended 1997, 1996 and 1995,
respectively.
The impact of reinsurance on life insurance in-force is shown in the
following schedule:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
LIFE INSURANCE IN FORCE
--------------------------------------- ASSUMED/NET
DIRECT ASSUMED CEDED NET %
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In millions of dollars)
DECEMBER 31, 1997.......................................... $235,468 $76,130 $74,242 $237,356 32.1%
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
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 9. RELATED PARTIES:
Assurance is party to the CNA Intercompany Expense Agreement whereby
expenses incurred by CNAF and each of its subsidiaries are allocated to the
appropriate company. Expenses of Assurance exclude $18.1 million, $28.5 million
and $21.3 million of general and administrative expenses incurred by Assurance
and allocated to CNAF for the years ended December 31, 1997, 1996 and 1995,
respectively. Assurance had $36.0 million and $67.5 million affiliated payable
at December 31, 1997 and 1996 respectively, for net cash settlements owed to an
affiliate 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.
30
<PAGE> 74
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONCLUDED
NOTE 11. BUSINESS SEGMENTS:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
REVENUES
Individual................................................ $ 920,853 $ 903,871 $ 767,224
Group..................................................... 3,015,094 2,952,414 2,698,565
Realized gains............................................ 163,579 163,571 138,985
----------- ----------- -----------
TOTAL............................................... $ 4,099,526 $ 4,019,856 $ 3,604,774
=========== =========== ===========
INCOME BEFORE INCOME TAX
Individual................................................ $ 110,196 $ 119,316 $ 78,323
Group..................................................... 70,039 82,202 106,856
Realized gains............................................ 148,966 149,322 131,150
----------- ----------- -----------
TOTAL............................................... $ 329,201 $ 350,840 $ 316,329
=========== =========== ===========
NET INCOME
Individual................................................ $ 74,323 $ 78,017 $ 50,927
Group..................................................... 47,696 53,134 69,100
Realized gains............................................ 96,264 94,266 85,268
----------- ----------- -----------
TOTAL............................................... $ 218,283 $ 225,417 $ 205,295
=========== =========== ===========
ASSETS
Individual................................................ $ 5,358,914 $ 4,709,914 $ 4,068,794
Group..................................................... 9,525,493 9,291,231 9,059,956
- ---------------------------------------------------------------------------------------------------------
TOTAL............................................... $14,884,407 $14,001,145 $13,128,750
=========================================================================================================
</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, $2.1 billion and $1.9 billion for the
years ended December 31, 1997, 1996 and 1995, respectively, under contracts
covering U.S. government employees and their dependents (FEHBP).
31
<PAGE> 75
B logo
Group
Variable
Annuity
Contracts
STATEMENT OF ADDITIONAL INFORMATION
Dated: April 30, 1998
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
CNA LOGO
FOR ALL THE COMMITMENTS YOU MAKE(R)
Y57-838LL
<PAGE> 76
PART C
OTHER INFORMATION
ITEM 28. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE NUMBERS
IN 1997
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
PAGE PAGE NUMBERS
NUMBERS IN STATEMENT
IN OF ADDITIONAL
PROSPECTUS INFORMATION
-- ----
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>
**
(13)(a) Consent of Independent Auditors.
**
(14) 1997 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> 77
ITEM 29. DIRECTORS AND OFFICERS OF THE INSURANCE COMPANY.
The following table sets forth certain information regarding: (i) each
director or officer of the Company who is engaged directly or indirectly in
activities relating to the Separate Account or the variable annuity contracts
offered by the Separate Account and (ii) each executive officer of the Company
(including the Company's president, secretary, treasurer and certain vice
presidents).
<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 None
*Jonathan D. Kantor........................... Director and Secretary None
*W. James MacGinnitie......................... Director, Senior Vice President and None
Chief Financial Officer
*William J. Sharkey, Jr. ..................... Director None
*Bernard L. Hengesbaugh....................... Chief Operating Officer None
*Lew H. Nathan................................ Group Vice President and Treasurer None
</TABLE>
- ---------------
* The principal business address is CNA Plaza, Chicago, Illinois 60685.
**
ITEM 31. NUMBER OF CONTRACTOWNERS.
As of April 21, 1998, the Separate Account had 192 qualified
Contractholders.
**
- ---------------
** 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> 78
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, 1998.
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
By /s/ MARILOU R. MCGIRR
------------------------------------
Marilou R. McGirr, 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 EXECUTIVE 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/ MARILOU R. MCGIRR Chairman of Committee and April 30, 1998
- ----------------------------------------------------- Member of Committee of
Marilou R. McGirr Continental Assurance
Company Separate
Account (B) (Principal
Executive Officer, Principal
Financial Officer and
Principal Accounting
Officer)
/s/ RICHARD W. DUBBERKE Member of Committee of April 30, 1998
- ----------------------------------------------------- Continental Assurance
Richard W. Dubberke Company Separate
Account (B)
/s/ RICHARD T. FOX Member of Committee of April 30, 1998
- ----------------------------------------------------- Continental Assurance
Richard T. Fox Company Separate
Account (B)
/s/ WILLIAM W. TONGUE Member of Committee of April 30, 1998
- ----------------------------------------------------- Continental Assurance
William W. Tongue Company Separate
Account (B)
</TABLE>
C-3
<PAGE> 79
<TABLE>
<C> <S> <C>
/s/ PETER J. WRENN April 30, 1998
- ----------------------------------------------------- Member of Committee of
Peter J. Wrenn Continental Assurance
Company Separate
Account (B)
/s/ DENNIS H. CHOOKASZIAN Director, Chairman of the Board April 30, 1998
- ----------------------------------------------------- and Chief Executive Officer of
Dennis H. Chookaszian Continental Assurance Company
(Principal Executive Officer)
/s/ PHILIP L. ENGEL Director and President April 30, 1998
- ----------------------------------------------------- of Continental Assurance
Philip L. Engel Company
/s/ MICHAEL C. GARNER Director of Continental Assurance April 30, 1998
- ----------------------------------------------------- Company
Michael C. Garner
/s/ JONATHAN D. KANTOR Director of Continental April 30, 1998
- ----------------------------------------------------- Assurance Company
Jonathan D. Kantor
/s/ PATRICIA L. KUBERA Group Vice President and April 30, 1998
- ----------------------------------------------------- Controller (Principal Accounting
Patricia L. Kubera Officer)
/s/ W. JAMES MACGINNITIE Director, Senior Vice President April 30, 1998
- ----------------------------------------------------- and Chief Financial Officer of
W. James MacGinnitie Continental Assurance Company
(Principal Financial Officer)
/s/ WILLIAM H. SHARKEY, JR. Director of Continental April 30, 1998
- ----------------------------------------------------- Assurance Company
William H. Sharkey, Jr.
</TABLE>
C-4
<PAGE> 80
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT NAME
------- ------------
<C> <S>
(13)(a) Independent Auditors' Consent
(14) 1997 Annual Report to Participants of the Separate
Account
(16) Calculation of Performance Data
(17) Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 13(a)
[Deloitte & Touche LLP Letterhead]
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. 45 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 13, 1998 accompanying the financial
statements of Continental Assurance Company Separate Account (B) for the year
ended December 31, 1997, and the financial highlights of Continental Assurance
Company Separate Account (B) for the ten years ended December 31, 1997, and our
report dated February 18, 1998, accompanying the financial statements of
Continental Assurance Company for the year ended December 31, 1997 appearing in
or incorporated by reference in the Prospectus and the Statement of Additional
Information, which are parts of such Registration Statement. 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, 1998
<PAGE> 1
EXHIBIT 14
- --------------------------------------------------------------------------------
Dear Participant:
- --------------------------------------------------------------------------------
Separate Account (B) ended the year with an Accumulated Unit Value increase
of 25.10% while the dividend-adjusted Standard and Poor's Composite Index of 500
stocks (S&P 500) increased by 33.36%. The Wall Street Journal reported that the
average return for diversified U.S. stock funds was 24.36%.
1997 was an unprecedented third consecutive year of strong double digit
growth for the stock market, with large capitalization stocks again
outperforming small capitalization stocks. The three-year S&P 500 returns for
1995-1997 of 37.53%, 22.96% and 33.36% were the highest consecutive returns for
any three year period during the measured period dating from 1926. The previous
high three-year period was 1954-1956 with returns of 52.60%, 31.60% and 6.60%,
respectively.
The strong stock market in 1997 reflected the positives that have been
driving the market for the past three years. Corporate profitability continued
strong, particularly considering we were experiencing the seventh consecutive
year of economic expansion. Although wage rates began to edge up, productivity
advancements and relatively low interest rates apparently were able to offset
most of the pressures on margins. Inflation remained under control which kept
the Federal Reserve at bay during 1997. The only increase of the Fed Funds rate
was a moderate 1/4 of 1% to 5.50% on March 25, 1997. Although the Federal
Reserve gave additional signals that they might raise interest rates again prior
to year end, the turmoil in Asia discouraged any such action.
The March increase in the Fed Funds rate precipitated a market correction of
approximately 9%. When there was no additional rate hike at the next Federal
Reserve Board meeting in April, the market took off and rallied strongly into
August. From April 15 to August 1, the S&P 500 increased by over 25%, 115% on an
annualized basis. As the Asian crisis continued to deepen into the fourth
quarter, stock prices went on hold and then took a one day plunge on October 27.
The S&P 500 fell 64.66 points, or 6.87% and the Dow Jones Industrial Average
fell 554.26 points, or 7.18%. Fortunately, the next day saw a partial bounce
back with the S&P 500 increasing 44.87 points and the Dow Jones Industrials
recovering 337.17 points. Although the S&P 500 recovered enough so that by early
December a new high was hit at 983.79, this was barely above the previous high
of 983.12 reached on October 7 and only 2% above August highs. The Dow Jones
Industrials actually hit its 1997 high on August 6.
Separate Account (B) has no investments in Asian companies. The portfolio was
negatively affected, however, as were world stock markets, by the potential
slowdown of growth in Asia. Not only will demand for our export products be
reduced, but Asian currency devaluations will make imports more attractive.
Also, several of your portfolio companies are multi-national with operations in
Asia. Companies such as Applied Materials, Citicorp, Molex and United
Technologies have direct exposure to the Asian markets. Our oil service
companies had a rough fourth quarter stock-wise as oil prices dropped in
anticipation of reduced Asian demand for petroleum. Earnings still look strong,
however, for Schlumberger, Camco and Santa Fe International, the portfolio
holdings in Separate Account (B).
We've previously commented on the success of our options writing program.
During 1997 we generated $986 thousand of call premium writing covered calls on
stocks held in our portfolio. This compares to $897 thousand received as call
premium in 1996. We intend to judiciously use this strategy to enhance income
generation in 1998.
1998 could be a difficult year for the stock market. Historically the average
return for the stock market has been about 12.5%, well below the average of the
last three years. The S&P 500 earnings multiple at 22 times trailing earnings
looks aggressive and leaves little room for earnings disappointments. On the
positive side, inflation should continue to be subdued and therefore interest
rates should not be a problem during at least the first half of 1998. The market
has been essentially unchanged for the last five months, but with increased
volatility. We believe there is still a possibility for a correction of at least
10% although low interest rates should keep our economy growing enough to
prevent a full scale bear market.
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/ Marilou R. McGirr
Marilou R. McGirr
Chairman of the Committee
- --------------------------------------------------------------------------------
1
<PAGE> 2
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
(PER ACCUMULATION UNIT OUTSTANDING DURING THE PERIOD) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Value at beginning of period $14.14 $11.74 $ 8.85 8.91 $7.70
----- ----- --- --- ---
Investment income .23 .19 .19 .19 .15
Fees .13 .10 .09 .07 .07
----- ----- --- --- ---
INVESTMENT INCOME--NET .10 .09 .10 .12 .08
Net gain (loss) on investments 3.45 2.31 2.79 (.18) 1.13
----- ----- --- --- ---
NET INCREASE (DECREASE) IN PARTICIPANTS' EQUITY
RESULTING FROM OPERATIONS 3.55 2.40 2.89 (.06) 1.21
----- ----- --- --- ---
VALUE AT END OF PERIOD $17.69 $14.14 $11.74 $8.85 $8.91
===== ===== ===== === ===
Ratio of investment income--
net to average participants' equity 0.6% 0.7% 1.0% 1.3% 1.0%
Ratio of fees to average participants' equity .83% .83% .83% .83% .83%
Portfolio turnover rate 45% 53% 46% 52% 69%
Number of accumulation units outstanding
at end of period 8,612,630 8,502,140 8,763,186 9,298,777 9,385,475
</TABLE>
- --------------------------------------------------------------------------------
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
VALUATION MARKET
DATE VALUE
- -------------------------
<S> <C> <C>
1997 December 31 $17.69
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
</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>
UNIT
VALUATION MARKET
DATE VALUE
- -----------------------
<S> <C> <C>
1998 January 1 $6.05
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
</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 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Consumer Staples 23.9% 18.2%
Technological 23.0 23.4
Financial Services 14.2 13.5
Consumer Services 11.3 13.2
Capital Goods 8.8 9.8
Energy 8.7 10.3
Basic Industries 3.6 5.6
Utilities 3.6 --
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Transportation 1.6 2.3
Consumer Cyclicals 1.3 3.7
---- ----
100% 100%
---- ----
</TABLE>
- --------------------------------------------------------------------------------
3
<PAGE> 4
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS:
AEROSPACE-(3.3%)
Raytheon Company 45,000 $ 2,272,500
United Technologies Corporation 38,200 2,781,438
------------
5,053,938
------------
BEVERAGES-(3.2%)
The Robert Mondavi Corporation* 49,000 2,388,750
PepsiCo, Inc. 67,000 2,441,313
------------
4,830,063
------------
BROADCASTING-(2.1%)
Tele-comm Liberty Media Gr-A* 88,875 3,221,719
------------
CHEMICAL-(1.8%)
Monsanto Company 65,000 2,730,000
------------
COMPUTER SYSTEMS-(3.1%)
Cisco Systems, Inc.* 45,000 2,508,750
EMC Corporation* 80,000 2,195,000
------------
4,703,750
------------
COMPUTER TECHNOLOGY-(4.0%)
First Data Corp. 80,000 2,340,000
Hewlett-Packard Company 59,000 3,687,500
------------
6,027,500
------------
CONTAINER-(1.6%)
Crown Cork & Seal Company, Inc. 50,000 2,506,250
------------
COSMETICS-(2.8%)
The Gillette Company 42,000 4,218,375
------------
DIVERSIFIED-(2.7%)
American Standard Companies, Inc.* 55,000 2,107,188
Corning Inc. 52,700 1,956,488
------------
4,063,676
------------
ELECTRONIC COMPONENTS-(6.0%)
Honeywell, Inc. 35,000 2,397,500
Molex Incorporated/Class A 145,995 4,197,356
Motorola, Inc. 44,000 2,510,750
------------
9,105,606
------------
ELECTRICAL EQUIPMENT-(2.2%)
General Electric Company 45,000 3,301,875
------------
ENERGY-(2.2%)
Enron Corp. 80,000 3,325,000
------------
FINANCIAL SERVICES-(2.1%)
American Express Company 35,000 3,123,750
------------
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
4
<PAGE> 5
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS:
FINANCIAL SERVICES (BANK)-(11.5%)
Banc One Corporation 54,500 $ 2,960,031
Bank United Corp. 70,000 3,425,625
Citicorp 35,500 4,488,531
Nationsbank Corporation 52,200 3,174,413
Norwest Corporation 90,000 3,476,250
------------
17,524,850
------------
FOODS-(2.0%)
C P C International Inc.** 28,800 3,103,200
------------
HEALTH CARE-(6.8%)
Cardinal Health, Inc. 49,750 3,737,469
Healthsouth Corp.* 128,000 3,552,000
Medtronic, Inc. 60,000 3,138,750
------------
10,428,219
------------
HOUSEHOLD PRODUCTS-(2.0%)
Procter & Gamble Co. 38,800 3,096,725
------------
INSTRUMENTS/CAPITAL GOODS-(1.3%)
Mettler-Toledo Holdings Inc.* 116,200 2,004,450
------------
MACHINERY-(2.2%)
Illinois Tool Works, Inc. 56,800 3,415,100
------------
MERCHANDISING-DRUGS-(1.4%)
Rite Aid Corporation 35,000 2,054,062
------------
MERCHANDISING-FOODS-(1.7%)
Safeway Inc.* 40,000 2,530,000
------------
OIL FIELD SERVICES & EQUIPMENT-(6.1%)
Camco International, Inc. 50,000 3,184,375
Santa Fe International 70,000 2,848,125
Schlumberger Limited 41,000 3,300,500
------------
9,333,000
------------
PHARMACEUTICAL-(9.8%)
Amgen, Inc.* 45,000 2,435,625
Eli Lilly and Company 40,000 2,785,000
Pfizer Inc. 81,000 6,039,562
Schering-Plough Corporation 60,000 3,727,500
------------
14,987,687
------------
PUBLISHING-(1.8%)
Tribune Company 45,000 2,801,250
------------
RAILROADS-(1.5%)
Burlington Northern Santa Fe 25,212 2,343,140
------------
RETAIL STORES-(1.2%)
The Sports Authority, Inc.* 124,750 1,840,062
------------
See accompanying Notes to Financial Statements.
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE> 6
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES
OR MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) PAR VALUE VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
SEMICONDUCTOR-(3.6%)
Applied Materials, Inc.* 88,000 $ 2,651,000
Intel Corp. 40,000 2,810,000
------------
5,461,000
------------
TELECOMMUNICATIONS-(2.0%)
Loral Space & Communications* 141,500 3,033,406
------------
UTILITY (COMMUNICATION)-(2.8%)
Teleport Communications Group Inc.* 35,000 1,920,625
Worldcom, Inc.* 80,000 2,420,000
------------
4,340,625
------------
UTILITY (WATER)-(0.6%)
United States Filter Corporation* 30,000 898,125
------------
TOTAL COMMON STOCKS--(95.4%) 145,406,403
------------
SHORT-TERM NOTES:
INSURANCE-(4.8%)
AIG Funding Inc., 5.82%, due 01/02/98 $7,335,000 7,333,814
------------
TOTAL SHORT-TERM NOTES-(4.8%) 7,333,814
------------
TOTAL INVESTMENTS-(100.2%) 152,740,217
------------
Cash and receivables less liabilities-(-0.2%) (361,323)
- -----------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY-NET ASSETS-(100.0%) $152,378,894
===============================================================================================
</TABLE>
*Non-income producing security in 1997.
**Effective 1/02/98 name changed to Bestfoods.
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN SHARES) INCREASED DECREASED NOW OWNED
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
A T & T Corporation 15,000 59,000 -
Adaptec, Inc. 50,000 50,000 -
American Express Company 15,000 10,000 35,000
American Standard Companies, Inc. 55,000 - 55,000
Amgen, Inc. 45,000 - 45,000
Applied Materials, Inc. 69,000 30,000 88,000
Banc One Corporation 10,000 10,000 54,500
</TABLE>
- --------------------------------------------------------------------------------
6
<PAGE> 7
- --------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN SHARES) INCREASED DECREASED NOW OWNED
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Bank United Corp. 70,000 - 70,000
Boatmen's Bancshares Inc. - 40,000 -
Burlington Northern Santa Fe - 5,000 25,212
CMP Media Inc. 2,000 2,000 -
Camco International, Inc. 5,000 35,000 50,000
Cardinal Health, Inc. 10,000 30,000 49,750
Cisco Systems, Inc. 45,000 - 45,000
Citicorp - 5,000 35,500
Cognizant Corp. 25,000 25,000 -
The Columbia Gas System, Inc. - 35,000 -
Columbia HCA Healthcare Corp. - 62,500 -
Corning Inc. 52,700 - 52,700
Crown Cork & Seal Company, Inc. 10,000 - 50,000
Deere & Company - 46,600 -
Electronic Data Systems Corporation - 57,500 -
EMC Corporation 80,000 - 80,000
Enron Corp. 10,000 10,000 80,000
Fluor Corporation - 33,000 -
General Electric Company 22,500 - 45,000
The Gillette Company - 10,000 42,000
Harman International Industries, Inc. 35,000 35,000 -
Healthsouth Corp. 94,000 60,000 128,000
Hewlett-Packard Company 10,000 15,000 59,000
Home Depot, Inc. - 38,333 -
Honeywell, Inc. 35,000 - 35,000
Illinois Tool Works, Inc. 28,400 - 56,800
Intel Corp. 40,000 25,000 40,000
Iona Technologies PLC-ADR 10,000 10,000 -
Eli Lilly and Company 60,000 30,000 40,000
Loral Space & Communications 22,500 - 141,500
McDonald's Corporation - 50,000 -
Medtronic, Inc. 60,000 - 60,000
Mettler-Toledo Holdings Inc. 116,200 - 116,200
Minerals Technologies Inc. - 47,300 -
Molex Incorporated/Class A 52,558 - 145,995
Monsanto Company 20,000 10,000 65,000
NCR Corporation 2,750 2,750 -
Nationsbank Corporation 52,200 - 52,200
Norwest Corporation 45,000 - 90,000
Pfizer Inc. 40,500 10,000 81,000
Procter & Gamble Co. 19,400 8,900 38,800
Raytheon Company 45,000 - 45,000
Rite Aid Corporation 35,000 - 35,000
Safeway Inc. 40,000 - 40,000
Santa Fe International 70,000 - 70,000
Schering Plough Corporation 40,000 20,000 60,000
</TABLE>
- --------------------------------------------------------------------------------
7
<PAGE> 8
- --------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (IN SHARES) INCREASED DECREASED NOW OWNED
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
Schlumberger Limited 23,000 5,000 41,000
Solutia Inc. 13,000 13,000 -
The Sports Authority, Inc. 20,000 - 124,750
Tele-Communications, Inc./Class A - 55,000 -
Tele-comm Liberty Media Gr-A 29,625 - 88,875
Teleport Communications Group Inc. 35,000 - 35,000
Thermo Electron Corp. - 61,625 -
Travelers/Aetna Property Casualty Corporation 25,000 95,000 -
Tribune Company 45,000 - 45,000
Tricon Global Restaurants 6,700 6,700 -
United States Filter Corporation 85,000 55,000 30,000
Worldcom, Inc. 80,000 - 80,000
===============================================================================================
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TEN LARGEST COMMON STOCK HOLDINGS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
MARKET % OF NET
DECEMBER 31, 1997 VALUE ASSETS
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Pfizer Inc. $ 6,039,562 4.0%
Citicorp 4,488,531 2.9
The Gillette Company 4,218,375 2.8
Molex Incorporated/Class A 4,197,356 2.8
Cardinal Health, Inc. 3,737,469 2.5
Schering-Plough Corporation 3,727,500 2.4
Hewlett-Packard Company 3,687,500 2.4
Healthsouth Corp. 3,552,000 2.3
Norwest Corporation 3,476,250 2.3
Bank United Corp. 3,425,625 2.2
- ----------------------------------------------------------------------------------------
$40,550,168 26.6%
========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
8
<PAGE> 9
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities of unaffiliated issuers--Note
1:
Common stocks at market (cost $92,262,123 and
$73,779,133) $145,406,403 $112,751,631
Call options written at market - 20,059
Short-term notes at amortized cost (approximates
market) 7,333,814 8,027,747
------------ ------------
TOTAL INVESTMENTS 152,740,217 120,799,437
Cash 13,730 188,311
Dividends receivable--Note 1: 102,376 144,192
Receivable for securities sold - 520,198
Receivable from Continental Assurance Company for fund
deposits 58,304 1,719
------------ ------------
TOTAL ASSETS 152,914,627 121,653,857
------------ ------------
LIABILITIES
Fees payable to Continental Assurance Company--Note 4: 40,585 40,876
Payable for securities purchased - 1,083,750
Deferred income call options written - 99,747
Payable to Continental Assurance Company for fund
withdrawals 495,148 237,842
------------ ------------
TOTAL LIABILITIES 535,733 1,462,215
- -----------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY--NET ASSETS (8,612,630 and 8,502,140
units issued
and outstanding at $17.69 and $14.14 per unit)--Note 2 $152,378,894 $120,191,642
=========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Investment income:
Dividends $ 1,316,494 $ 1,177,681
Interest and other 755,828 509,710
----------- -----------
2,072,322 1,687,391
----------- -----------
Fees (Continental Assurance Company)--Note 4:
Investment advisory fees 704,159 562,628
Service fees 464,745 371,335
----------- -----------
1,168,904 933,963
----------- -----------
INVESTMENT INCOME--NET 903,418 753,428
----------- -----------
Investment gain--Note 3:
Net realized gain 16,194,879 12,631,639
Net unrealized gain 14,151,723 7,550,017
----------- -----------
NET GAIN ON INVESTMENTS 30,346,602 20,181,656
- ----------------------------------------------------------------------------------------
NET INCREASE IN PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $31,250,020 $20,935,084
========================================================================================
</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 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
From operations:
Investment income--net $ 903,418 $ 753,428
Net realized gain on investments 16,194,879 12,631,639
Net unrealized gain on investments 14,151,723 7,550,017
------------ ------------
Net increase in participants' equity resulting from
operations 31,250,020 20,935,084
------------ ------------
From unit transactions:
Sales 11,909,643 2,182,340
Withdrawals (10,972,411) (5,770,866)
------------ ------------
Net increase (decrease) in participants' equity
resulting from unit transactions 937,232 (3,588,526)
------------ ------------
TOTAL INCREASE IN PARTICIPANTS' EQUITY 32,187,252 17,346,558
Participants' equity, January 1 120,191,642 102,845,084
- --------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY, DECEMBER 31 $152,378,894 $120,191,642
- --------------------------------------------------------------------------------------------
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. No open derivative
positions existed at December 31, 1997. The gross notional principal amount of
these instruments at December 31, 1996 totaled $3,841,250.
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 December 31, 1997 and 1996 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>
- ---------------------------------------------------------------------------------------------
DECEMBER 31 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
From operations:
Accumulated investment income--net $ 52,185,165 $ 51,281,747
Accumulated net realized gain on investment transactions 96,074,948 79,880,069
Accumulated unrealized gain 55,477,008 39,694,309
Accumulated unrealized loss (2,332,729) (701,753)
------------ ------------ ---
Accumulated income 201,404,392 170,154,372
From unit transactions:
Accumulated proceeds from sale of units, net of
withdrawals (49,025,498) (49,962,730)
- ---------------------------------------------------------------------------------------------
TOTAL PARTICIPANTS' EQUITY--NET ASSETS $152,378,894 $120,191,642
=============================================================================================
</TABLE>
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENTS:
================================================================================
<TABLE>
<CAPTION>
NET REALIZED GAIN ON INVESTMENTS
YEAR ENDED DECEMBER 31 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate proceeds $820,595,354 $385,825,919
Aggregate cost 804,400,475 373,194,280
- ---------------------------------------------------------------------------------------------
Net realized gain $ 16,194,879 $ 12,631,639
=============================================================================================
CHANGE IN UNREALIZED GAIN ON INVESTMENTS
YEAR ENDED DECEMBER 31 1997 1996
- ---------------------------------------------------------------------------------------------
Unrealized gain on investments:
Balance, December 31 $ 53,144,279 $ 38,992,556
Less balance, January 1 38,992,556 31,442,539
- ---------------------------------------------------------------------------------------------
Change in net unrealized gain $ 14,151,723 $ 7,550,017
=============================================================================================
AGGREGATE COST OF SECURITIES PURCHASED
YEAR ENDED DECEMBER 31 1997 1996
- ---------------------------------------------------------------------------------------------
Common stocks $ 60,343,096 $ 54,207,247
Put options - 3,000
Bonds - 2,346,875
Short-term notes 761,856,229 327,063,972
- ---------------------------------------------------------------------------------------------
Total purchases $822,199,325 $383,621,094
=============================================================================================
</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 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Investment advisory fees $ 704,159 $562,628
Service fees 464,745 371,335
---------- --------
Total fees charged to fund income 1,168,904 933,963
Sales and administrative fees paid by participants 11,417 12,704
- -------------------------------------------------------------------------------------------
Total $1,180,321 $946,667
===========================================================================================
</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, 1997, 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, 1997 and
1996, 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, 1997. 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 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, 1997 and 1996, 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, 1997.
Deloitte & Touche LLP
Chicago, Illinois
February 13, 1998
- --------------------------------------------------------------------------------
12
<PAGE> 13
[SEPARATE ACCOUNT B LOGO]
CONTINENTAL ASSURANCE COMPANY
SEPARATE ACCOUNT (B)
REPORT TO PARTICIPANTS
DECEMBER 31, 1997
[CNA LOGO]
[CA LOGO]
L 554-921 (12/97) 2/98
<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, 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
1-1-97 TO 12-31-97 1-1-93 TO 12-31-97 1-1-88 TO 12-31-97
- -------------------------------------------------------------------------------------------------------
<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 $1,176.00 $2,159.56 $4,252.84
- -------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN 17.60% 16.65% 15.58%
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
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 $1,158.51 $1,950.27 $3,610.40
- -------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN 15.85% 14.29% 13.70%
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
HR-10 PLANS
Investment $1,000 $1,000 $1,000
Less Sales Load (7%) (70) (70) (70)
Less Adm Exp (1.5%) (15) (15) (15)
------ ------ ------
Net Investment $915 $915 $915
Acctg fee: $20 1st yr; $10 ea add'l yr
Accounting withdrawal fee $10
Surrender fee $20 (2%)
- -------------------------------------------------------------------------------------------------------
ERV $1,094.72 $1,570.51 $3,062.73
- -------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN 9.47% 9.45% 11.84%
- -------------------------------------------------------------------------------------------------------
</TABLE>
n
P(1+T) = ERV
P = a hypothetical initial payment of $1000
T = Average annual total return
n = numbers of years
ERV = ending redeembable value of a hypothetical $1000 payment made at the
beginning of the one, five and 10-year period, at the end of the one, five, or
10-year period.
<PAGE> 1
[ARTICLE] 6
[CIK] 0000023971
[NAME] CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT B
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1997
[PERIOD-START] JAN-01-1997
[PERIOD-END] DEC-31-1997
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 152,740
[RECEIVABLES] 161
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 152,915
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 536
[TOTAL-LIABILITIES] 536
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 0
[SHARES-COMMON-STOCK] 8,612,630
[SHARES-COMMON-PRIOR] 8,502,140
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 53,144
[NET-ASSETS] 152,379
[DIVIDEND-INCOME] 1,316
[INTEREST-INCOME] 756
[OTHER-INCOME] 0
[EXPENSES-NET] 1,619
[NET-INVESTMENT-INCOME] 903
[REALIZED-GAINS-CURRENT] 16,195
[APPREC-INCREASE-CURRENT] 14,152
[NET-CHANGE-FROM-OPS] 31,250
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 184,354
[NUMBER-OF-SHARES-REDEEMED] 73,863
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 32,187
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 704
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1,169
[AVERAGE-NET-ASSETS] 139,325
[PER-SHARE-NAV-BEGIN] 14.138
[PER-SHARE-NII] 0.104
[PER-SHARE-GAIN-APPREC] 3.45
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 17.692
[EXPENSE-RATIO] 0.008
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 7
[CIK] 0000023971
[NAME] CONTINENTAL ASSURANCE COMPANY
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1997
[PERIOD-START] JAN-01-1997
[PERIOD-END] DEC-31-1997
[DEBT-HELD-FOR-SALE] 5,711,950
[DEBT-CARRYING-VALUE] 0
[DEBT-MARKET-VALUE] 0
[EQUITIES] 21,917
[MORTGAGE] 20,553
[REAL-ESTATE] 4,168
[TOTAL-INVEST] 6,411,305
[CASH] 50,072
[RECOVER-REINSURE] 173,974
[DEFERRED-ACQUISITION] 971,665
[TOTAL-ASSETS] 14,884,407
[POLICY-LOSSES] 4,962,733
[UNEARNED-PREMIUMS] 0
[POLICY-OTHER] 0
[POLICY-HOLDER-FUNDS] 589,821
[NOTES-PAYABLE] 10,000
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 21,831
[OTHER-SE] 2,316,779
[TOTAL-LIABILITY-AND-EQUITY] 14,884,407
[PREMIUMS] 3,435,294
[INVESTMENT-INCOME] 418,395
[INVESTMENT-GAINS] 163,579
[OTHER-INCOME] 82,258
[BENEFITS] 3,254,223
[UNDERWRITING-AMORTIZATION] 121,111
[UNDERWRITING-OTHER] 363,344
[INCOME-PRETAX] 329,201
[INCOME-TAX] 110,918
[INCOME-CONTINUING] 218,283
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 218,283
[EPS-PRIMARY] 49.99
[EPS-DILUTED] 49.99
[RESERVE-OPEN] 0
[PROVISION-CURRENT] 0
[PROVISION-PRIOR] 0
[PAYMENTS-CURRENT] 0
[PAYMENTS-PRIOR] 0
[RESERVE-CLOSE] 0
[CUMULATIVE-DEFICIENCY] 0
</TABLE>
