<PAGE> 1
- --------------------------------------------------------------------------------
Dear Participant:
- --------------------------------------------------------------------------------
For the six months ended June 30, 1999, Separate Account (B)'s Accumulated
Unit Value increased 17.21% while the dividend adjusted Standard & Poor's
Composite Index of 500 stocks (S&P 500) increased by 12.38%. The Account's
twelve month gain was 23.10% versus the S&P 500's dividend adjusted return of
22.75%. Separate Account (B) also topped the Lipper Index of growth stock mutual
funds which registered gains of 11.89% and 18.87% for the six month and one year
periods, respectively.
The powerful stock market rally during the first half of 1999 adds to the
four straight years of double digit growth experienced over the 1995-1998
period. With the S&P 500 closing at 1372.66 on June 30, the effective
price/earnings multiple for the Index was approximately 28 times the mean of 14
Wall Street estimates of $48.37 for 1999. The average price/earnings multiple
over the past 10 years was approximately 20 times.
The U.S. financial market environment continues to be positive. Inflation
remains low which limits the magnitude of any near term rise in interest rates.
The business cycle has been muted thanks to low inventory levels prompted by low
inflation and better information technology. In the postwar years all recessions
have been accompanied by an inventory correction. Consequently, structurally
lower inventory levels moderate sharp fluctuations in economic growth. The
profit picture has actually improved this year and upward revisions are
significantly outnumbering downward revisions.
Low inflation, lower risk perception and solid earnings have led to an upward
revision of the market's price/earnings ratio. As we have mentioned in previous
participant letters, the market is priced for perfection and is vulnerable to
disappointment. In our generation, the disappointment has come in the form of
tightening credit and rising interest rates triggered by inflationary
expectations. The Federal Reserve raised the Fed Funds rate from 4.75% to 5.00%
on June 30 and has recently given muted signals that the rate might have to be
raised again.
Your Separate Account (B) portfolio is structured for growth with primarily
high quality, large capitalization growth companies. The median market
capitalization for the portfolio is $34.3 billion as of June 30, with 5 holdings
exceeding $200 billion and only one holding, Emmis Communications, under $1
billion; the Emmis position has subsequently been sold. The portfolio has a
strong representation in the health care and technology sectors, whereas
cyclical commodity companies have been avoided. Also, Separate Account (B) has
not been active in the more traditional income stocks, such as electric
utilities and Real Estate Investment Trusts.
Separate Account (B) has been employing a program of writing call options on
stocks held in the portfolio. This program has enhanced portfolio cash flow and
has generated net premium of approximately $1.16 million during the first half
of 1999.
The second half of 1999 could present some challenges to the stock market.
The Federal Reserve will raise interest rates again if inflation begins to heat
up. Rising interest rates are particularly inimical to high growth, high
multiple companies that have earnings growth discounted well into the future.
Y2K adjustments could act to slow technology spending in the second half, as
corporate managers become more cautious in regard to adding new technology prior
to 2000. We anticipate a choppy market during the second half, with short term
concerns somewhat offsetting continuing long-term market positives. On balance,
we do not anticipate a market correction that would be categorized as a bear
market.
Your investment managers 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,
Marilou R. McGirr
Marilou R. McGirr
Chairman of the Committee
- --------------------------------------------------------------------------------
1
<PAGE> 2
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30
(UNAUDITED) YEAR ENDED DECEMBER 31
----------- ------------------------------------------------------
(PER ACCUMULATION UNIT OUTSTANDING DURING THE PERIOD) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Value at beginning of period $21.55 $17.69 $14.14 $11.74 $ 8.85
----- ----- ----- ----- -----
Investment income .09 .20 .23 .19 .19
Fees .10 .16 .13 .10 .09
----- ----- ----- ----- -----
NET INVESTMENT INCOME (.01) .04 .10 .09 .10
Net gain on investments 3.72 3.82 3.45 2.31 2.79
----- ----- ----- ----- -----
NET INCREASE IN PARTICIPANTS' EQUITY
RESULTING FROM OPERATIONS 3.71 3.86 3.55 2.40 2.89
----- ----- ----- ----- -----
VALUE AT END OF PERIOD $25.26 $21.55 $17.69 $14.14 $11.74
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Ratio of investment income--
net to average participants' equity (0.10)%(a) 0.20% 0.60% 0.70% 1.00%
Ratio of fees to average participants' equity .83%(a) .83% .83% .83% .83%
Portfolio turnover rate 18% 41% 45% 53% 46%
Number of accumulation units outstanding
at end of period 8,073,323 8,320,912 8,612,630 8,502,140 8,763,186
<CAPTION>
(PER ACCUMULATION UNIT OUTSTANDING DURING THE PERIOD)
- ----------------------------------------------------- ---
<S> <C>
Value at beginning of period
Investment income
Fees
NET INVESTMENT INCOME
Net gain on investments
NET INCREASE IN PARTICIPANTS' EQUITY
RESULTING FROM OPERATIONS
VALUE AT END OF PERIOD
Ratio of investment income--
net to average participants' equity
Ratio of fees to average participants' equity
Portfolio turnover rate
Number of accumulation units outstanding
at end of period
</TABLE>
- --------------------------------------------------------------------------------
(a) annualized See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
COMMITTEE FOR SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
MEMBERS
- --------------------------------------------------------------------------------
Marilou R. McGirr, Chairman
Vice President
Continental Assurance Company
Richard W. Dubberke
Vice President and
Portfolio Manager
Continental Assurance Company
Richard T. Fox
Financial Consultant
William W. Tongue
Professor of Economics
and Finance, Emeritus
University of Illinois at Chicago
Peter J. Wrenn
President
Hudson Technology, Inc.
- --------------------------------------------------------------------------------
SECRETARY
Timothy Scott
Assistant Vice President and
Assistant 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>
1999 June 30 $25.26
1998 December 31 21.55
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
</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>
1999 July 1 $7.75
1999 January 1 6.69
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
</TABLE>
- --------------------------------------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT IN ONE ACCUMULATION UNIT
- --------------------------------------------------------------------------------
Separate Account (B) does not make distributions of investment income and
realized capital gains; therefore, the unit values include
investment income and capital gains. This chart displays the unit value at
December 31 for the past ten years, and June 30, 1999. This period was
one of mixed common stock prices. The values shown should not be considered
representations of values which may be achieved in the future.
Unit Value Bar Graph
<TABLE>
<CAPTION>
UNIT VALUE
----------
<S> <C>
'1989' 5.31
'1990' 5.45
'1991' 7.29
'1992' 7.70
'1993' 8.91
'1994' 8.85
'1995' 11.74
'1996' 14.14
'1997' 17.69
'1998' 21.55
June 1999 25.26
</TABLE>
- --------------------------------------------------------------------------------
3
<PAGE> 4
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES COST VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS:
AEROSPACE-(3.2%)
Raytheon Company 45,000 $2,525,350 $ 3,166,875
United Technologies Corporation 46,400 1,258,970 3,326,300
------------
6,493,175
------------
BEVERAGES-(2.8%)
Anheuser-Busch Companies, Inc. 30,000 2,313,875 2,128,125
PepsiCo, Inc. 92,000 2,925,018 3,559,250
------------
5,687,375
------------
BROADCASTING-(0.5%)
Emmis Communication Corporation* 20,000 1,017,813 987,500
------------
BUILDING MATERIALS-(1.4%)
Lowe's Companies, Inc. 50,000 2,084,550 2,834,375
------------
CABLE SERVICES-(7.0%)
AT&T Corp.-Liberty Media-A* 266,624 1,257,516 9,798,432
Comcast Corporation 120,000 2,964,297 4,612,500
------------
14,410,932
------------
COMMUNICATIONS EQUIPMENT-(1.0%)
L-3 Communications Holdings, Inc.* 43,700 1,871,582 2,111,256
------------
COMPUTER HARDWARE-(1.3%)
Sun Microsystems, Inc.* 40,000 2,034,688 2,755,000
------------
COMPUTER SOFTWARE-(3.5%)
America Online, Inc.* 15,000 2,167,150 1,657,500
First Data Corp. 75,000 1,756,600 3,670,312
Microsoft Corporation* 21,000 1,253,156 1,893,938
------------
7,221,750
------------
COMPUTER SYSTEMS-(8.8%)
Cisco Systems, Inc.* 135,000 2,357,813 8,707,500
EMC Corporation* 100,000 2,185,519 5,500,000
International Business Machines Corporation 30,000 2,502,775 3,877,500
------------
18,085,000
------------
COSMETICS-(1.7%)
The Gillette Company 84,000 1,546,470 3,444,000
------------
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
4
<PAGE> 5
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES COST VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DRUGS-DISTRIBUTION-(2.3%)
Cardinal Health, Inc. 74,625 $3,060,583 $ 4,785,328
------------
ELECTRICAL EQUIPMENT-(2.5%)
General Electric Company 45,000 2,264,075 5,085,000
------------
ELECTRONIC CONNECTORS-(1.8%)
Molex Incorporated/Class A 115,995 1,344,860 3,653,842
------------
ELECTRONIC EQUIPMENT-(4.9%)
Applied Materials, Inc.* 78,000 2,561,688 5,762,250
Motorola, Inc. 44,000 1,923,715 4,169,000
------------
9,931,250
------------
ELECTRONIC SEMICONDUCTOR-(3.6%)
Intel Corp 49,600 3,059,762 2,951,200
Texas Instruments Incorporated 30,000 1,921,737 4,350,000
------------
7,301,200
------------
FINANCIAL-BANKS-(5.0%)
Bank United Corp. 70,000 2,251,875 2,813,125
Citigroup Inc. 73,125 1,137,760 3,473,438
Wells Fargo & Company 90,000 1,988,150 3,847,500
------------
10,134,063
------------
FINANCIAL SERVICES-(1.9%)
American Express Company 30,000 2,793,706 3,903,750
------------
HOSPITAL SUPPLIES-(2.3%)
Medtronic, Inc. 60,000 2,025,850 4,672,500
------------
HOUSEHOLD PRODUCTS-(1.9%)
Procter & Gamble Co. 43,800 1,504,771 3,909,150
------------
LEISURE-(1.0%)
Carnival Corporation 40,000 1,942,114 1,940,000
------------
LIFE SCIENCES-(1.3%)
Monsanto Company 65,000 2,232,624 2,563,438
------------
MACHINERY-INDUSTRIAL-(4.2%)
Illinois Tool Works, Inc. 51,800 217,625 4,247,600
Tyco International Ltd. 46,000 2,386,975 4,358,500
------------
8,606,100
------------
MERCHANDISING-FOODS-(3.3%)
The Kroger Co.* 120,000 3,024,930 3,352,500
Safeway Inc.* 70,000 1,844,950 3,465,000
------------
6,817,500
------------
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
5
<PAGE> 6
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES COST VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MERCHANDISING-HARDLINES-(1.7%)
Tandy Corporation 70,000 $1,987,000 $ 3,421,250
------------
NATURAL GAS-(3.2%)
Enron Corp. 80,000 2,034,678 6,540,000
------------
OIL SERVICES-(3.1%)
Santa Fe International 95,000 2,989,158 2,185,000
Schlumberger Limited 64,600 2,169,460 4,114,213
------------
6,299,213
------------
PHARMACEUTICAL-(8.8%)
American Home Products Corporation 54,000 2,443,415 3,105,000
Elan Corp., PLC* 40,000 1,392,456 1,110,000
Eli Lilly and Company 10,000 865,700 716,250
Pfizer Inc. 51,000 169,182 5,597,250
Schering-Plough Corporation 120,000 1,038,050 6,360,000
Watson Pharmaceuticals Inc.* 30,000 1,390,906 1,051,875
------------
17,940,375
------------
PUBLISHING-(1.7%)
Tribune Company 40,000 1,974,655 3,485,000
------------
TELECOMMUNICATIONS-(5.1%)
Equant NV* 30,000 2,182,988 2,823,750
Loral Spaces & Communications* 161,500 2,602,899 2,907,000
Tellabs, Inc.* 71,000 2,428,312 4,796,937
------------
10,527,687
------------
UTILITIES-COMMUNICATIONS-(7.9%)
AT&T Corp. 58,177 1,990,608 3,247,004
Intermedia Communications Inc.* 80,000 2,082,500 2,400,000
MCI Worldcom, Inc.* 80,000 2,694,375 6,900,000
Sprint Corporation 70,000 2,114,208 3,696,875
------------
16,243,879
------------
TOTAL COMMON STOCKS-(98.7%) $201,790,888
------------
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
6
<PAGE> 7
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS OR MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) $ PAR VALUE VALUE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
OPTIONS:
America Online, Inc. 50 $ 4,125
American Express Company 50 (45,876)
Applied Materials, Inc. 100 (45,500)
Cardinal Health, Inc. 100 (5,875)
Cisco Systems, Inc. 200 (13,626)
Emmis Communication Corporation 100 (4,250)
Enron Corp. 100 (15,500)
Illinois Tool Works, Inc. 100 2,624
International Business Machines Corporation 50 (7,125)
MCI Worldcom, Inc. 100 124
Molex Incorporated/Class A 100 (1,125)
Motorola, Inc. 50 1,312
Schlumberger Limited 100 (501)
Tellabs, Inc. 50 (875)
Texas Instruments Incorporated 100 (9,877)
------------
TOTAL OPTIONS-(-0.1%) (141,945)
------------
SHORT-TERM NOTES:
FINANCIAL SERVICES-BANK-(1.4%)
The First National Bank of Chicago Eurodollar Time
Deposit, 5.5% due 7/1/99 2,861,000 2,861,437
------------
TOTAL SHORT-TERM NOTES-(1.4%) 2,861,437
------------
TOTAL INVESTMENTS-(100.0%) $204,510,380
------------
------------
=============================================================================================
</TABLE>
*Non-income producing security in 1999.
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
7
<PAGE> 8
- --------------------------------------------------------------------------------
STOCK PORTFOLIO CHANGES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999 (IN SHARES) INCREASED DECREASED NOW OWNED
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK:
AT&T Corp. 58,177 -- 58,177
AT&T Corp.-Liberty Media -A 133,312 -- 266,624
AirTouch Communications, Inc. 10,000 10,000 --
America Online, Inc. 15,000 -- 15,000
American Express Company 10,000 15,000 30,000
AMP Incorporated -- 20,000 --
At Home Corporation-Ser A 5,000 5,000 --
Anheuser-Busch Companies, Inc. 30,000 -- 30,000
Applied Materials, Inc. 10,000 20,000 78,000
Bestfoods -- 30,600 --
Cardinal Health, Inc. 10,000 10,000 74,625
Carnival Corporation 40,000 -- 40,000
Cisco Systems, Inc. 67,500 -- 135,000
Citigroup Inc. 24,375 -- 73,125
Comcast Corporation 75,000 10,000 120,000
Elan Corp. PLC 40,000 -- 40,000
EMC Corporation 70,000 40,000 100,000
Emmis Communication Corporation -- 25,000 20,000
Equant NV 30,000 -- 30,000
First Union Corporation 5,000 45,000 --
Honeywell, Inc. -- 35,000 --
Illinois Tool Works, Inc. -- 5,000 51,800
Intel Corp. 44,800 15,000 49,600
International Business Machines Corporation 20,000 5,000 30,000
The Kroger Co. 70,000 -- 120,000
L-3 Communications Holdings, Inc. 43,700 -- 43,700
Eli Lilly and Company 30,000 20,000 10,000
Microsoft Corporation 13,000 10,000 21,000
Molex Incorporated/Class A -- 10,000 115,995
The Robert Mondavi Corporation -- 54,000 --
Pfizer Inc. -- 10,000 51,000
Procter & Gamble Co. 5,000 -- 43,800
Rite Aid Corporation -- 70,000 --
Safeway Inc. -- 10,000 70,000
Sprint Corporation 35,000 -- 70,000
Sun Microsystems, Inc. 40,000 -- 40,000
Tandy Corporation 70,000 -- 70,000
Tellabs, Inc. 38,000 10,000 71,000
Tele-communications Inc. -- 50,000 --
United Technologies Corporation 23,200 5,000 46,400
Watson Pharmaceuticals, Inc. 30,000 -- 30,000
</TABLE>
- --------------------------------------------------------------------------------
8
<PAGE> 9
- --------------------------------------------------------------------------------
TEN LARGEST COMMON STOCK HOLDINGS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET % OF NET
JUNE 30, 1999 VALUE ASSETS
- ----------------------------------------------------------------------------------------
<S> <C> <C>
AT&T Corp-Liberty Media-A $ 9,798,432 4.8%
Cisco Systems, Inc. 8,707,500 4.3
MCI Worldcom, Inc. 6,900,000 3.4
Enron Corp. 6,540,000 3.2
Schering-Plough Corporation 6,360,000 3.1
Applied Materials, Inc. 5,762,250 2.8
Pfizer Inc. 5,597,250 2.7
EMC Corporation 5,500,000 2.7
General Electric Company 5,085,000 2.5
Tellabs, Inc. 4,796,937 2.3
- ----------------------------------------------------------------------------------------
$65,047,369 31.8%
========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALLOCATION OF EQUITY INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Technological 33.7% 29.2%
Consumer Staples 22.3 27.4
Consumer Services 12.7 15.6
Utilities 8.0 5.9
Financial Services 7.0 8.6
Capital Goods 6.8 6.6
Energy 6.4 5.2
Consumer Cyclicals 3.1 1.5
- --------------------------------------------------------------------------------------
100% 100%
======================================================================================
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE> 10
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities of unaffiliated issuers--Note 1
Common stocks, at market (cost $108,061,442 and
$99,881,837) $201,790,888 $171,705,997
Call options written, at market--Note 5 (141,945) 2,685
Short-term notes, at amortized cost (approximates
market) 2,861,437 7,717,295
------------ ------------
TOTAL INVESTMENTS 204,510,380 179,425,977
Cash 465 23,876
Dividends receivable--Note 1 71,513 79,613
Receivable for securities sold 283,048 --
Receivable from Continental Assurance Company for fund
deposits 76,644 --
------------ ------------
TOTAL ASSETS 204,942,050 179,529,466
------------ ------------
LIABILITIES
Fees payable to Continental Assurance Company--Note 4 54,043 52,131
Payable for securities purchased 573,738 --
Deferred income on call options written 218,367 87,060
Payable to Continental Assurance Company for fund
withdrawals 176,220 44,449
------------ ------------
TOTAL LIABILITIES 1,022,368 183,640
- -----------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY--NET ASSETS (8,073,323 and 8,320,912
units issued
and outstanding at $25.26 and $21.55 per unit)--Note 2 $203,919,682 $179,345,826
=========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Income:
Dividends $ 557,498 $ 660,042
Interest and other 144,355 203,320
----------- -----------
701,853 863,362
----------- -----------
Fees (to Continental Assurance Company)--Note 4
Investment advisory fees 474,951 410,072
Service fees 313,468 270,648
----------- -----------
788,419 680,720
----------- -----------
NET INVESTMENT INCOME (86,566) 182,642
----------- -----------
Investments--Note 3
Net realized gain 8,700,494 6,479,250
Net unrealized gain 21,760,655 17,606,116
----------- -----------
NET GAIN ON INVESTMENTS 30,461,149 24,085,366
- ----------------------------------------------------------------------------------------
NET INCREASE IN PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $30,374,583 $24,268,008
========================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
10
<PAGE> 11
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN PARTICIPANTS' EQUITY
(UNAUDITED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
From operations:
Net investment income $ (86,566) $ 182,642
Net realized gain on investments 8,700,494 6,479,250
Net unrealized gain on investments 21,760,655 17,606,116
------------ ------------
Net increase in participants' equity resulting from
operations 30,374,583 24,268,008
------------ ------------
From unit transactions:
Sales 368,633 2,268,446
Withdrawals (6,169,360) (5,919,972)
------------ ------------
Net decrease in participants' equity resulting from
unit transactions (5,800,727) (3,651,526)
------------ ------------
TOTAL INCREASE IN PARTICIPANTS' EQUITY 24,573,856 20,616,482
Participants' equity, January 1 179,345,826 152,378,894
- --------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY, JUNE 30 $203,919,682 $172,995,376
- --------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ORGANIZATION
Continental Assurance Company 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 (CAC), 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 85% of the outstanding common stock of CNA.
The operations of CAC include the sale of certain variable annuity contracts,
the proceeds of which are invested in Separate Account (B). CAC 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 CAC.
INVESTMENTS
Investments in securities traded on national securities exchanges are valued
at the last reported sales price. 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.
Net realized gains and losses on sales of securities are determined as the
difference between proceeds and cost, using the specific identification method.
There are no differences in cost for financial statement and Federal income tax
purposes.
Security transactions are accounted for on the trade date. Dividend income is
recorded on the ex-dividend date.
Separate Account (B) may loan securities, up to a maximum of 25% of its net
assets, to brokers under loan agreements which are fully secured by cash or
government securities. Loaned securities are not reported herein as purchases or
sales since Separate Account (B) remains the owner of loaned securities. During
the years ended June 30, 1999 and 1998 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 by Separate
Account (B) on net investment income and net realized capital gains, which are
reinvested in Separate Account (B) and taken into account in determining unit
values.
OTHER
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
- --------------------------------------------------------------------------------
11
<PAGE> 12
- --------------------------------------------------------------------------------
NOTE 2. PARTICIPANTS' EQUITY--NET ASSETS:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Participants' equity--net assets consisted of the following:
- ---------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
From operations:
Accumulated investment income--net $ 52,407,620 $ 52,494,186
Accumulated net realized gain on investment transactions 118,762,428 110,061,935
Accumulated unrealized gain 96,149,114 74,723,866
Accumulated unrealized loss (2,561,614) (2,897,021)
------------ ------------ ---
Accumulated income 264,757,548 234,382,966
From unit transactions:
Accumulated proceeds from sale of units, net of
withdrawals (60,837,866) (55,037,140)
- ---------------------------------------------------------------------------------------------
TOTAL PARTICIPANTS' EQUITY--NET ASSETS $203,919,682 $179,345,826
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENTS:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET REALIZED GAIN ON INVESTMENTS
SIX MONTHS ENDED JUNE 30 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate proceeds $419,645,325 $395,757,494
Aggregate cost 410,944,831 389,278,244
- ---------------------------------------------------------------------------------------------
Net realized gain $ 8,700,494 $ 6,479,250
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED GAIN ON INVESTMENTS
SIX MONTHS ENDED JUNE 30 1999 1998
- ---------------------------------------------------------------------------------------------
Unrealized gain on investments:
Balance, June 30 $ 93,587,500 $ 70,750,395
Less balance, January 1 71,826,845 53,144,279
- ---------------------------------------------------------------------------------------------
Change in net unrealized gain $ 21,760,655 $ 17,606,116
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
AGGREGATE COST OF SECURITIES PURCHASED
SIX MONTHS ENDED JUNE 30 1999 1998
- ---------------------------------------------------------------------------------------------
Common stocks $ 33,810,318 $ 26,795,824
Short-term notes 380,469,519 365,178,405
- ---------------------------------------------------------------------------------------------
Total purchases $414,279,837 $391,974,229
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
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12
<PAGE> 13
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NOTE 4. MANAGEMENT FEES:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Separate Account (B) pays fees to CAC for investment advisory and
management services 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 CAC for certain legal, accounting and other expenses. Such
reimbursement of services fees 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 directly to CAC 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 CAC
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Investment advisory fees $ 474,951 $ 410,072
Service fees 313,468 270,648
---------- ----------
Total fees charged to fund income 788,419 680,720
Sales and administrative fees paid by participants 783 870
- ---------------------------------------------------------------------------------------------
Total $ 789,202 $ 681,590
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
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NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Separate Account (B) invests from time to time in certain derivative
financial instruments, namely put and call options, to increase investments
returns.
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.
A summary of the aggregate notional amounts and estimated market values of
call options, as well as the monthly average market values and the recognized
gain, are presented below.
CALL OPTIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
<S> <C> <C>
NOTIONAL VALUE $10,900,000 $4,725,000
MARKET VALUE $ (141,945) $ 2,685
MONTHLY VALUE $ (24,937) $ 4,502
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1999 1998
(UNAUDITED)
<S> <C> <C>
NET UNREALIZED GAIN $1,027,973 $ 640,024
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
These options were collateralized by stock with a market value of
$10,726,563 at June 30, 1999 and $4,468,130 at December 31, 1998.
- --------------------------------------------------------------------------------
13
<PAGE> 14
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF IMPACT OF YEAR 2000 ON SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 beginning in 1999. Such malfunctions
could lead to business delays and disruptions. Separate Account (B) does not
maintain any systems. Instead, it relies on the systems of its investment
advisor Continental Assurance Company (CAC) and third party vendors. Separate
Account (B) has a plan under which it reviews periodically the progress that
these parties are making on this issue. To date, CNA Financial Corporation (CNA)
on behalf of CAC has certified internally as Year 2000-ready all of the systems
used by CAC in its duties as investment advisor and administrative agent for
Separate Account (B). While there is no client charge to Separate Account (B),
CNA estimates that the total cost to replace and upgrade its systems to
accommodate Year 2000 processing will be approximately $60 to $70 million. As of
June 30, 1999, CNA has spent approximately $60 million on Year 2000 readiness
matters.
CNA has also received statements of Year 2000 compliance from certain key
business partners. Separate Account (B) management believes that the systems on
which it relies do not have any significant remaining exposure to the Year 2000
issue and, therefore, Separate Account (B) does not have material exposure to
the Year 2000 issue. However, due to the interdependent nature of computer
systems, there may be an adverse impact on Separate Account (B) if banks,
independent agents, vendors, insurance agents, third party administrators,
various governmental agencies and other business partners fail to successfully
address the Year 2000. To mitigate this impact, CNA is communicating with these
various entities to coordinate Year 2000 conversion.
In addition, CNA has developed business resumption plans to ensure that it
and Separate Account (B) are able to continue critical processes through other
means in the event that it becomes necessary to do so. Formal strategies have
been developed within each business unit and support organization to include
appropriate recovery processes and use of alternative vendors.
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14
<PAGE> 15
[B LOGO]
Participants Inquiries To: CONTINENTAL ASSURANCE COMPANY
Continental Assurance Company
Separate Account (B) SEPARATE ACCOUNT (B)
Attn: Individual Pension Accounts-35S
P.O. Box 803572 REPORT TO PARTICIPANTS
Chicago, Illinois 60680-3572
800-351-3001 DECEMBER 31, 1998
[CNA LOGO]
[CA LOGO]
L 554-921 (12/98) 2/99
