<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
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-3
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 48 [X]
AND
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 28 [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 OFFICES) (ZIP CODE)
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.
PIPER MARBURY RUDNICK & WOLFE
203 NORTH LASALLE STREET
SUITE 1800
CHICAGO, ILLINOIS 60601
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IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[X] IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B) OF RULE 485
[ ] ON (DATE) 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
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<PAGE> 2
PROSPECTUS
GROUP
VARIABLE
ANNUITY
CONTRACTS [B LOGO]
The group variable annuity contracts described in this prospectus provide:
- tax deferred annuities for employees of public schools and certain
tax-exempt organizations; and
- retirement plans for self-employed individuals and their eligible
employees.
You may participate in these contracts by investing in Continental
Assurance Company Separate Account (B), a separate account created by
Continental Assurance Company. We will place all purchase payments that you make
under a contract, after the deduction of initial charges, in Separate
Account (B).
Separate Account (B) invests its assets 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 only
a secondary objective. Continental Assurance Company acts as investment adviser
to, and as principal underwriter for, Separate Account (B).
Group variable annuity contracts involve risks, including possible loss of
principal, and are not a deposit or obligation of, or guaranteed or endorsed by,
any bank or depository institution. The contracts are not federally insured by
the Federal Deposit Insurance Corporation, The Federal Reserve Board, or any
other agency.
Please read this prospectus carefully before investing and keep it for
future reference. It contains important information about the separate account
and the group variable annuity contracts that you need before purchasing a
contract.
To learn more about Separate Account (B) and the contracts offered by this
prospectus, you can obtain a copy of the Statement of Additional Information
dated May 1, 2000. The Statement of Additional Information has been filed with
the Securities and Exchange Commission and is incorporated by reference into
this prospectus. The table of contents of the Statement of Additional
Information appears on page 42 of this prospectus. For a free copy of the
Statement of Additional Information, please call or write us at:
Continental Assurance Company
Attn: Individual Pension Accounts-35S
P.O. Box 803572
Chicago, Illinois 60680-3572
Telephone: (800) 351-3001
In addition, the SEC maintains a web site (http://www.sec.gov) that
contains the Statement of Additional Information and other information about
Separate Account (B).
The SEC has not approved or disapproved these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
DATED: MAY 1, 2000
<PAGE> 3
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS AND IN
THE STATEMENT OF ADDITIONAL INFORMATION. NEITHER CONTINENTAL ASSURANCE COMPANY
NOR SEPARATE ACCOUNT (B) HAS AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION
THAT IS DIFFERENT THAN THAT WHICH IS SET FORTH IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED, 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>
Summary..................................................... 4
Group Variable Annuity Contracts.......................... 4
Fee and Expense Tables with Examples...................... 4
403(b) Plan Contract for Joint Retirement Board Fees
and Expenses.......................................... 4
Level Deduction Contract for 403(b) Plans Fees and
Expenses.............................................. 5
Graded Deduction Contract for 403(b) Plans Fees and
Expenses.............................................. 6
Contract for HR-10 Plans Fees and Expenses............. 7
The Investment Adviser and Investment Advisory Fee........ 8
403(b) Plan Sales and Administrative Charges.............. 9
HR-10 Plan Sales and Administrative Charges............... 9
Purchase Limits........................................... 10
Investment Objectives..................................... 10
Transfers................................................. 10
Annuity Selection......................................... 10
Withdrawals............................................... 10
Penalty Taxes............................................. 11
Condensed Financial Information............................. 12
Description of CAC and Separate Account (B)................. 14
General................................................... 14
Investment Policies and Restrictions...................... 15
Management.................................................. 19
The Committee............................................. 19
Investment Advisory Agreement............................. 19
Deductions and Expenses..................................... 20
Sales and Administrative Charges--General................. 20
Sales and Administrative Charges--403(b) Plans............ 20
Sales and Administrative Charges--HR-10 Plans............. 21
Investment Advisory Charges............................... 22
</TABLE>
2
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Description of Group Variable Annuity Contracts............. 22
General................................................... 22
Sales of Contracts........................................ 23
Voting Rights............................................. 23
Assignment................................................ 24
Modification or Termination of the Contract............... 24
Contractholder Inquiries.................................. 24
Purchase Payments and Accumulations....................... 24
Allocations of Purchase Payments--HR-10 Plans............. 24
Accumulation Period....................................... 25
Value of an Accumulation Unit............................. 25
Withdrawals............................................... 26
Annuities................................................... 27
Electing the Retirement Date and Form of Annuity--403(b)
Plans.................................................. 27
Annuity Options--403(b) Plans............................. 27
Retirement of Participant--HR-10 Plans.................... 28
Annuity Options--HR-10 Plans.............................. 28
Annuity Payments............................................ 30
Determination of Amount of the First Monthly Variable
Annuity Payment........................................ 30
Determination of the Value of an Annuity Unit and Amount
of Second and Subsequent Monthly Variable Annuity
Payments............................................... 30
Examples.................................................. 31
Assumed Investment Rate................................... 32
Benefits on Death or Withdrawal............................. 32
403(b) Plans.............................................. 32
HR-10 Plans............................................... 33
Federal Taxes............................................... 35
Federal Tax Treatment of Participants..................... 35
Federal Tax Status of Separate Account (B)................ 38
Employee Retirement Income Security Act................... 38
Legal Matters............................................... 39
Reports to Participants..................................... 39
Financial Statements........................................ 40
Independent Auditors' Report................................ 41
Table of Contents of the Statement of Additional
Information............................................... 42
Glossary.................................................... 43
</TABLE>
3
<PAGE> 5
SUMMARY
Because this is only a summary, it does not contain all the information
that may be important to you. You should read the entire prospectus before
deciding to invest in a Contract. Some of the technical terms used in this
prospectus are defined in the Glossary beginning on page 4.
GROUP VARIABLE ANNUITY CONTRACTS
The Contracts offered by this prospectus are designed to provide annuity
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 a trustee for the benefit of
self-employed individuals for themselves and their employees, and to
associations of self-employed persons for the benefit of participating
members.
We currently offer three types of Contracts for 403(b) Plans: (a) the
403(b) Plan Contract for the Joint Retirement Board (This contract is available
only to employees or retired employees of The Joint Retirement Board of the
Rabbinical Assembly of America, The United Synagogue of America, and The Jewish
Theological Seminary of America (the "Joint Retirement Board")); (b) the level
deduction Contract; and (c) the graded deduction Contract. We currently offer
one type of Contract for HR-10 Plans. Each Contract may be modified or amended.
FEE AND EXPENSE TABLES WITH EXAMPLES
403(b) PLAN CONTRACT FOR JOINT RETIREMENT BOARD FEES AND EXPENSES
<TABLE>
<S> <C>
Your 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
Your Annual Contract Fee.................................... None
Your 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).............................................0.32%
------
Total Other Expenses................................. 0.65%
Total Annual Expenses.................................. 1.15%
</TABLE>
4
<PAGE> 6
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
If you surrender your Contract 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: $12 $39 $67 $147
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: $262 $289 $317 $397
If you do not surrender your Contract:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $12 $39 $67 $147
</TABLE>
We designed this table to help you understand the various costs and
expenses that you will bear directly or indirectly. Contractholders
currently pay an annual fee of .83% of average net assets. Under the
administrative service agreement with the Joint Retirement Board, we deduct
an additional fee of .08% from each Contractholder's net asset value at the
end of each calendar quarter (March 31, June 30, September 30, and December
31) and pay this fee 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.
LEVEL DEDUCTION CONTRACT FOR 403(b) PLANS FEES AND EXPENSES
<TABLE>
<S> <C> <C>
Your 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.................................................... 1.00%
Fixed Rate Annuity Purchase Fee................................. $250
Your Annual Contract Fee............................................. None
Your 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> 7
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
If you surrender your Contract 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: $68 $86 $104 $159
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: $318 $336 $354 $409
If you do not surrender your Contract:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $68 $86 $104 $159
</TABLE>
We designed this table to help you understand the various costs and
expenses that you will bear directly or indirectly. Contractholders
currently pay an annual fee of .83% of average net assets. 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. We charge a $250 annuity
purchase fee only if the participant chooses a fixed rate annuity. We
charge a $10 exchange fee for the second and succeeding transfers in most
of the 403(b) Contracts.
GRADED DEDUCTION CONTRACT FOR 403(b) PLANS FEES AND EXPENSES
<TABLE>
<S> <C> <C>
Your 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.................................................... 1.00%
Fixed Rate Annuity Purchase Fee................................. $250
Your Annual Contract Fee............................................. $30
Your 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> 8
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
If you surrender your Contract 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: $88 $165 $292 $437
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: $338 $415 $492 $686
If you do not surrender your Contract:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $88 $165 $242 $437
</TABLE>
We designed this table to help you understand the various costs and
expenses that you will bear directly or indirectly. Contractholders
currently pay an annual fee of .83% of average net assets. 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. We deduct a 5% sales load 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. CAC also deducts an administrative
charge based upon the previous year's cost of administration. There is no
maximum dollar limit on this charge. In 2000, CAC will assess this charge
at an annual rate of $30 per participant. The participant has several
different annuity options from which to choose. We charge a $250 annuity
purchase fee only if the participant chooses a fixed rate annuity. We
charge a $10 exchange fee for the second and succeeding transfers in most
of the 403(b) Plan Contracts.
CONTRACT FOR HR-10 PLANS FEES AND EXPENSES
<TABLE>
<S> <C>
Your 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........................................... 1.00%
Fixed Rate Annuity Purchase Fee........................ $250
Individual Accounting Fee.............................. $20
Accounting Withdrawal Fee.............................. $10
Your Annual Contract Fee.................................... None
Your 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>
7
<PAGE> 9
<TABLE>
<S> <C> <C> <C> <C>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
If you surrender your Contract 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: $143 $185 $223 $322
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: $393 $435 $473 $572
If you do not surrender your Contract:
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets: $123 $215 $253 $362
</TABLE>
We designed this table to help you understand the various costs and
expenses that you will bear directly or indirectly. Contractholders
currently pay an annual fee of .83% of average net assets. 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. We deduct a sales load under
these Contracts that vary 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. We charge a $250 annuity purchase fee only if
the participant chooses a fixed rate annuity. CAC may deduct 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. CAC did not deduct this charge in 1997, 1998 or
1999. We deduct a $10 exchange fee for the second and succeeding transfer
in most of the HR-10 Plan Contracts. We deduct a surrender fee (termination
charge) of 2% of the Purchase Payments received prior to withdrawal when
your Account is terminated and the entire interest in the Contract is
withdrawn. We deduct a termination charge of 2% of the pro rata amount of
Purchase Payments received when you withdraw part of your interest in the
Contract.
CAC believes the fees and charges deducted under the Contracts, in the
aggregate, are reasonable in relation to the services rendered, the
expenses expected to be incurred and the risks assumed by CAC.
THE INVESTMENT ADVISER AND
INVESTMENT ADVISORY
FEE...................... CAC acts as the investment adviser to Separate
Account (B). CAC is a stock life insurance company
that was organized under the Illinois Insurance
Code in 1911. CAC maintains its principal office at
CNA Plaza, Chicago, Illinois 60685. Separate
Account (B) is registered as an open-end
diversified management investment company under the
1940 Act.
CAC receives an investment advisory fee at the
annual rate of 0.5% of the average daily net asset
value of Separate Account (B) and a service fee at
the annual rate of 0.33% of the average daily net
asset value of Separate Account (B) for investment
management and other services.
8
<PAGE> 10
403(b) PLAN SALES AND
ADMINISTRATIVE CHARGES... Joint Retirement Board Contract. Under the current
403(b) Plan Contract with the Joint Retirement
Board, CAC does not deduct any charge for sales and
administrative expenses from Purchase Payments.
Under the administrative service agreement with the
Joint Retirement Board effective January 1, 1997,
and amended effective January 1, 2000, each
Participant under the Joint Retirement Board Plan
is charged a quarterly fee of .08% of the
Participant's net asset value on March 31, June 30,
September 30 and December 31. The fee is remitted
to the Joint Retirement Board for administrative
services performed by it on behalf of Joint
Retirement Board Plan Participants.
Level Deduction Contract. Under the level
deduction Contract, we deduct 6% (6.38% of the net
amount invested) from each Purchase Payment for
sales and administrative expenses. Of such 6%
deduction, 5% is for sales expenses and 1% is for
administrative expenses. CAC reserves the right to
increase the rate of deductions for administrative
expenses in the future. Although CAC 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 under such
Contracts.
Graded Deduction Contract. Under the graded
deduction Contract, we deduct up to 5% (5.26% of
the net amount invested) from each Purchase Payment
for sales expenses. We reduce the deduction 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). CAC also deducts an
administrative charge based upon the previous
year's cost of administration. There is no maximum
dollar limit on this charge. In 2000, CAC will
assess this charge at an annual rate of $30 per
participant.
HR-10 PLAN SALES AND
ADMINISTRATIVE CHARGES... We deduct a charge of 0 to 8.5% of Purchase
Payments (0 to 9.29% of the net amount invested)
from each Purchase Payment. This charge is the sum
of the following expenses:
- sales expenses amounting to a deduction of 0 to
7.0% of Purchase Payments (0 to 7.65% of the net
amount invested); and
- administrative expenses amounting to a deduction
of 0 to 1.5% of Purchase Payments (0 to 1.64% of
the net amount invested).
We credit the balance of the Purchase Payment,
after we deduct sales and administrative charges,
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 CAC and the applicable commission
expenses. Accordingly, we will not reduce sales
charges on
9
<PAGE> 11
individual Contracts 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. CAC
reserves the right to increase the rate of
deductions for administrative expenses in the
future.
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...... Separate Account (B) invests its assets primarily
in common stocks and securities convertible into
common stocks. The primary investment objective of
Separate Account (B) is the growth of capital in
relation to the growth of the economy and the
changing value of the dollar. Current investment
income is only a secondary objective. Separate
Account (B)'s investment policies require CAC, in
making investments for Separate Account (B), to
maintain Separate Account (B)'s status as a
diversified investment company. The dollar amount
of investment accumulation before retirement and
the dollar amount of subsequent retirement benefits
will vary to reflect the dividends, interest and
fluctuations in the market value of the securities
held in Separate Account (B) and will be subject to
the same risks to which any owner of common stocks
is subject.
TRANSFERS.................. Prior to beginning 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 that we offer
provide that any such transfer will be made without
charge. Others provide that CAC 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.
ANNUITY SELECTION.......... The participant has several different annuity
options from which to choose. We charge a $250
annuity purchase fee if the participant chooses a
fixed rate annuity. For the other annuity options,
there is no fee. CAC 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) before beginning
annuity payments by providing CAC with written
notice. 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 notice
to CAC. A withdrawal may be subject to penalty
taxes, in addition to applicable federal income
taxes.
10
<PAGE> 12
HR-10 Plans. Subject to limitations, you may
withdraw part or all of your interest in the
Contract in one lump sum on any Valuation Date,
except for funds held for terminated or retired
participants. If you elect to make such a
withdrawal, CAC will deduct a termination charge of
2% of the pro rata amount of the Purchase Payments
received under the Contract relating to the
withdrawal.
PENALTY TAXES.............. Distributions made prior to age 59 1/2 generally
are subject to a penalty tax of 10%, in addition to
otherwise applicable federal income taxes. This
penalty tax will not apply under the following
circumstances:
- if the distribution is made in connection with
death or disability;
- if the distribution is made after separation
from service where the separation occurred after
the participant attains age 55;
- if the distribution is part of a series of
annual or more frequent annuity payments made
after separation from service and over the life
of the participant or the joint lives of the
participant and his or her beneficiary;
- if the distribution is made for certain medical
expenses within the deductible limitation under
the Internal Revenue Code;
- if the distribution is made to an alternate
payee pursuant to a qualified domestic relations
order ("QDRO"); or
- if the distribution is made on account of an
Internal Revenue Service ("IRS") levy on the
plan.
11
<PAGE> 13
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,
--------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income(a)......... $ .171 $ .196 $ .238 $ .194 $ .187 $ .189 $ .155 $ .164 $ .185 $ .243
Expenses(b).................. .203 .160 .134 .107 .085 .073 .068 .060 .052 .044
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Net investment income........ (.032) .036 .104 .087 .102 .116 .087 .104 .133 .199
Capital changes
Net realized and unrealized
gain (loss) on
investments.............. 7.263 3.826 3.450 2.314 2.788 (.181) 1.124 .307 1.707 (.055)
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Net increase (decrease) in
net asset value.......... 7.231 3.862 3.554 2.401 2.890 (.065) 1.211 .411 1.840 .144
Accumulation unit value at
the beginning of the
period..................... 21.554 17.692 14.138 11.737 8.847 8.912 7.701 7.290 5.450 5.306
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Accumulation unit value at
end of period.............. $28.785 $21.554 $17.692 $14.138 $11.737 $8.847 $8.912 $7.701 $7.290 $5.450
======= ======= ======= ======= ======= ====== ====== ====== ====== ======
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).................. (.13)% .19% .64% .67% 1.00% 1.31% 1.05% 1.44% 2.11% 3.74%
Portfolio turnover rate...... 34% 41% 45% 53% 46% 52% 69% 71% 13% 55%
Number of accumulation units
outstanding at end of
period (000 omitted)....... 7,909 8,321 8,613 8,502 8,763 9,299 9,385 9,935 10,486 11,086
</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, CAC makes
quarterly withdrawals for investment advisory services to Separate Account (B)
at an annual rate of .5% of the average net asset value and quarterly
withdrawals of a service fee at an annual rate of .33% of the average net asset
value.
(c) Participants' equity appearing in the financial statements incorporated
by reference herein is the equivalent of net assets.
Separate Account (B) 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 Separate Account (B)'s unit value at the beginning of
the period. Such units are then valued at Separate Account (B)'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 Separate Account (B) 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 included, the amount or return that a
Participant would realize for an investment during the specified period would be
lower.
12
<PAGE> 14
A cumulative total return reflects Separate Account (B)'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 Separate Account (B)'s performance had been constant over
the entire period. Because average annual returns for more than one year tend to
smooth out variations in Separate Account (B)'s annual returns, participants
should recognize that such figures are not the same as actual year-by-year
results. Separate Account (B)'s performance figures are based on historical
results and are not intended to indicate future performance. The investment
return and unit value of Separate Account (B) will vary and may be worth more or
less at redemption than their original cost.
From time to time, Separate Account (B) may produce advertising or sales
materials which disclose its performance over various periods of time. Separate
Account (B) 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 Separate Account (B) and
the portfolios of such other funds or market indices may be comprised of
securities that differ significantly from Separate Account (B)'s investments.
13
<PAGE> 15
DESCRIPTION OF CAC AND SEPARATE ACCOUNT (B)
GENERAL
CAC 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. CAC's principal office is located at
CNA Plaza, Chicago, Illinois 60685.
All of the voting securities of CAC 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 86.5% of the outstanding voting securities of CNA Financial as of
December 31, 1999. 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 33% of the outstanding
common stock of Loews Corporation as of December 31, 1999. Therefore, they may
be deemed to be parents of Loews Corporation, and thus of CNA Financial and CAC,
within the meaning of the federal securities laws.
Separate Account (B) was established by CAC 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 Separate Account (B),
CAC 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. Separate Account (B) 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 Separate Account (B) or CAC by the SEC. Separate
Account (B) has no sub-accounts. Net Purchase Payments made in accordance with
the provisions of the Contracts described herein are added to Separate Account
(B) and invested as described herein. 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.
CAC owns Separate Account (B)'s assets and, under existing law, is not
considered to be a Trustee with respect to those assets. Nevertheless, the
assets of Separate Account (B) 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
Separate Account (B) (whether realized or not) are credited to or charged
against Separate Account (B) without regard to other income, gains or losses of
CAC (in accordance with the Contracts' provisions). Thus, the dollar amount of
payments or values which vary reflect the investment results of just Separate
Account (B). Additionally, the Illinois Insurance Code and the Contracts
themselves prohibit CAC from charging any liabilities arising out of other
business of CAC against Separate Account (B)'s assets (equal to the reserves and
other contract liabilities of Separate Account (B)).
14
<PAGE> 16
INVESTMENT POLICIES AND RESTRICTIONS
The objectives and policies in making investments for Separate Account (B)
are set forth below.
1. The primary objective of CAC in making investments for Separate Account
(B) will be the growth of capital in relation to the growth of the
economy and the changing value of the dollar. Current investment income
is only a secondary objective. Accordingly, the assets of Separate
Account (B) will be invested primarily in common stocks and in other
securities convertible into common stocks.
2. When CAC believes that economic and market conditions indicate a
likelihood that investing a majority of the assets of Separate Account
(B) in common stocks or securities convertible into common stocks might
result in a material decrease in the unit value of Separate Account (B),
less than a majority of the assets of Separate Account (B) 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 CAC deems that economic and market conditions so indicate, a
portion of the assets of Separate Account (B) 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 Separate Account (B) 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 Separate Account (B), CAC may not
purchase for Separate Account (B) the securities of any issuer if such
purchase would cause more than 5% of the market value of Separate
Account (B)'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 Separate Account (B)'s portfolio. The balance of 25% of
the assets of Separate Account (B) may be invested without regard to
such 5% or 10% limitations.
6. CAC, in acting for Separate Account (B), will not underwrite securities
of others or invest in restricted securities.
7. CAC, in acting for Separate Account (B), will not concentrate more than
25% of Separate Account (B)'s investments in any one industry.
8. The assets of Separate Account (B) will not be invested in commodity
contracts.
9. The assets of Separate Account (B) will not be invested in securities
contracts of investment companies.
10. CAC, in acting for Separate Account (B), 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
15
<PAGE> 17
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 Separate
Account (B)'s net assets at any time.
11. CAC, in acting for Separate Account (B), will not engage in the
purchase and sale of interests in real estate, except that CAC 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. CAC, in acting for Separate Account (B), will not purchase securities
for the purpose of control or management of the issuer thereof.
13. CAC will not make short sales for Separate Account (B).
14. CAC will not borrow money for Separate Account (B).
15. CAC will keep Separate Account (B)'s assets substantially fully
invested in assets described in paragraphs 1, 2, 3 and 4 above, as
described therein, and will limit Separate Account (B)'s cash position,
to the extent feasible, to such amounts as may be required to permit
CAC to make normal contract payments from Separate Account (B).
16. CAC, in acting for Separate Account (B), 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 CAC, in
acting for Separate Account (B), 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 Separate Account (B) 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 following table sets
forth Separate Account (B)'s rate of total portfolio turnover for the periods
indicated:
<TABLE>
<CAPTION>
RATE OF TOTAL PORTFOLIO TURNOVER PERCENT
- -------------------------------- -------
<S> <C>
1999........................................................ 34%
1998........................................................ 41%
1997........................................................ 45%
</TABLE>
Changes in the rate of portfolio turnover from year to year are
attributable to changes in CAC's assessment of prevailing market conditions. All
investment income and realized capital gains will be reinvested. CAC, in acting
for Separate Account (B), will limit portfolio transactions to those which CAC,
in the exercise of prudent business judgment, deems advisable in order for
Separate Account (B) 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 Separate Account (B) and will be subject to the same risks as are inherent in
the ownership of common stocks.
CAC, in acting for Separate Account (B), 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
16
<PAGE> 18
marketable portfolio securities with those of other accounts under the
management of CAC or its affiliates and the averaging of prices among Separate
Account (B) and such other accounts will not be deemed to result in a trading
account in securities. CAC, in acting for Separate Account (B), will not
mortgage or pledge the investments of Separate Account (B), 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.
CAC, in acting for Separate Account (B), may write covered call options.
The "writing" of call options by Separate Account (B) means that Separate
Account (B) will be selling the right, but not the obligation, to acquire a
specified number of securities held in Separate Account (B)'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 Separate Account (B) of
its intention to exercise and delivering to Separate Account (B) 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 Separate Account (B) on the
sale of the option (the "premium"), Separate Account (B) 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, Separate Account
(B) 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. Separate Account
(B) 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.
CAC, in acting for Separate Account (B), 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, Separate Account (B) would be left in a less favorable position
than if such put option had not been purchased. If market conditions are
appropriate for Separate Account (B) to exercise the purchased put option,
Separate Account (B) also may sell a put option to close out a purchased put
option rather than exercising the purchased put option.
Separate Account (B) 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
Separate Account (B)'s total assets.
The use of options exposes Separate Account (B) to certain additional
investment risks and transaction costs. The risks that may be associated with
the use of option contracts include, but are not
17
<PAGE> 19
limited to, the risk that securities prices will not move in the direction
anticipated by Separate Account (B) 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 Separate Account (B)'s return due
to the opportunity losses of foregoing other potential investments with the
segregated assets.
CAC is permitted to enter into repurchase agreements and reverse repurchase
agreements on behalf of Separate Account (B). A repurchase agreement is an
instrument under which the purchaser (i.e., Separate Account (B)) 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 Separate Account (B) may otherwise invest.
A reverse repurchase agreement is an agreement under which the lender
(i.e., Separate Account (B)) 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.
CAC will limit investments by Separate Account (B) which may not be sold
and settled within three 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 Separate Account (B).
18
<PAGE> 20
MANAGEMENT
THE COMMITTEE
The supervision of Separate Account (B) is vested by CAC in a Committee.
The Committee has the following specific duties:
1. To review periodically the portfolio of Separate Account (B) 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.
3. To recommend from time to time any changes deemed appropriate in
the fundamental investment policies of Separate Account (B), to be
submitted to the participants at their next meeting.
4. To select independent auditors, whose engagement shall be approved
annually by the participants.
The Committee is also authorized to amend the Regulations for Government of
Separate Account (B), except as otherwise provided by law.
INVESTMENT ADVISORY AGREEMENT
Under the Investment Advisory Agreement, CAC acts as the investment adviser
to Separate Account (B). In rendering its services as investment adviser, CAC is
responsible to the Committee. CAC, as Separate Account (B)'s investment adviser,
provides Separate Account (B) with an investment program complying with the
investment objectives, policies and restrictions of Separate Account (B) (see
"Description of CAC and Separate Account (B)--Investment Policies and
Restrictions"). In carrying out Separate Account (B)'s investment program, CAC
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. CAC performs research, statistical
analysis, and continuous supervision of Separate Account (B)'s investment
portfolio, and also furnishes office space for Separate Account (B) and pays the
salaries and fees of Separate Account (B)'s officers and Committee Members. The
Investment Advisory Agreement does not require employees of CAC to devote their
exclusive efforts to Separate Account (B)'s business, and it is expected that
they will provide investment advisory services for CAC's other customers and for
CNA Financial and its affiliates.
19
<PAGE> 21
DEDUCTIONS AND EXPENSES
SALES AND ADMINISTRATIVE CHARGES--GENERAL
CAC may be deemed to be the principal underwriter for Separate Account (B)
and performs all sales and administrative functions relative to the Contracts
and Separate Account (B). CAC does not act as principal underwriter for any
other investment company.
CAC received the following sales and administrative fees in connection with
the operations of Separate Account (B):
<TABLE>
<CAPTION>
SALES AND ADMINISTRATIVE FEES AMOUNT
- ----------------------------- -------
<S> <C>
1999........................................................ $ 7,961
1998........................................................ 10,428
1997........................................................ 11,417
</TABLE>
CAC, 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) PLANS
The following is an overview of the sales and administrative charges
applicable to the different types of 403(b) Plans offered by Separate Account
(B):
JOINT RETIREMENT BOARD CONTRACT. Under the administrative service
agreement with the Joint Retirement Board, effective January 1, 1997 and amended
effective January 1, 2000, each Participant under the Joint Retirement Board
Plan is charged a quarterly fee of .08% of the Participant's net asset value on
March 31, June 30, September 30 and December 31. The fee is remitted to the
Joint Retirement Board for administrative services performed by it on behalf of
its 403(b) Plan Participants.
LEVEL DEDUCTION CONTRACTS. Pursuant to the Administrative Service
Agreement, and as provided in the Contracts, CAC 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 Investment Advisory
Agreement. CAC 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 CAC. Following the end of the fifth year of
participation under the Contract, the 1% deduction by CAC from Purchase Payments
to cover administrative expenses may be increased by CAC upon prior written
notice to the participant.
GRADED DEDUCTION CONTRACTS. Pursuant to the Administrative Service
Agreement, and as provided in the Contracts, to cover sales expenses CAC 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
20
<PAGE> 22
- 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 CAC.
Pursuant to the Administrative Service Agreement, and as provided in the
Contracts, CAC 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 2000, CAC 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.
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
beginning of annuity payments for only eight 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 CAC under an HR-10 Plan Contract
is, after deduction of a percentage charge, credited to Separate Account (B).
The charge ranges from 0 to 8.5% of Purchase Payments (0 to 9.29% of the 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. CAC guarantees that, except for
this charge and the charges described below, no further deductions will be made
for sales and administrative expenses. While CAC 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 CAC. Conversely, if such expenses
exceed this charge, a loss to CAC 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 CAC 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.
If the Contract so provides, CAC 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
21
<PAGE> 23
plan relating to such Contract, $10 per year per participant thereafter, and $10
at each withdrawal. The initial charge levels anticipated by CAC will be
furnished at the time that application for the Contract is under consideration,
and the charges provided for will be based upon CAC'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 CAC's expenses.
INVESTMENT ADVISORY CHARGES
CAC makes quarterly withdrawals from Separate Account (B) as follows:
- at an annual rate of 0.5% of the average daily net asset value of
Separate Account (B) for providing investment advisory services, and
- at an additional annual rate of 0.33% of the average daily net
asset value of Separate Account (B) as a service fee for bearing
certain expenses of Separate Account (B). 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.
CAC 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 can be no assurance that this objective will be attained.
The Contracts involve investment risk, including possible loss of
principal. 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 CAC to anticipate changes in such investments necessary to meet
changes in economic conditions. There can be 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 Contracts are not a deposit or obligation of, or guaranteed or
endorsed by, any bank or depository institution, and the Contracts are not
federally insured by the Federal Deposit Insurance Corporation, The Federal
Reserve Board, or any other governmental agency.
The variable annuity payments are determined on the basis of (1) the
mortality table specified in the Contract, and (2) the investment performance of
Separate Account (B). The dollar amount of the variable annuity payments will
not be affected by adverse mortality experience or by an increase in CAC'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.
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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, CAC is taking the chance that the actuarial
estimate of mortality rates among annuitants may prove erroneous; in assuming
the expense risk, CAC is taking the chance that the expense margins deducted by
CAC 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 CAC, CAC's earnings will be reduced; if an error in estimation favors
CAC, CAC's earnings will be increased.
SALES OF CONTRACTS
The Contracts are offered by employees and licensed agents and brokers of
CAC.
VOTING RIGHTS
Participants have the right to vote at any annual meeting of participants
upon the following matters:
1. To elect Members of the Committee for Separate Account (B)
(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 Separate Account (B).
4. To ratify or reject the Committee's selection of independent
auditors for Separate Account (B).
The Committee currently intends to hold annual meetings of participants for
these purposes. However, there is no requirement under applicable law that
Separate Account (B) hold regular annual meetings of participants and the
Committee, in its discretion, may continue holding regular annual meetings of
participants in the future. Meetings of participants are required by the 1940
Act in certain circumstances, including to approve any change in fundamental
investment policies.
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 Separate Account
(B). The number of votes which a retired participant may cast is equal to the
monetary value of the actuarial reserve maintained by CAC in Separate Account
(B) 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.
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.
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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 CAC.
MODIFICATION OR TERMINATION OF THE CONTRACT
Each Contract provides that it may be modified or amended in any respect by
agreement between CAC 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. CAC may also modify or amend any Contract, without
your consent or the consent of any participant, in order to conform to
applicable law or to changes in the operation of Separate Account (B) 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 CAC. 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. When a participant begins
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
Telephone: (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 CAC as collected.
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
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prior Purchase Payments between the Contracts and insurance or fixed annuity
contracts will be permitted prior to retirement only with the consent of CAC. 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 annuity payments begin, when a Purchase Payment is
received on behalf of a participant, a sales and administrative charge is
deducted. 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 CAC, 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 Separate Account (B), 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 Separate
Account (B) 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 Separate Account (B) 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 Separate Account (B) 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 Separate Account (B) is the market value of all
securities and other assets, less liabilities of Separate Account (B), including
accrued investment advisory fees and other service fees. We determine the net
asset value of Separate Account (B) 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;
- 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;
- other over-the-counter market securities not quoted in the Nasdaq
National Market on the basis of the bid price of over-the-counter
market quotations, if available; and
- 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 Separate Account (B). In the event any income taxes are
imposed, they will be deducted in determining the net asset value of Separate
Account (B). Deductions are also made by CAC 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 Separate
Account (B), under CAC's Investment Advisory Agreement with Separate Account
(B).
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 CAC, 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. If you
elect to make such a withdrawal, CAC will deduct a termination charge of 2% of
the pro rata amount of the Purchase Payments received under the Contract before
your withdrawal. In general, any distribution from an HR-10 Plan made prior to
age 59 1/2 (other than on account of death, disability, separation from service
where the separation occurred during or after the calendar year in which 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 over the
participant's life or the joint lives of the Participants and his or her
beneficiary, or if the withdrawal is made for certain medical expenses within
the deductible limits under the Internal Revenue Codes or if it is made to an
alternate payee pursuant to a QDRO or if it is made on account of an IRS levy on
the plan) is subject to an additional 10% tax, under the Internal Revenue Code.
A participant may elect, by written notice to CAC, to withdraw all or a
portion of his individual account, other than certain amounts attributable to a
salary reduction agreement, prior to beginning 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 CAC. CAC 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
CAC. 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 salary
reduction 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 CAC within seven days after receipt
of a written redemption request by CAC 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. CAC currently charges a $250 fee for the purchase of a fixed
rate annuity. CAC reserves the right to change this charge at any time. Prior to
beginning 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
CAC 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
begin. Distributions must generally begin by April 1 of the year following the
year of attainment of age 70 1/2 or, if later and the participant was not a sole
proprietor or Five Percent Owner with respect to the year in which he or she
reached age 70 1/2, 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
The following annuity options are available under 403(b) Plans offered by
Separate Account (B):
- 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 CAC to be the "normal form". Unless the
Plan adopted by the Contractholder and communicated to CAC provides for
a qualified joint and survivor annuity as defined in ERISA, this option
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 the commencement of payments. This option
may only be selected by participants under the graded deduction
Contract.
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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 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 CAC provides
for a qualified joint and survivor annuity as defined in ERISA as the automatic
form of payment, 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 CAC. Information on such
options will be furnished upon written request to CAC.
RETIREMENT OF PARTICIPANT--HR-10 PLANS
Distributions must generally begin 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 5% Owners and 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 CAC 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. CAC currently charges $250 for the purchase of a fixed rate annuity.
CAC reserves the right to change this charge. Prior to
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beginning 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
CAC 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.
The following annuity options are available under HR-10 Plans offered by
Separate Account (B):
- 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 CAC to be
the "normal form." Unless the plan adopted by the Contractholder
and communicated to CAC provides for a qualified joint and survivor
annuity as defined in ERISA, this option 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 CAC 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
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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.
ANNUITY PAYMENTS
DETERMINATION OF AMOUNT OF THE FIRST MONTHLY VARIABLE ANNUITY PAYMENT
As of the date annuity payments are to begin, 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 CAC to applicable state taxing authorities once per
calendar year. Certain states provide for credits against premium tax
liabilities based upon CAC's ownership of properties or investments located
therein (none of which are assets of Separate Account (B)). In the event that
CAC 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.
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 Separate Account (B) during the period
since the last Valuation Date. Such factor is equal
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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).
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.
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, 2000 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, 1999 was $26.988159. The total value of
the participant's account was therefore $404,072.39.
- 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
$404,072.39, was therefore divided by $1,000 and multiplied by the
annuity rate of $6.34 to obtain the initial monthly payment,
$2,561.82. (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 $8.705090. This was divided into
$2,561.82 to obtain the quantity 294.289892 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, 2000, would be found by
multiplying the number of Annuity Units by the monetary value of an
Annuity Unit on that date. This was $9.524137. The dollar amount of
the second payment would have been times 294.289892 or $2,802.86.
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).
- HR-10 PLAN CONTRACT. Assume the participant selected Option 1--Life
Ten Years Certain. 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, $404,072.39, was therefore divided
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by $1,000 and multiplied by the annuity rate of to obtain the initial
monthly payment, $2,561.82. (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 $8.705090. This
was divided into $2,561.82 to obtain the quantity 294.289892, 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, 2000,
would be found by multiplying the number of Annuity Units by the
monetary value of an Annuity Unit on that date. This was $9.524137. The
dollar amount of the second payment would have been 294.289892 times
$9.524137 or $2,802.86. 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).
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 begin. If an
assumed investment rate is not selected, then a 3 1/2% rate will be applied.
CAC, 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:
- The participant may elect to have his individual account applied to
provide annuity payments beginning immediately under the selected
annuity option.
- 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
CAC, CNA Plaza, Chicago, Illinois 60685. Payment will be made within
seven days thereafter,
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without termination charge. Payments upon redemption may be more or less
than the original cost of the Accumulation Units.
- 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,
if he is not a Five Percent Owner with respect to the year he or she
reaches age 70 1/2, the year in which he retires) and the account
will continue to participate in the investment results of Separate
Account (B). At his required beginning date, the participant must
take an annuity or surrender his account and receive its value.
- If the individual participant moves to another employer which has
similar group annuity contract in force with CAC, 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.
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 Separate
Account (B) 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 distributed by the end of the year that contains the fifth
anniversary of his death unless the beneficiary is his spouse or if the
beneficiary takes the benefit in the form of a lifetime annuity that begins by
the end of the year that contains the first anniversary of the participant's
death. 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 to the extent the spouse directs a rollover to an individual retirement
plan or makes 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
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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 CAC, CNA Plaza, Chicago, Illinois 60685. Payments upon death
or withdrawal may be more or less than the total of the original purchase
payments.
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 CAC, subject to spousal consent as described in
subparagraph (a) above if required under the Plan.
(c) A participant may, if his interest in Separate Account (B) 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 Separate Account
(B).
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.
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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 payments are received by him. Any Purchase Payments in
excess of applicable limitations under the Internal Revenue Code are includable
in income for the year in which they are made.
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 in excess of his Investment in
the Contract will be taxed as ordinary income in the year received. If any
portion of the balance to the credit of a participant is payable to the
participant in an Eligible Rollover Distribution, the participant or his
surviving spouse will defer taxation to the extent he or she (1) has such
distribution paid directly to an individual retirement plan or another tax-
sheltered annuity which accepts such rollovers or (2) makes 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, required minimum
distributions under Section 401(a)(9) of the Internal Revenue Code and hardship
distributions.
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). The
Employer is required to pay a 10% excise tax on nondeductible
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contributions, 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. In addition, contributions to 403(b) plans are
subject to an "exclusion allowance" imposed by Section 403(b) of the Internal
Revenue Code. Generally, the exclusion allowance limits the amount that can be
excluded from a participant's income each year to 20% of the participant's
compensation multiplied by the Participant's years of service with the employer,
minus amounts previously contributed by or on behalf of the Participant under
the 403(b) plan and other employer -- sponsored retirement plans, to the extent
excluded from the Participant's income.
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 may be
made, if permitted by the plan, in an annual amount of up to $10,500. For 403(b)
Plans, the annual limit on salary reduction contributions is $10,500. These
contributions are subject to certain non-discrimination rules.
HR-10 PLANS. For a self-employed individual, compensation may generally be
defined as earned income, determined after the plan contribution. Only the first
$170,000 of a person's compensation ($275,000 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, $135,000 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 $135,000 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 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
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more than $67,500, (2) one of the 10 employees with annual compensation of more
than $30,000 who owns the largest interests in the Employer, (3) a 5% owner, or
(4) an owner of 1 percent or more of the stock, profits or capital of the
Employer which owner has annual compensation of more than $150,000.
For limitation years beginning prior to January 1, 2000, if an Employer
maintains a defined contribution plan and a defined benefit plan, there are
aggregate limitations on the benefits and contributions that may be provided
under the combination of plans. The limitations are more restrictive for top
heavy plans and are most restrictive for super top heavy plans (that is, defined
contribution plans where more than 90% of aggregate account balances are for key
employees and defined benefit plans where more than 90% of the cumulative
accrued benefits are for key employees).
DISTRIBUTIONS--HR-10 PLANS. Similar treatment is accorded to self-employed
individuals and common-law employees with respect to distributions from a plan.
A distribution is taxable except to the extent it consists of employee
non-deductible contributions which are received tax-free. (Distributions are
deemed to consist proportionally of tax-free and taxable amounts, unless CAC has
a separate record of amounts attributable to pre-1987 non-deductible employee
contributions, in which case those amounts are deemed distributed first. For
participants who were age 50 by January 1, 1986, an election may be made to
preserve the federal income tax treatment of lump sum distributions in effect
prior to 1987, i.e., ten-year forward income averaging (using 1986 tax rates)
and any portion of the distribution attributable to pre-1974 participation is
taxable as long term capital gain at a 20% rate. Generally, a lump sum
distribution is a 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. 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 defer taxation on such
distribution to the extent he or she (1) has such distribution paid directly to
an individual retirement plan or another qualified plan which accepts such
rollovers or (2) makes 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, required minimum distributions under Section 401(a)(9) of the
Internal Revenue Code, and certain hardship distributions from a 401(k) plan.
DISTRIBUTIONS--403(B) AND HR-10 PLANS. Distributions made to any
participant in an HR-10 Plan or 403(b) Plan prior to attainment of age 59 1/2
(unless the distribution is made on account of death, disability, separation
from service where the separation occurred during or after the calendar year in
which the participant attains age 55, certain medical expenses within the
deductible limits of the Internal Revenue Code, or as part of a series of annual
or more frequent annuity payments made after separation from service and at
least over the participant's life, or if the distribution is made to an
alternate payee pursuant to a QDRO or if it is made on account of an IRS levy on
the plan) 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
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taxes will be withheld from the taxable portion of any distribution that is not
an Eligible Rollover Distribution, unless the participants elects not to have
amounts withheld. 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 SEPARATE ACCOUNT (B)
Separate Account (B) is not qualified as a "regulated investment company"
under subchapter M of the Internal Revenue Code, as it is not taxed separately
from CAC. While Separate Account (B) is part of the total operations of CAC,
under existing federal income tax law, no taxes are payable on the investment
income and realized capital gains which are reinvested in Separate Account (B)
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.
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.
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 on
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 CAC in accordance with provisions in the Contracts which permit CAC 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.
As set forth 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 CAC have been
adopted by some Employers.
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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, 2000, 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
Separate Account (B) is not involved in any pending legal proceedings. CAC
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 CAC, such
litigation will not materially adversely affect the business or financial
position of CAC or Separate Account (B) or the ability of CAC 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, Group Vice President and Deputy General Counsel of CAC.
REPORTS TO PARTICIPANTS
Semi-annually, CAC 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 Separate Account (B), 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
Separate Account (B), 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 Separate Account (B)'s independent
auditors.
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FINANCIAL STATEMENTS
The following financial statements of Separate Account (B), the notes
thereto and the Independent Auditors' Report with respect thereto are
incorporated into the Statement of Additional Information by this reference from
Separate Account (B)'s 1999 Annual Report to Participants: Balance Sheet;
Statement of Operations; Statement of Changes in Participants' Equity; and
Schedule of Investments. Copies of the 1999 Annual Report to Participants may be
obtained, at no charge, by contacting in writing or by telephone:
Continental Assurance Company
Attn: Individual Pension Accounts-35S
P.O. Box 803572
Chicago, Illinois 60680-3572
Telephone: (800) 351-3001
In addition, the SEC maintains a web site (http://www.sec.gov) that
contains the 1999 Annual Report to Participants and other information about
Separate Account (B).
Financial statements of CAC, the notes thereto and the Independent
Auditors' Report with respect thereto are set forth on 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 CAC and are not financial statements of Separate Account (B).
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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, 1999 and for the year ended December 31, 1999 (two years ended
December 31, 1999 for the statement of changes in participants' equity), and the
related schedule of investments as of December 31, 1999, and have issued our
report dated February 18, 2000; such financial statements, schedule and report
are included in the 1999 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, 1999 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 18, 2000
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TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Glossary.................................................... 43
Management of Separate Account (B).......................... 3
Code of Ethics.............................................. 4
Investment Advisory Services................................ 5
Securities Custodian........................................ 6
Independent Auditors........................................ 6
Brokerage Allocations....................................... 7
Calculation of Performance Data............................. 7
Underwriting................................................ 8
Financial Statements........................................ 8
</TABLE>
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GLOSSARY
We have capitalized some of the terms used in this prospectus. To help you
understand these terms, we have defined them in this glossary.
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 CAC and Separate Account
(B) under which CAC provides certain administrative services for Separate
Account (B).
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.
CAC: Continental Assurance Company.
Casualty: Continental Casualty Company.
CNA Financial: CNA Financial Corporation.
Committee: a five-member board in which the supervision of Separate Account (B)
is vested.
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. References in this prospectus to
"you" or "your" refer to Contractholders.
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 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.
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Fixed Annuity: an annuity providing for payments which remain fixed throughout
the payment period and which do not vary with the investment experience of
Separate Account (B).
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 qualifies 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 CAC and Separate Account
(B) under which CAC acts as the investment adviser to Separate Account (B).
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 who has an interest in Separate Account (B) because such
person makes Purchase Payments or they are made for such person.
Purchase Payments: amounts paid to CAC by or for a Participant.
Separate Account (B): Continental Assurance Company Separate Account (B), which
consists of assets set aside by CAC in an account which does not contain the
investment experience of other assets or liabilities of CAC.
Valuation Date: a date on which CAC determines the value of Separate Account
(B).
Variable Annuity: an annuity providing for payments varying in amount according
to the investment experience of Separate Account (B).
44
<PAGE> 46
B logo
Group
Variable
Annuity
Contracts
PROSPECTUS
Dated: May 1, 2000
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
CNA LOGO
FOR ALL THE COMMITMENTS YOU MAKE(R)
Z57-835LL
<PAGE> 47
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) ("Separate Account (B)"),
which is a separate account created by Continental Assurance Company ("CAC"),
and certain Group Variable Annuity Contracts sold by CAC. This Statement of
Additional Information is not a Prospectus and should be read in conjunction
with the Prospectus of Separate Account (B), dated May 1, 2000.
For a free copy of the Prospectus, please call or write us at:
Continental Assurance Company
Attn: Individual Pension Accounts-35S
P.O. Box 803572
Chicago, Illinois 60680-3572
Telephone: (800) 351-3001
In addition, the Securities and Exchange Commission maintains a web site
(http://www.sec.gov) that contains the Prospectus and other information about
Separate Account (B).
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
DATED: MAY 1, 2000
<PAGE> 48
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS STATEMENT OF
ADDITIONAL INFORMATION AND IN THE PROSPECTUS. NEITHER CONTINENTAL ASSURANCE
COMPANY OR SEPARATE ACCOUNT (B) HAVE AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT THAN THAT WHICH IS SET FORTH IN THIS STATEMENT OF
ADDITIONAL INFORMATION AND THE PROSPECTUS. THIS STATEMENT OF ADDITIONAL
INFORMATION DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE TO PURCHASE
ANY SECURITIES. SUCH OFFERS MAY BE MADE ONLY BY THE PROSPECTUS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Glossary.................................................... 2
Management of Separate Account (B).......................... 3
Code of Ethics.............................................. 4
Investment Advisory Services................................ 5
Securities Custodian........................................ 6
Independent Auditors........................................ 6
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".
CAC: Continental Assurance Company.
Casualty: Continental Casualty Company.
CNA Financial: CNA Financial Corporation.
Committee: a five member board in which the supervision of Separate Account (B)
is vested.
Contract: a group variable annuity contract described in this Statement of
Additional Information.
Investment Advisory Agreement: an agreement between CAC and Separate Account
(B) under which CAC acts as the investment adviser to Separate Account (B).
1940 Act: the Investment Company Act of 1940, as amended.
Separate Account (B): Continental Assurance Company Separate Account (B), which
consists of assets set aside by CAC, the investment experience of which is kept
separate from that of other assets of CAC.
Variable Annuity: an annuity providing for payments varying in amount in
accordance with the investment experience of Separate Account (B).
2
<PAGE> 49
MANAGEMENT OF SEPARATE ACCOUNT (B)
OFFICERS AND MEMBERS OF THE COMMITTEE
<TABLE>
<CAPTION>
POSITION(S)
HELD WITH SEPARATE PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE ACCOUNT (B) DURING PAST FIVE YEARS
---------------- --- ------------------ -----------------------
<S> <C> <C> <C>
Richard W. Dubberke*........ 62 Vice President, Vice President of CAC and Casualty(1); Vice
CNA Plaza Treasurer and President, Treasurer and Director of CNA Income
Chicago, Illinois 60685 Member of Committee Shares, Inc. (closed-end investment company) ("CIS").
Richard T. Fox.............. 62 Member of Committee Independent Financial Consultant since October 1995;
661 Sheridan Road Chief Executive Officer of 21st Century Environmental
Winnetka, Illinois 60093 Management, Inc. (environmental recycling company)
("21EMI") from August 1994 to September 1995(2);
Marilou R. McGirr*.......... 47 Chairman of Committee Vice President of CAC and Casualty since January
CNA Plaza and Member of 1997(1); Assistant Vice President of CAC and Casualty
Chicago, Illinois 60685 Committee from January 1995 to January 1997;
William W. Tongue........... 84 Member of Committee Professor Emeritus of Economics and Finance,
212 Shoreline Drive University of Illinois at Chicago.
Park Ridge, Illinois 60068
Peter J. Wrenn.............. 64 Member of Committee President of Hudson Technology, Inc. (tooling and
915 Columbian Avenue Manufacturing).
Oak Park, Illinois 60302
Lynne Gugenheim*............ 40 Secretary of Group Vice President and Deputy General Counsel of
CNA Plaza Committee CAC and Casualty since March 2000(1). Vice President
Chicago, Illinois 60685 and Associate General Counsel of CAC and Casualty
from January 1996 to March 2000. Secretary of CAC and
CIS since April 1995. From November 1994 to December
1995, Assistant Vice President and Assistant General
Counsel of CAC 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 CAC.
(1) CNA Financial, 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 CAC.
(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 Separate
Account (B). CAC pays Committee Members a fee for their service. The Committee
Member's fee is currently $10,000 per annum. CAC 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 CAC, CNA Financial or any of
their affiliated companies. Therefore, neither Mr. Dubberke nor Ms. McGirr has
received or will receive any such payments. During 1999, 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 CAC receives a monthly investment advisory fee (at the annual rate of 0.5%
of the average daily net asset value of
3
<PAGE> 50
Separate Account (B)) from Separate Account (B) pursuant to CAC's Investment
Advisory Agreement with Separate Account (B).
The following table sets forth information regarding the compensation of
all Committee Members of Separate Account (B) for services rendered in 1999 to
Separate Account (B) and to funds deemed to be included in the same fund complex
as Separate Account (B). 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 TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED FROM FUND AND FUND
COMPENSATION ACCRUED AS PART OF ANNUAL BENEFITS COMPLEX
NAME OF PERSON, POSITION FROM FUND 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,
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).
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of February 23, 2000, no person was deemed to be in control of Separate
Account (B) or was known by either CAC or Separate Account (B) 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 Separate Account (B) own any
Accumulation Units of Separate Account (B).
CODE OF ETHICS
The Committee for Separate Account (B) has adopted a Code of Ethics
relating to the personal investing activities of certain Committee members,
officers and employees of Separate Account (B) and certain directors, officers,
and employees of CAC, as the investment adviser for Separate Account (B)
("access persons"). The Code of Ethics is designed to prevent unlawful practices
in connection with the purchase or sale of securities by access persons. Under
the Code of practices in connection with the purchase or sale of securities by
access persons. Under the Code of Ethics, access persons are permitted to engage
in personal securities transactions, but are subject to restrictions on their
right to purchase certain securities which may be purchased or held by Separate
Account (B). In addition, access persons are required to report their personal
securities transactions for monitoring purposes. A copy of the Code of Ethics is
on file with the Securities and Exchange Commission (the "SEC") and can be
reviewed and copied at the SEC's Public Reference Room in Washington, D.C.
Information on the operation of the
4
<PAGE> 51
Public Reference Room may be obtained by calling the SEC at 1-202-942-8090. The
Code of Ethics is also available on the EDGAR Database on the SEC's Internet
site at http://www.sec.gov. A copy of the Code of Ethics may also be obtained,
after paying a duplicating fee, by electronic request made to [email protected]
or by writing the SEC's Public Reference Section, Washington D.C. 20549-0102.
INVESTMENT ADVISORY SERVICES
All of the voting securities of CAC are owned by Casualty, a stock casualty
insurance company organized under the Illinois Insurance Code, the home office
of which is located at CNA Plaza, Chicago, Illinois 60685. All of the voting
securities of Casualty are owned by CNA Financial, a Delaware corporation, CNA
Plaza, Chicago, Illinois 60685. Loews Corporation, a Delaware corporation, 667
Madison Avenue, New York, New York 10021-8087, with interests in insurance,
hotels, watches and other timing devices, drilling rigs and tobacco, owned
approximately 86.5% of the outstanding voting securities of CNA Financial as of
December 31, 1999. 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 33% of the outstanding
common stock of Loews Corporation as of December 31, 1999. Therefore, they may
be deemed to be parents of Loews Corporation, and thus of CNA Financial
Corporation and CAC, within the meaning of the federal securities laws.
Pursuant to the Investment Advisory Agreement, CAC makes quarterly
withdrawals from Separate Account (B) at an annual rate of 0.5% of the average
daily net asset value of Separate Account (B) for providing investment advisory
services, and at an additional annual rate of 0.33% of the average daily net
asset value of Separate Account (B) as a service fee for bearing the following
expenses of Separate Account (B): costs and expenses incident to compliance with
federal and state regulations applicable to any public offering of Accumulation
Units in Separate Account (B); expenses related to printing and distributing
prospectuses and statements of additional information to persons who, at the
time of such distribution, are participants in Separate Account (B); SEC
registration; 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 Separate Account (B) 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 CAC as a profit. If such expenses are greater than
the fee, the difference will accrue to CAC as a loss. Under its Investment
Advisory Agreement with Separate Account (B), CAC is permitted to make such
withdrawals on a monthly basis instead of on a quarterly basis, but to date CAC
has nevertheless consented to being paid quarterly. Separate Account (B) has
incurred the following investment advisory and service fees payable to CAC:
1999, $1,641,178; 1998, $1,365,230; and 1997, $1,180,321. Separate Account (B)
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
5
<PAGE> 52
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 Separate Account (B) may be
liquidated. In the event of such liquidation, the interest of any retired
participant in Separate Account (B) will be transferred by CAC to its regular
reserves, and CAC 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 Separate Account (B) upon
termination of the Investment Advisory Agreement may have adverse federal income
tax consequences for a participant electing to receive a lump sum settlement
since the full amount of the settlement received will be taxable as ordinary
income realized in the year of receipt.
Under separate agreements with Separate Account (B), CAC acts as principal
underwriter and performs all sales and administrative functions relative to
Separate Account (B) and the variable annuity contracts of Separate Account (B).
The amounts earned by CAC for sales and administrative functions rendered to
Separate Account (B) for each of the years 1999, 1998, and 1997 were $7,961,
$10,428, and $11,417, respectively. The agreement covering sales and
administrative services does not cover the services covered by the Investment
Advisory Agreement.
CAC has an affiliate, CNA Investor Services, Inc. ("Investor Services"),
(the successor by merger to CNA Securities Corp.), which is a member of the
National Association of Securities Dealers, Inc. CAC and Separate Account (B)
are parties to an agreement under which Separate Account (B) receives credit
from CAC in the form of a reduction of the investment advisory fee to the extent
that services of Investor Services are utilized in connection with Separate
Account (B)'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 Separate Account (B) and to CNA
Securities Corp. for the services of CNA Securities Corp. to be utilized in
connections with certain of Separate Account (B)'s portfolio transactions. The
advantage of such arrangement was reduced significantly by the above-mentioned
changes in the securities laws. Separate Account (B) had no transactions with
Investor Services during 1999, 1998 and 1997.
SECURITIES CUSTODIAN
The custodian of Separate Account (B)'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 Separate Account (B).
INDEPENDENT AUDITORS
The Committee has appointed Deloitte & Touche LLP, Two Prudential Plaza,
180 North Stetson Avenue, Chicago, Illinois, as auditors to audit the financial
statements of Separate Account (B). They also audit the Schedule of Investments
and the Financial Highlights of Separate Account (B). In addition, Deloitte &
Touche LLP has been appointed to audit the consolidated financial statements of
CAC.
6
<PAGE> 53
BROKERAGE ALLOCATIONS
Officers and employees in the Investment Department of CAC are primarily
responsible for making portfolio decisions for Separate Account (B) and for
placing brokerage business of Separate Account (B). Separate Account (B) has
paid the following brokerage fees and commissions in connection with portfolio
transactions: 1999, $652,517,1998, $538,717; and 1997, $464,745.
In selecting brokers to execute portfolio transactions, CAC'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 CAC is the quality of execution. Research
services, to the extent provided to CAC, may be used by CAC in servicing its
other accounts and not all such services are used in connection with Separate
Account (B).
In connection with the purchase and sale of portfolio securities for
Separate Account (B), CAC does not bunch orders for such transactions with
orders for other accounts under the management of Loews, CNA Financial, CAC or
other subsidiaries of CNA Financial unless such other accounts are registered
investment companies and unless such bunching would not have adverse
consequences for Separate Account (B) and such other accounts. Under no
circumstances are orders bunched with orders for CAC's own account or for the
account of Loews Corporation, CNA Financial or other subsidiaries of CNA
Financial. No bunching of orders occurred during 1999.
CALCULATION OF PERFORMANCE DATA
In computing the end-of-period values listed below of a hypothetical
investment in Separate Account (B), 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 Separate Account (B) 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>
25.54% AVERAGE RETURN FOR 25.04% AVERAGE RETURN FOR 17.68% AVERAGE RETURN FOR
1 YEAR PERIOD 5 YEAR PERIOD 10 YEAR PERIOD
ENDING ON 12-31-99 ENDING ON 12-31-99 ENDING ON 12-31-99
- ------------------------- ------------------------- -------------------------
<S> <C> <C>
$1,255.37 $3,056.86 $5,094.76
</TABLE>
7
<PAGE> 54
GRADED DEDUCTION CONTRACT FOR 403(b) PLANS
If you invested $1,000 in Separate Account (B) 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>
23.87% AVERAGE RETURN FOR 23.18% AVERAGE RETURN FOR 15.74% AVERAGE RETURN FOR
1 YEAR PERIOD 5 YEAR PERIOD 10 YEAR PERIOD
ENDING ON 12-31-99 ENDING ON 12-31-99 ENDING ON 12-31-99
- ------------------------- ------------------------- -------------------------
<S> <C> <C>
$1,238.72 $2,835.90 $4,312.04
</TABLE>
HR-10 PLANS
If you invested $1,000 in Separate Account (B) 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>
17.20% AVERAGE RETURN FOR 23.19% AVERAGE RETURN FOR 16.48% AVERAGE RETURN FOR
1 YEAR PERIOD 5 YEAR PERIOD 10 YEAR PERIOD
ENDING ON 12-31-99 ENDING ON 12-31-99 ENDING ON 12-31-99
- ------------------------- ------------------------- -------------------------
<S> <C> <C>
$1,171.98 $2,836.55 $4,597.48
</TABLE>
UNDERWRITING
CAC may be deemed to be the principal underwriter for Separate Account (B),
but receives no compensation from Separate Account (B) other than the fees
pursuant to the Investment Advisory Agreement and the Administrative Service
Agreement. The Contracts are offered by employees and licensed agents and
brokers of CAC, 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 Separate Account (B), the notes thereto and the
Independent Auditors' Report with respect thereto are incorporated into this
Statement of Additional Information by this reference to Separate Account (B)'s
1999 Annual Report to Participants: Balance Sheet; Statement of Operations;
Statement of Changes in Participants' Equity; and Schedule of Investments.
Copies of the 1999 Annual Report to Participants may be obtained, at no charge,
upon request by contacting in writing or by telephone:
Continental Assurance Company
Attn: Individual Pension Accounts-35S
P.O. Box 803572
Chicago, Illinois 60680-3572
Telephone: (800) 351-3001
In addition, the SEC maintains a web site (http://www.sec.gov) that
contains the Annual Report to Participants and other information about Separate
Account (B).
8
<PAGE> 55
Financial statements of CAC, the notes thereto and the Independent
Auditors' Report with respect thereto are set forth on page 10 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 CAC and are not financial statements of Separate Account (B).
9
<PAGE> 56
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Continental Assurance Company
We have audited the accompanying consolidated balance sheets of Continental
Assurance Company (the "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, 1999 and 1998
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, 1999.
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, 1999 and 1998, and the results of its operations and cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
As discussed in Note 15 to the consolidated financial statements, the
Company changed its method of accounting for liabilities for insurance-related
assessments in 1999.
Deloitte & Touche LLP
Chicago, Illinois
February 23, 2000
(March 14, 2000 as to Note 16)
10
<PAGE> 57
The following consolidated financial statements are those of Continental
Assurance Company and not those of Separate Account (B). They are included for
the purpose of informing investors as to the financial position and operations
of CAC.
CONTINENTAL ASSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998
- ------------------------------------------------------------------------------------------
(In thousands of dollars, except share data)
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities available-for-sale (amortized cost:
$5,967,504 and $5,235,971)............................. $ 5,784,235 $ 5,354,356
Equity securities available-for-sale (cost: $169,565 and
$49,132)............................................... 170,092 45,099
Mortgage loans and real estate (less accumulated
depreciation: $121 and $129)........................... 18,097 19,050
Policy loans............................................ 191,622 177,442
Other invested assets................................... 17,766 9,261
Short-term investments.................................. 696,828 851,334
----------- -----------
TOTAL INVESTMENTS................................... 6,878,640 6,456,542
Cash...................................................... 30,628 19,003
Insurance receivables:
Reinsurance receivables................................. 518,594 341,282
Premium and other insurance receivables................. 521,430 469,289
Less allowance for doubtful accounts.................... (324) (266)
Deferred acquisition costs................................ 1,307,115 1,127,761
Accrued investment income................................. 76,023 65,431
Receivables for securities sold........................... 11,887 46,793
Federal income taxes recoverable.......................... 57,881 --
Property and equipment at cost (less accumulated
depreciation: $166,386 and $161,001).................... 159,109 145,489
Other assets.............................................. 271,042 432,231
Separate Account business................................. 4,603,133 5,202,834
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $14,435,158 $14,306,389
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Insurance reserves:
Future policy benefits.................................. $ 5,118,631 $ 4,707,831
Claims.................................................. 724,632 654,388
Policyholders' funds.................................... 577,409 608,114
Securities sold under repurchase agreements............... 454,938 78,126
Participating policyholders' equity....................... 118,382 139,526
Federal income taxes payable.............................. -- 12,190
Payables for securities purchased......................... 27,312 13,504
Deferred income taxes..................................... 77,559 138,951
Debt...................................................... 10,000 10,000
Other liabilities......................................... 344,485 316,191
Separate Account business................................. 4,603,133 5,202,834
----------- -----------
TOTAL LIABILITIES................................... 12,056,481 11,881,655
----------- -----------
Commitments and contingent liabilities...................... -- --
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................................ 423,151 335,666
Retained earnings......................................... 2,091,381 1,961,459
Accumulated other comprehensive income (loss)............. (157,686) 105,778
----------- -----------
TOTAL STOCKHOLDER'S EQUITY.......................... 2,378,677 2,424,734
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $14,435,158 $14,306,389
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
11
<PAGE> 58
CONTINENTAL ASSURANCE COMPANY
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Revenues:
Premiums.................................................. $3,318,507 $3,295,229 $3,435,294
Net investment income..................................... 455,812 445,084 418,395
Realized investment gains (losses)........................ (48,060) 134,652 163,579
Other..................................................... 85,963 86,236 82,258
---------- ---------- ----------
3,812,222 3,961,201 4,099,526
---------- ---------- ----------
Benefits and expenses:
Insurance claims and policyholders' benefits.............. 3,195,297 3,223,757 3,254,223
Amortization of deferred acquisition costs................ 135,916 132,228 121,111
Restructuring and other related charges................... 5,000 46,306 --
Other operating expenses.................................. 284,852 351,609 363,344
Participating policyholder's interest..................... 10,562 28,850 31,647
---------- ---------- ----------
3,631,627 3,782,750 3,770,325
---------- ---------- ----------
Income before cumulative effect of change in accounting
principle and income tax expense...................... 180,595 178,451 329,201
Income tax expense.......................................... 48,359 69,583 110,918
---------- ---------- ----------
Income before cumulative effect of change in accounting
principle............................................... 132,236 108,868 218,283
Cumulative effective of change in accounting principle, net
of tax.................................................... (2,314) -- --
- ------------------------------------------------------------------------------------------------------
NET INCOME................................................ $ 129,922 $ 108,868 $ 218,283
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
12
<PAGE> 59
CONTINENTAL ASSURANCE COMPANY
STATEMENTS OF CONSOLIDATED STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE COMPREHENSIVE TOTAL
COMMON PAID-IN INCOME RETAINED INCOME STOCKHOLDER'S
STOCK CAPITAL (LOSS) EARNINGS (LOSS) EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.............. $21,831 $335,666 $1,634,308 $ 56,663 $2,048,468
Comprehensive income:
Net income.......................... -- -- $ 218,283 218,283 -- 218,283
Other comprehensive income.......... -- -- 71,859 -- 71,859 71,859
---------
Total comprehensive income............ $ 290,142
------- -------- ========= ---------- --------- ----------
BALANCE, DECEMBER 31, 1997.............. 21,831 335,666 1,852,591 128,522 2,338,610
Comprehensive income (loss):
Net income.......................... -- -- $ 108,868 108,868 -- 108,868
Other comprehensive loss............ -- -- (22,744) -- (22,744) (22,744)
---------
Total comprehensive income............ $ 86,124
------- -------- ========= ---------- --------- ----------
BALANCE, DECEMBER 31, 1998.............. 21,831 335,666 1,961,459 105,778 2,424,734
Capital contribution from parent...... -- 87,485 -- -- 87,485
Comprehensive income (loss):
Net income.......................... -- -- $ 129,922 129,922 -- 129,922
Other comprehensive loss............ -- -- (263,464) -- (263,464) (263,464)
---------
Total comprehensive loss.............. $(133,542)
- -------------------------------------------------------------- ============= ------------------------------------------
BALANCE, DECEMBER 31, 1999 $21,831 $423,151 $2,091,381 $(157,686) $2,378,677
============================================================== ==========================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
13
<PAGE> 60
CONTINENTAL ASSURANCE COMPANY
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
DECEMBER 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 129,922 $ 108,868 $ 218,283
----------- ----------- -----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Net realized investment (gains) losses pre-tax.......... 48,060 (134,652) (163,579)
Participating policyholders' interest................... 4,134 1,965 7,714
Amortization of bond discount........................... (43,147) (24,834) (25,278)
Depreciation............................................ 17,733 20,779 22,713
Changes in:
Insurance receivables................................. (229,395) (16,378) (59,235)
Deferred acquisition costs............................ (149,562) (156,096) (201,914)
Accrued investment income............................. (10,592) 10,043 29,421
Federal income taxes recoverable...................... (75,633) 54,899 6,859
Insurance reserves.................................... 350,381 338,016 297,365
Deferred income taxes................................. 41,645 2,527 38,024
Other liabilities..................................... 62,142 (268,734) 150,503
Other, net............................................ (43,285) (14,782) (83,321)
----------- ----------- -----------
TOTAL ADJUSTMENTS............................... (27,519) (187,247) 19,272
----------- ----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES........ 102,403 (78,379) 237,555
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities.............................. (9,839,531) (6,624,402) (8,179,284)
Proceeds from fixed maturities
Sales................................................... 8,527,089 6,661,464 6,752,672
Maturities, calls and redemption........................ 548,466 396,915 732,884
Purchase of equity securities............................. (178,135) (40,926) (90,796)
Proceeds from sale of equity securities................... 196,474 11,063 138,061
Change in short-term investments.......................... 206,808 (365,293) 31,970
Purchase of property and equipment........................ (27,617) (30,586) (39,059)
Securities sold under repurchase agreements............... 376,812 (74,590) 152,716
Change in other investments............................... (15,233) (940) 13,657
Other, net................................................ 14,131 34,843 54,535
----------- ----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES........ (190,736) (32,452) (432,644)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts from investment contracts credited to
policyholder account balance............................ 249,612 276,590 399,795
Return of policyholder account balances on investment
contracts............................................... (149,654) (196,828) (193,844)
----------- ----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES........ 99,958 79,762 205,951
----------- ----------- -----------
NET CASH FLOWS.................................. 11,625 (31,069) 10,862
Cash at beginning of year................................... 19,003 50,072 39,210
- -----------------------------------------------------------------------------------------------------
CASH AT END OF YEAR 30,628 19,003 50,072
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Federal income taxes...................................... 71,744 76,750 6,009
Interest expense.......................................... 300 289 377
Non-cash contribution of capital, net of tax................ 87,485 -- --
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
14
<PAGE> 61
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Continental Assurance Company ("CAC") is a wholly-owned subsidiary of
Continental Casualty Company ("Casualty") which is wholly-owned by CNA Financial
Corporation ("CNAF"). Loews Corporation owns approximately 86% of the
outstanding common stock of CNAF. The significant operating subsidiaries of CAC
consist of Valley Forge Life Insurance Company ("VFL"), Convida Holdings Ltd.,
CNA Health Partners, Inc., CNA Life Insurance Company of Canada, Charles
Steadman & Co., Inc., and CNA International Life Company, SPC Limited.
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 1999. All significant 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 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 9%, and mortality, morbidity and withdrawal
assumptions reflect CAC and industry experience prevailing at the time of issue.
Expense assumptions include the estimated effects of inflation and expenses to
be incurred 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 4.45% to 7.25% for the three
years ended December 31, 1999.
Claim reserves--Claim and claim adjustment expense reserves, except
reserves for accident and health disability claims, are not discounted and are
based on (a) case basis estimates for losses reported on direct business,
adjusted in the aggregate for ultimate loss expectations, (b) estimates of
unreported losses, (c) estimates of losses on assumed insurance, (d) estimates
of future expenses to be incurred in settlement of claims and (e) estimates of
claim recoveries, exclusive of reinsurance recoveries which are reported as an
asset. Management considers current conditions and trends as well as past CAC
and
15
<PAGE> 62
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 1.--(CONTINUED):
industry experience in establishing these estimates. The effects of inflation,
which can be significant, are implicitly considered in the reserving process and
are part of the recorded reserve balance.
Claim and claim adjustment expense reserves represent management's
estimates of ultimate liabilities based on currently available facts and case
law and the ultimate liability may vary significantly from such estimates. CAC
regularly reviews its reserves, and any adjustments to the previously
established reserves are recognized in income in the period the need for such
adjustments becomes apparent.
Reinsurance--CAC assumes and cedes insurance with other insurers and
reinsurers and members of various reinsurance pools and associations. CAC
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
and CAC's retained amount varies by type of coverage. CAC's life reinsurance
includes coinsurance, yearly renewable term and facultative programs.
Deferred acquisition costs--Life insurance acquisition costs are
capitalized and amortized using 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 duration. To the
extent that unrealized gains or losses on available-for-sale securities would
result in an adjustment of deferred policy acquisition costs, had those gains or
losses actually been realized, an adjustment to deferred acquisition costs is
recorded with an offsetting adjustment recorded to unrealized investment gains
or losses which are included in accumulated other comprehensive income and
reported as a component of stockholders' equity.
Participating business--Participating business represented 0.5%, 0.5% and
0.7% of gross life insurance in force and 0.6%, 0.7% and 0.7% of premium income
for 1999, 1998 and 1997, respectively. Participating policyholders' equity is
determined by allocating 90% of the 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 benefits
and expenses.
Separate Account business--CAC and VFL write certain investment and annuity
contracts. The supporting assets and liabilities of these contracts are legally
segregated and reported as assets and liabilities of Separate Account business.
CAC guarantees principal and a specified return to the contractholders on
approximately 53% and 64% of the Separate Account liabilities at December 31,
1999 and 1998, respectively. Substantially all assets of the Separate Account
business are carried at fair value. Separate Account liabilities are carried at
contract values.
16
<PAGE> 63
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 1.--(CONTINUED):
INVESTMENTS
Valuation of investments--CAC classifies its fixed maturity securities
(bonds and redeemable preferred stocks) 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, and amortization and accretion are included
in investment income. Changes in fair value are reported as a component of
accumulated other comprehensive income. Investments are written down to
estimated fair values, and losses are recognized in income when a decline in
value is determined to be other than temporary.
Mortgage loans are carried at unpaid principal balances, including
unamortized premium or discount. Investments in real estate are carried at
depreciated cost. Policy loans are carried at unpaid balances. Short-term
investments are carried at amortized cost, which approximates fair value.
Other invested assets include investments in joint ventures, limited
partnerships, certain derivative securities and other investments. The
investments in joint ventures and limited partnerships are carried at CAC's
equity in the investees' net assets. CAC records its investments in derivative
securities at fair value. Under this method, the derivative securities are
recorded in the consolidated balance sheets at fair value at the reporting date
and changes in fair value are recognized in realized investment gains and
losses.
Investment gains and losses--All securities transactions are recorded on
the trade date. Realized investment gains and losses are determined on the basis
of the cost of the specific securities sold. Unrealized investment gains and
losses on fixed maturity securities and equity securities are reflected as part
of stockholder's equity, net of applicable deferred income taxes and deferred
acquisition costs. 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 lending activities--CAC lends securities to unrelated parties,
primarily major brokerage firms. Borrowers of these securities must deposit
collateral with CAC equal to 100% of the fair value of the securities if the
collateral is cash or 102% of the fair value of the securities if the collateral
is securities. Cash deposits from these transactions are invested in short-term
investments (primarily commercial paper) and a liability is recognized for the
obligation to return the collateral. CAC continues to receive the interest on
the loaned fixed maturity securities, as beneficial owner and accordingly,
loaned fixed maturity securities are reported as investments in fixed maturity
securities.
INCOME TAXES
CAC accounts for income taxes under the liability method. Under the
liability method, deferred income taxes are recognized for temporary differences
between the financial statement and tax return bases of assets and liabilities.
Temporary differences primarily relate to insurance reserves, deferred
acquisition costs and net unrealized investment gains or losses.
17
<PAGE> 64
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 1.--(CONTINUED):
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.
NOTE 2. INVESTMENTS:
The significant components of net investment income are presented in the
following table:
NET INVESTMENT INCOME
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Fixed maturities............................................ $421,430 $406,603 $369,662
Equity securities........................................... 1,787 2,205 1,923
Mortgage loans and Real Estate.............................. 1,324 1,690 2,956
Policy loans................................................ 10,706 10,725 10,274
Short-term investments and other............................ 30,221 33,954 39,010
-------- -------- --------
465,468 455,177 423,825
Investment expense.......................................... (9,656) (10,093) (5,430)
- ---------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $455,812 $445,084 $418,395
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 65
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED):
Net realized investment gains (losses) and net unrealized appreciation
(depreciation) in investments are set forth in the following table:
ANALYSIS OF INVESTMENT GAINS (LOSSES)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Realized investment gains (losses):
Fixed maturities.......................................... $ (72,150) $105,756 $ 87,371
Equity securities......................................... 4,916 (3,468) 19,183
Real estate............................................... 457 (2) 4,955
Short term, Separate Accounts, and other.................. 18,717 32,366 52,070
--------- -------- ---------
(48,060) 134,652 163,579
Allocated to participating policyholders gains (losses)... 4,718 (13,997) (14,613)
Income tax benefit (expense).............................. 17,263 (43,412) (52,701)
--------- -------- ---------
NET REALIZED INVESTMENT GAINS (LOSSES)............ (26,079) 77,243 96,265
--------- -------- ---------
Change in net unrealized investment gains (losses):
Fixed maturities.......................................... (301,653) 4,678 77,134
Equity securities......................................... 4,560 (5,431) 8,940
Short term, Separate Accounts, and other.................. (155,669) (13,680) 50,465
--------- -------- ---------
(452,762) (14,433) 136,539
--------- -------- ---------
Reclassification to deferred acquisition costs............ 29,792 (6,784) (8,326)
Allocated to participating policyholders.................. 21,094 (277) (3,983)
Deferred income tax benefit (expense)..................... 148,039 1,999 (51,512)
--------- -------- ---------
CHANGE IN NET UNREALIZED INVESTMENT GAINS
(LOSSES)........................................ (253,837) (19,495) 72,718
- -----------------------------------------------------------------------------------------------------------
NET APPRECIATION (DEPRECIATION) IN INVESTMENTS $(279,916) $ 57,748 $ 168,983
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of fixed maturities and equity securities and the
resulting gains and (losses) are set forth in the following table.
SUMMARY OF GROSS REALIZED INVESTMENT GAINS (LOSSES)
FOR FIXED MATURITIES AND EQUITY SECURITIES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
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............................... $8,527,089 $196,474 $6,661,464 $ 11,063 $6,752,672 $138,061
---------- -------- ---------- -------- ---------- --------
Gross realized gains.............................. 44,809 5,910 119,707 268 113,008 19,365
Gross realized (losses)........................... (116,959) (994) (13,951) (3,736) (25,637) (182)
- -------------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAINS (LOSSES) ON SALES $ (72,150) $ 4,916 $ 105,756 $ (3,468) $ 87,371 $ 19,183
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 66
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED):
Net unrealized investment gains (losses) are set forth in the following
table:
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1999 1998
------------------------------- ------------------------------
DECEMBER 31 GAINS LOSSES NET GAINS LOSSES NET
- --------------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities........................................ $18,094 ($201,363) $(183,269) $155,739 $(37,355) $118,384
Equity securities....................................... 7,850 (7,323) 527 5,499 (9,532) (4,033)
Other, principally Separate Account business............ 2,635 (74,900) (72,265) 83,483 (79) 83,404
------- --------- --------- -------- -------- --------
$28,579 $(283,586) (255,007) $244,721 $(46,966) 197,755
======= ========= ======== ========
Adjustment to deferred policy acquisition costs related
to unrealized gains (losses) and other................ 14,682 (15,110)
Allocated to participating policyholders................ 16,941 (4,153)
Deferred income tax expense............................. 84,114 (67,824)
- --------------------------------------------------------------------------------------------------------------------------
NET UNREALIZED INVESTMENT GAINS (LOSSES) $(139,270) $110,668
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table provides a summary of investments in fixed maturity
securities and equity securities available for sale:
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
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, 1999
U.S. Treasuries and obligations of government agencies...... $1,506,276 $ -- $ 47,739 $1,458,537
Asset-backed securities..................................... 2,034,814 6,689 65,585 1,975,918
Corporate securities........................................ 1,901,840 5,687 72,707 1,834,820
Other debt securities....................................... 524,574 5,718 15,332 514,960
---------- -------- -------- ----------
Total fixed maturities.................................. 5,967,504 18,094 201,363 5,784,235
Equity securities........................................... 169,565 7,850 7,323 170,092
- ----------------------------------------------------------------------------------------------------------------
TOTAL $6,137,069 $ 25,944 $208,686 $5,954,327
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
U.S. Treasuries and obligations of government agencies...... $ 994,437 $ 13,904 $ 4,729 $1,003,612
Asset-backed securities..................................... 1,946,160 59,391 2,288 2,003,264
Corporate securities........................................ 1,681,423 50,223 15,137 1,716,509
Other debt securities....................................... 613,951 32,221 15,201 630,971
---------- -------- -------- ----------
Total fixed maturities.................................... 5,235,971 155,739 37,355 5,354,356
Equity securities........................................... 49,132 5,499 9,532 45,099
- ----------------------------------------------------------------------------------------------------------------
TOTAL $5,285,103 $161,238 $ 46,887 $5,399,455
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 67
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED):
The following table summarizes fixed maturities by contractual maturity at
December 31, 1999:
SUMMARY OF INVESTMENTS IN FIXED
MATURITIES BY CONTRACTUAL MATURITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1999
-----------------------
AMORTIZED MARKET
YEAR ENDED DECEMBER 31 COST VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands of dollars)
Due in one year or less..................................... $ 91,960 $ 91,677
Due after one year through five years....................... 1,466,255 1,440,660
Due after five years through ten years...................... 1,198,636 1,156,700
Due after ten years......................................... 1,175,838 1,119,281
Asset-backed securities not due at a single maturity date... 2,034,814 1,975,917
- --------------------------------------------------------------------------------------
TOTAL $5,967,503 $5,784,235
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</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, 1999 and 1998. There are no
investments in a single issuer, other than investments in securities issued by
the U.S. Government or its agencies, 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 $262.5 million and $426.5 million
at December 31, 1999 and 1998, respectively. Net unrealized gains (losses) on
high yield securities, included in the general account, were ($14.3) million and
$5.0 million at December 31, 1999 and 1998, respectively.
At December 31, 1999, total Separate Account investments excluding cash and
other assets amounted to $4.5 billion with taxable fixed maturities representing
approximately 72.4% of the Separate Accounts' portfolio. Approximately 53% and
64%, at December 31, 1999 and 1998, respectively, of the Separate Account
investments were used to fund guaranteed investment contracts (GICs) for which
CAC guarantees principal and a specified return to the contract holders. The
duration of fixed maturities included in the GIC portfolio is matched to
approximate the corresponding payout pattern of the liabilities of the GIC
contracts.
All fixed maturities in the GIC portfolio were carried at fair value and
amounted to $2.3 billion and $3.2 billion at December 31, 1999 and 1998,
respectively. At December 31, 1999 and 1998, net unrealized gains (losses) on
fixed maturities in the GIC portfolio amounted to approximately ($65.2) million
and $64.3 million, respectively. The gross unrealized gains and (losses) on the
fixed maturities in the GIC
21
<PAGE> 68
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 2.--(CONTINUED):
portfolio at December 31, 1999, were $9.5 million and ($74.7) million,
respectively compared to $84.3 million and ($20.0) million, respectively at
December 31, 1998.
High yield securities in the guaranteed Separate Account portfolio were
carried at fair value totaling $85.4 million and $268.9 million at December 31,
1999 and 1998, respectively. Net unrealized losses on high yield securities held
in such Separate Accounts were $5.8 million and $8.8 million at December 31,
1999 and 1998, respectively.
NOTE 3. DEBT
Debt consists of the following obligation at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
DECEMBER 31 1999 1998
- -------------------------------------------------------------------------------
(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 DEBT $10,000 $10,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
NOTE 4. FINANCIAL INSTRUMENTS
In the normal course of business, CAC invests in various financial assets,
incurs various financial liabilities, and enters into agreements involving
derivative securities, including off-balance sheet financial instruments.
Fair values are required to be disclosed for all financial instruments,
whether or not recognized in the consolidated balance sheets, for which it is
practical 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 CAC could realize in the
current market exchange.
Non-financial instruments such as real estate, deferred policy 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 CAC.
The carrying amounts reported in the consolidated balance sheets
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 CAC's other
financial instrument assets and liabilities are listed in the following table.
Derivative instruments are shown in a separate table.
22
<PAGE> 69
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 4.--(CONTINUED):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
DECEMBER 31 1999 1998
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ---------------------------------------------------------------------------------------------------------------
(In thousand of dollars)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Investments:
Fixed maturities.......................................... 5,784,235 5,784,235 5,354,356 5,354,356
Equity securities......................................... 170,092 170,092 45,099 45,099
Mortgage loans............................................ 15,408 15,712 14,688 15,565
Policy loans.............................................. 191,622 179,038 177,442 172,616
Other invested assets..................................... 17,766 17,766 9,261 9,261
Separate Account assets:
Fixed maturities.......................................... 3,260,184 3,260,184 4,154,709 4,154,709
Equity securities......................................... 260,369 260,369 297,074 297,074
Other..................................................... 493,379 493,379 216,418 216,418
FINANCIAL LIABILITIES
Premium deposits and annuity contracts...................... 1,300,762 1,247,539 1,259,235 1,204,980
Debt........................................................ 10,000 10,000 10,000 10,000
Separate Account liabilities
Guaranteed investment contracts........................... 1,512,092 1,517,800 2,422,811 2,478,395
Deferred annuities........................................ 117,167 125,081 85,460 102,422
Variable separate accounts................................ 1,504,633 1,504,633 1,268,051 1,268,051
Other..................................................... 570,825 570,825 600,171 600,171
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used by CAC in estimating the
fair value for the above financial instruments:
Fixed maturities and equity securities are based on quoted market
prices, where available. For securities not actively traded, fair values
are estimated using values obtained from independent pricing services,
costs to settle or quoted market prices of comparable instruments.
The fair values for mortgage loans and policy loans are estimated
using discounted cash flow analyses at interest rates currently offered for
similar loans to borrowers with comparable credit ratings. Loans with
similar characteristics are aggregated for purposes of the calculations.
Valuation techniques to determine fair value of other invested assets
and other Separate Account business assets consist of discounted cash flows
and quoted market prices of (a) the investments, (b) comparable instruments
or (c) underlying assets of the investments.
Premium deposits and annuity contracts are valued based on cash
surrender values and the outstanding fund balances.
CAC's long-term debt represents floating rate tax exempt bonds with
interest rates determined monthly and thus approximates fair value.
23
<PAGE> 70
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 4.--(CONTINUED):
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
CAC invests in derivative financial instruments in the normal course of
business primarily to reduce its exposure to market risk (principally interest
rate, equity stock price and foreign currency risk). Financial instruments used
for such purposes include interest rate swaps, interest rate caps, put and call
options, commitments to purchase securities, futures and forwards. Other than
derivatives held in certain Separate Accounts, CAC generally does not hold or
issue these instruments for trading purposes. CAC also uses derivatives to
mitigate the risk associated with its indexed group annuity contracts by
purchasing S&P 500 index futures contracts in a notional amount equal to the
portion of the customer liability related to S&P 500 exposure.
The gross notional principal or contractual amounts of derivative financial
instruments in the general account totaled $588.1 million at December 31, 1999
and $500.0 million at December 31, 1998. The gross notional principal or
contractual amounts of derivative financial instruments in the Separate Accounts
totaled $1,626.6 million and $1,193.9 million at December 31, 1999 and 1998,
respectively. The contractual 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 instruments.
The fair values associated with derivative financial instruments are
generally affected by interest rates, equity prices and foreign currency
exchange rates. The credit exposure associated with non-performance by the
counterparties to these instruments is generally limited to the gross fair value
asset related to the instruments recognized in the consolidated balance sheets.
CAC continuously monitors the credit worthiness of its counterparties. CAC
generally does not require collateral from its derivative investment
counterparties.
The fair value of derivatives generally represent the estimated amounts
that CAC would expect to receive or pay upon termination of the contracts at the
reporting date. Dealer quotes are available for substantially all of CAC's
derivatives. For derivative instruments not actively traded, fair values are
estimated using values obtained from independent pricing services, costs to
settle or quoted market prices of comparable instruments.
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. Realized gains and losses on the S&P
500 index futures contracts, as reflected in the table
24
<PAGE> 71
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 4.--(CONTINUED):
below, generally are used to satisfy the liability to the Separate Account
contractholders and are not reflected in CAC's operations.
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.
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.
A summary of the aggregate contractual or notional amounts, estimated fair
values and gains or losses related to derivative financial instruments as of and
for the year ended December 31, 1999 and 1998 are presented below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 CONTRACTUAL ASSET/(LIABILITY) REALIZED
(In thousands of dollars) NOTIONAL AMOUNT FAIR VALUE GAIN/(LOSS)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
General Account
Interest rate caps........................................ $ 500,000 $ 4,334 $ 3,965
Commitments to purchase mortgage backed securities........ 7,000 (77) (153)
Forwards.................................................. 81,091 181 181
- ---------------------------------------------------------------------------------------------------------------
TOTAL $ 588,091 $ 4,438 $ 3,993
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Separate Accounts
Futures purchased......................................... $1,113,342 $-- $131,186
Futures sold, not yet purchased........................... 78,798 2,001
Forwards.................................................. -- -- (44)
Commitments to purchase government and municipal
securities.............................................. 228,000 (2,401) (3,676)
Options purchased......................................... 108,075 711 (1,529)
Options written........................................... 98,358 212 3,834
- ---------------------------------------------------------------------------------------------------------------
TOTAL $1,626,573 $(1,478) $131,772
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 72
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 4.--(CONTINUED):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 CONTRACTUAL ASSET/(LIABILITY) REALIZED
(In thousands of dollars) NOTIONAL AMOUNT FAIR VALUE GAIN/(LOSS)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
General Account
Interest rate caps........................................ $ 500,000 $ 1,151 $ (2,234)
Commitments to purchase mortgage backed securities........ -- -- --
Forwards.................................................. -- -- --
- ---------------------------------------------------------------------------------------------------------------
TOTAL $ 500,000 $ 1,151 $ (2,234)
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Separate Accounts
Futures purchased......................................... $ 928,411 $ 2,505 $155,991
Futures sold, not yet purchased........................... 50,853 -- (744)
Forwards.................................................. 2,441 2 3
Commitments to purchase government and municipal
securities.............................................. 68,650 1,276 3,695
Options purchased......................................... 77,350 765 (1,192)
Options written........................................... 66,218 (317) 2,360
- ---------------------------------------------------------------------------------------------------------------
TOTAL $1,193,923 $ 4,231 $160,113
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 5. STATUTORY CAPITAL AND SURPLUS (UNAUDITED)
Statutory capital and surplus and net income for CAC 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.
CAC has no material permitted accounting practices. Statutory net income (loss)
was $76.7 million, $(56.7) million and $42.6 million for the years ended
December 31, 1999, 1998 and 1997, respectively. Statutory capital and surplus
for CAC was $1.2 billion and $1.1 billion at December 31, 1999 and 1998,
respectively. The Board of Directors appropriated statutory capital and surplus
of $34.5 million in 1999 under regulatory formula, to fund excess group losses
due to an epidemic or disaster, if necessary. The payment of dividends by CAC to
Casualty, without prior approval of the Illinois Insurance Department is limited
to formula amounts. Approximately $137.6 million and $110.9 million at December
31, 1999 and 1998, respectively, of available dividends was not subject to prior
Insurance Department approval.
26
<PAGE> 73
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 6. ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income is comprised of all changes to stockholder's equity,
except those changes resulting from investments and distributions to the
stockholder. Other comprehensive income (loss) is comprehensive income (loss)
exclusive of net income. The changes in the components of accumulated other
comprehensive income (loss) are shown in the following tables.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
TAX
PRE-TAX (EXPENSE) NET
YEAR ENDED DECEMBER 31, 1999 AMOUNT BENEFIT AMOUNT
- -----------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the
period.................................................. $(405,304) 141,856 $(263,448)
Allocated to participating policyholders.................. 21,094 -- 21,094
Adjustment for (gains) losses included in net income...... (47,458) 16,610 (30,848)
Adjustment for allocation of deferred acquisition costs to
unrealized gains (losses)............................... 29,792 (10,427) 19,365
Cumulative foreign currency translation adjustment.......... (9,627) -- (9,627)
- -----------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE LOSS $(411,503) $148,039 $(263,464)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TAX
PRE-TAX (EXPENSE) NET
YEAR ENDED DECEMBER 31, 1998 AMOUNT BENEFIT AMOUNT
- -----------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the
period.................................................. $ 91,129 $(32,806) $ 58,323
Allocated to participating policyholders.................. (277) -- (277)
Adjustment for (gains) losses included in net income...... (105,562) 32,431 (73,131)
Adjustment for allocation of deferred acquisition costs to
unrealized gains (losses)............................... (6,784) 2,374 (4,410)
Cumulative foreign currency translation adjustment.......... (3,249) -- (3,249)
- -----------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE LOSS $ (24,743) $ 1,999 $ (22,744)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TAX
PRE-TAX (EXPENSE) NET
YEAR ENDED DECEMBER 31, 1997 AMOUNT BENEFIT AMOUNT
- -----------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Net unrealized gains (losses) on investment securities:
Net unrealized holding gains (losses) arising during the
period.................................................. $ 150,509 $(59,746) $ 90,763
Allocated to participating policyholders.................. (3,983) -- (3,983)
Adjustment for (gains) losses included in net income...... (13,970) 5,320 (8,650)
Adjustment for allocation of deferred acquisition costs to
unrealized gains (losses)............................... (8,326) 2,914 (5,412)
Cumulative foreign currency translation adjustment.......... (859) -- (859)
- -----------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE INCOME $ 123,371 $(51,512) $ 71,859
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 74
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 6.--(CONTINUED):
The following table displays the components of accumulated other
comprehensive income included in the consolidated balance sheet and statements
of stockholder's equity for 1999 and 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY NET UNREALIZED TOTAL ACCUMULATED
TRANSLATION GAINS/(LOSSES) OTHER COMPREHENSIVE
ADJUSTMENT ON INVESTMENTS INCOME
- -------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Balance December 31, 1998 (4,890) 110,668 105,778
- -------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1999 $(18,416) $(139,270) $(157,686)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 7. BENEFIT PLANS
CAC has contracted with Casualty for the majority of the 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 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. While the terms of
the plans vary, benefits are generally based on years of credited service and
the employee's highest sixty consecutive months of compensation. Casualty is
included in the CNAF Employees' Retirement Plan and is allocated a share of
these expenses. The net pension cost allocated to CAC was $10.4 million, $10.9
million and $7.8 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS
CNAF provides certain health and dental care benefits for eligible retirees
through age 64, and provides life insurance and reimbursement of Medicare Part B
premiums for all eligible retired persons. CNAF funds benefit costs principally
on the basis of current benefit payments. Net postretirement benefit cost
allocated to CAC was $2.8 million, $5.2 million and $4.3 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
SAVINGS PLANS
Casualty is included in the CNA Employees' Savings Plan, which is a
contributory plan, that allows employees to make regular contributions of up to
16% of their salary, subject to certain limitations prescribed by the Internal
Revenue Service. CAC is allocated a share of the CNAF Employees' Savings Plan
expenses. CNAF contributes an amount equal to 70% of the first 6% of salary
contributed by the employee. CNAF contributions allocated to and expensed by CAC
for the Savings Plan were $2.7 million in year 1999, $2.2 million in year 1998
and $2.0 million in year 1997.
28
<PAGE> 75
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 8. INCOME TAXES
CAC 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 CAC is computed on a
stand-alone basis, as if CAC and its domestic life insurance subsidiary were
filing its own separate consolidated tax return.
A tax memorandum account defined as the "Policyholders' Surplus Account" is
maintained and totalled $70.4 million at December 31, 1999 and 1998. Under the
1984 Tax Act, 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. The tax liability in the event of distribution
of the Policyholders' Surplus Account is an estimated $24.6 million and is not
reflected in the accompanying balance sheets.
Significant components of CAC's deferred tax assets and liabilities as of
December 31, 1999 and 1998 and are shown in the table below:
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
DECEMBER 31 1999 1998
- -----------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C>
Insurance reserves.......................................... $294,598 $ 242,479
Deferred acquisition costs.................................. (396,384) (323,455)
Investment valuation........................................ (44,890) 13,007
Net unrealized gains........................................ 84,114 (66,128)
Property and equipment...................................... (6,163) (4,184)
Receivables................................................. (6,859) (6,859)
Benefit plans............................................... 4,701 9,554
Other, net.................................................. (6,676) (3,365)
- -----------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITIES $(77,559) $(138,951)
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
At December 31, 1999, gross deferred tax assets and liabilities amounted to
$414.4 million and $492.0 million, respectively. At December 31, 1998, gross
deferred tax assets and liabilities amounted to $297.2 million and $436.2
million, respectively.
29
<PAGE> 76
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 8.--(CONTINUED):
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997
- ------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Current tax expense (benefit)............................... $ (923) $70,681 $ 77,545
Deferred tax expense........................................ 49,282 (1,098) 33,373
- ------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $48,359 $69,583 $110,918
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
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 1999 INCOME 1998 INCOME 1997 INCOME
- ----------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Income taxes at statutory rates............................. $ 63,208 35.0% $62,458 35.0% $115,221 35.0%
Prior year(s) adjustment.................................... (13,500) (7.5) (1,500) (0.8) -- 0.0
Net operating loss carry-forward............................ 1,387 0.8 2,996 1.7 816 0.2
State income tax (benefit) expense.......................... (1,948) (1.1) 1,907 1.1 1,349 0.4
Other items, net............................................ (788) 0.4 3,722 2.1 (6,468) (1.9)
- ----------------------------------------------------------------------------------------------------------------------
INCOME TAX AT EFFECTIVE RATE $ 48,359 26.8% $69,583 39.0% $110,918 33.7%
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 9. REINSURANCE
The ceding of insurance does not discharge the primary liability of CAC.
CAC 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. For carriers that are not authorized
reinsurers in their states of domicile, CAC and its insurance subsidiaries
received collateral, primarily in the form of bank letters of credit. Such
collateral totaled approximately $15 million and $14 million at December 31,
1999 and 1998, respectively.
30
<PAGE> 77
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 9.--(CONTINUED):
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 table:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
PREMIUMS
--------------------------------- ASSUMED/NET
YEAR ENDED DECEMBER 31 DIRECT ASSUMED CEDED NET %
- -------------------------------------------------------------------------------------------------------------
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
1999
Life...................................................... $1,174 $222 $420 $ 976 22.7%
Accident and Health....................................... 2,329 159 145 2,343 6.8
------ ---- ---- ------ ----
Total premiums.......................................... $3,503 $381 $565 $3,319 11.5%
====== ==== ==== ====== ====
1998
Life...................................................... $1,013 $160 $281 $ 892 17.9%
Accident and Health....................................... 2,382 90 69 2,403 3.7
------ ---- ---- ------ ----
Total premiums.......................................... $3,395 $250 $350 $3,295 7.6%
====== ==== ==== ====== ====
1997
Life...................................................... $ 908 $128 $131 $ 905 14.1%
Accident and Health....................................... 2,502 96 68 2,530 3.8
------ ---- ---- ------ ----
Total premiums.......................................... $3,410 $224 $199 $3,435 6.5%
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Premium revenues ceded to non-affiliated companies were $565.0 million,
$349.0 million and $199.0 million for the years ended December 31, 1999, 1998
and 1997, respectively. Additionally, insurance claims and policyholders'
benefits are net of reinsurance recoveries of $415.3 million; $250.9 million and
$128.4 million for years ended 1999, 1998 and 1997, 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)
YEAR ENDED DECEMBER 31
1999........................................................ $339,255 $130,735 $184,375 $285,615 45.8%
1998........................................................ 297,488 96,906 128,896 265,498 36.5
1997........................................................ 235,468 76,130 74,242 237,356 32.1
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 10. RELATED PARTIES
CAC 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 CAC exclude $24.0 million, $17.5 million and $18.1 million
of general and administrative expenses incurred by CAC and allocated to CNAF for
the years ended December 31, 1999, 1998 and 1997, respectively. CAC had a $12.4
million receivable from affiliates at December 31, 1999 and a $1.9 million
payable to affiliates at
31
<PAGE> 78
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 10.--(CONTINUED):
December 31, 1998 for net cash settlements with an affiliate, arising in the
normal course of operations relating to pooling and general expense
reimbursements. There are no interest charges on intercompany receivables and
payables.
NOTE 11. LEGAL
CAC 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 CAC.
NOTE 12. RESTRUCTURING AND OTHER RELATED CHARGES
CNAF finalized and approved a restructuring plan (the Plan) in August 1998.
In connection with the Plan, CNAF incurred various expenses that were recorded
in the third and fourth quarters of 1998 and throughout 1999. These
restructuring and other related charges primarily related to the following
activities: planned reductions in the workforce; the consolidation of certain
processing centers; the exiting of certain businesses and facilities; the
termination of lease obligations and the writeoff of certain assets related to
these activities. CAC was part of the restructuring plans as described below.
The 1998 restructuring and other related charges initially accrued by CAC
were approximately $36 million. These charges included $29 million of costs
related to the CAC's decision to exit the Employer Health and Affinity lines of
business. These costs represented CAC's estimate of losses in connection with
fulfilling the remaining obligations under contracts. Earned premiums for these
lines of business were approximately $400 million in 1998. The 1998 charges also
included employee severance and outplacement costs of approximately $7 million
related to the planned net reduction in workforce of approximately 400
employees.
The 1999 restructuring related charges incurred by CAC were approximately
$5 million for employee severance and related charges. During 1999,
approximately 300 employees were released, the majority of whom were claims
adjusters and sales support staff.
ACCRUED RESTRUCTURING AND OTHER RELATED CHARGES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
EMPLOYEE
TERMINATION
AND RELATED BUSINESS
(IN MILLIONS OF DOLLARS) BENEFIT COSTS EXIT COSTS TOTAL
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Initial Accrual September 30, 1998.......................... $ 7 $ 29 $ 36
Payments charged against liability.......................... (1) -- (1)
Costs that did not require cash............................. -- -- --
- --------------------------------------------------------------------------------------------------
ACCRUED COSTS AT DECEMBER 31, 1998 6 29 35
- --------------------------------------------------------------------------------------------------
Payments charged against liability.......................... (6) (12) (18)
Costs that did not require cash............................. -- -- --
- --------------------------------------------------------------------------------------------------
ACCRUED COSTS AT DECEMBER 31, 1999 $-- $ 17 $ 17
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 79
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 13. BUSINESS SEGMENTS
CAC has two operating segments: Group Operations and Life Operations. Group
Operations offers a broad array of group life and health insurance and
reinsurance products to employers, affinity groups and other entities that
purchase insurance as a group. Life Operations provides financial protection to
individuals through a full product line of term life insurance, universal life
insurance, long term care insurance, annuities and provides retirement service
products to institutional markets. Corporate results consist of operating and
investing activities not attributable to operating segments.
The accounting policies of the segments are the same as those described in
the summary of significant accounting polices. CAC manages its assets on a legal
entity basis while segment operations are conducted across legal entities; as
such, assets are not readily identifiable by individual segment. In addition,
distinct investment portfolios are not maintained for each segment, and
accordingly, allocation of assets to each segment is not performed. Investment
income and realized investment gains/losses are allocated based on each
segment's equity, as adjusted.
Depreciation and capital expenditures are not material to segments' income
and cash flow.
Income taxes have been allocated on the basis of taxable income of the
respective segments.
Approximately 98% of CAC's premiums are derived from the United States.
Premiums from any individual foreign country are not significant.
CAC provides health insurance benefits to postal and other federal
employees under the Federal Employees Health Benefit Plan (FEHBP). Premiums
under this contract totaled $2.1 billion, $2.0 billion and $2.1 billion for the
years ended December 31, 1999, 1998 and 1997, respectively.
33
<PAGE> 80
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 13.--(CONTINUED):
The following tables contain income statement information for CAC's
reportable segments, corporate and consolidated results for 1999, 1998 and 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
GROUP LIFE CORPORATE
YEAR ENDED DECEMBER 31, 1999 OPERATIONS OPERATIONS AND OTHER TOTAL
- -------------------------------------------------------------------------------------------------------------------
(In thousand of dollars)
<S> <C> <C> <C> <C>
REVENUES, EXCLUDING REALIZED INVESTMENT GAINS/LOSSES
Premiums.................................................. $2,712,022 $ 606,485 $ -- $3,318,507
Net investment income..................................... 44,364 421,146 (9,698) 455,812
Other..................................................... 37,603 47,850 510 85,963
---------- ---------- ------- ----------
TOTAL REVENUES...................................... 2,793,989 1,075,481 (9,188) 3,860,282
---------- ---------- ------- ----------
BENEFITS AND EXPENSES
Insurance claims and policyholders' benefits.............. 2,404,456 775,642 15,199 3,195,297
Amortization of deferred acquisition costs................ (13,204) 149,946 (826) 135,916
Restructuring and other related charges................... 5,000 -- -- 5,000
Other operating expenses.................................. 342,236 (47,936) (9,448) 284,852
Participating policyholders' interest (excluding realized
investment gains/losses)................................ -- 24,228 (6,408) 17,820
---------- ---------- ------- ----------
TOTAL BENEFITS AND EXPENSES......................... 2,738,488 901,880 (1,483) 3,638,885
---------- ---------- ------- ----------
Operating income before income tax.......................... 55,501 173,601 (7,705) 221,397
Income tax (expense) benefit................................ (15,774) (60,219) 12,911 (63,082)
---------- ---------- ------- ----------
Net operating income (excluding realized investment
gains/losses)........................................... 39,727 113,382 5,206 158,315
Realized investment gains (losses) net of tax and
participating policyholders' interest................... (10,077) (34,420) 18,418 (26,079)
Cumulative effect of change in accounting principle, net
of tax.................................................. (613) (1,701) -- (2,314)
- -------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 29,037 $ 77,261 $23,624 $ 129,922
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 81
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 13.--(CONTINUED):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
GROUP LIFE CORPORATE
YEAR ENDED DECEMBER 31, 1998 OPERATIONS OPERATIONS AND OTHER TOTAL
- -------------------------------------------------------------------------------------------------------------------
(In thousand of dollars)
<S> <C> <C> <C> <C>
REVENUES, EXCLUDING REALIZED INVESTMENT GAINS/LOSSES
Premiums.................................................. $2,743,597 $ 551,632 $ -- $3,295,229
Net investment income..................................... 44,006 399,814 1,264 445,084
Other..................................................... 20,298 65,573 365 86,236
---------- ---------- -------- ----------
TOTAL REVENUES...................................... 2,807,901 1,017,019 1,629 3,826,549
---------- ---------- -------- ----------
BENEFITS AND EXPENSES
Insurance claims and policyholders' benefits.............. 2,517,391 693,687 12,679 3,223,757
Amortization of deferred acquisition costs................ 5,516 117,422 9,290 132,228
Restructuring and other related charges................... 39,402 6,904 -- 46,306
Other operating expenses.................................. 317,372 32,711 1,526 351,609
Participating policyholders' interest (excluding realized
investment gains/losses)................................ -- 17,563 (2,710) 14,853
---------- ---------- -------- ----------
TOTAL BENEFITS AND EXPENSES......................... 2,879,681 868,287 20,785 3,768,753
---------- ---------- -------- ----------
Operating income before income tax.......................... (71,780) 148,732 (19,156) 57,796
Income tax (expense) benefit................................ 25,283 (57,078) 5,624 (26,171)
---------- ---------- -------- ----------
Net operating income (excluding realized investment
gains/losses)........................................... (46,497) 91,654 (13,532) 31,625
Realized investment gains, net of tax and participating
policyholders' interest................................. 8,762 56,993 11,488 77,243
Cumulative effect of change in accounting principle, net
of tax.................................................. --
- -------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (37,735) $ 148,647 $ (2,044) $ 108,868
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
GROUP LIFE CORPORATE
YEAR ENDED DECEMBER 31, 1997 OPERATIONS OPERATIONS AND OTHER TOTAL
- -------------------------------------------------------------------------------------------------------------------
(In thousand of dollars)
<S> <C> <C> <C> <C>
REVENUES, EXCLUDING REALIZED INVESTMENT GAINS/LOSSES
Premiums.................................................. $2,844,268 $ 591,026 $ -- $3,435,294
Net investment income..................................... 38,156 372,248 7,991 418,395
Other..................................................... 16,414 65,707 137 82,258
---------- ---------- -------- ----------
TOTAL REVENUES...................................... 2,898,838 1,028,981 8,128 3,935,947
---------- ---------- -------- ----------
Benefits and expenses
Insurance claims and policyholders' benefits.............. 2,545,602 697,244 11,377 3,254,223
Amortization of deferred acquisition costs................ 1,556 110,748 8,807 121,111
Other operating expenses.................................. 322,897 30,505 9,942 363,344
Participating policyholders' interest (excluding realized
investment gains/losses)................................ -- 20,004 (2,970) 17,034
---------- ---------- -------- ----------
TOTAL BENEFITS AND EXPENSES......................... 2,870,055 858,501 27,156 3,755,712
---------- ---------- -------- ----------
Operating income before income tax.......................... 28,783 170,480 (19,028) 180,235
Income tax (expense) benefit................................ (9,897) (54,406) 6,086 (58,217)
---------- ---------- -------- ----------
Net operating income (excluding realized investment
gains/losses)........................................... 18,886 116,074 (12,942) 122,018
Realized investment gains, net of tax and participating
policyholders' interest................................. 6,886 82,035 7,344 96,265
- -------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 25,772 $ 198,109 $ (5,598) $ 218,283
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 82
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 14. ACCOUNTING STANDARDS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement requires that an entity recognize all
derivative instruments as either assets or liabilities in the balance sheet and
measures those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
This Statement is effective for fiscal years beginning after June 15, 2000. CAC
is currently evaluating the effects of this Statement on its accounting and
reporting for derivative securities and hedging activities.
ACCOUNTING FOR INSURANCE AND REINSURANCE CONTRACTS THAT DO NOT TRANSFER
INSURANCE RISK
In October 1998, the American Institute of Certified Public Accountant's
Accounting Standards Executive Committee issued Statement of Position 98-7,
"Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk." This guidance excludes long-duration life and health insurance
contracts from its scope. This Statement of Position is effective for financial
statements beginning January 1, 2000, with early adoption encouraged. CAC does
not expect the adoption to have a significant impact on the results of
operations or stockholder's equity of CAC.
NOTE 15. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In the first quarter of 1999, CAC adopted Statement of Position 97-3
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" (SOP 97-3). SOP 97-3 requires that insurance companies recognize
liabilities for insurance-related assessments when an assessment is probable and
will be imposed, when it can be reasonably estimated, and when the event
obligating the entity to pay or probable assessment has occurred on or before
the date of the financial statements. Adoption of SOP 97-3 resulted in an after
tax charge of $2,314 thousand ($3,560 thousand, pretax) as a cumulative effect
of a change in accounting principle. The pro forma effect of adoption on
reported results for prior periods is not significant.
NOTE 16. OTHER EVENTS
On March 8, 2000, CNAF announced that it is exploring the sale of its
individual life insurance and life reinsurance businesses. This potential sale
would include the sale of CAC and a majority of its operating Subsidiaries. CNAF
has engaged the services of an investment banking firm to assist with this
effort. At this time, a buyer has not been identified.
36
<PAGE> 83
CONTINENTAL ASSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 16.--(CONTINUED):
As expected, several of the major rating agencies placed the ratings of the
CAC and VFL under review as a result of this announcement. Each rating agency
has slightly different terms for this special review: Standard & Poor's placed
the rating on CreditWatch with developing implications; A.M. Best placed the
rating under review with developing implications; Duff & Phelps placed the
rating on Rating Watch--Uncertain, implying it could be upgraded or downgraded
in the future; Moody's placed the rating under review with Direction Uncertain,
implying it could be upgraded or downgraded in the future. When an insurance
company experiences a significant event which might be pertinent to its
financial strength rating or claims-paying ability rating, the major ratings
agencies generally place that company's rating under special review. Such events
may include merger, sale, recapitalization, regulatory action, or other
significant event.
37
<PAGE> 84
[B LOGO]
Group
Variable
Annuity
Contracts
STATEMENT OF ADDITIONAL INFORMATION
Dated: May 1, 2000
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
[CNA LOGO]
FOR ALL THE COMMITMENTS YOU MAKE(R)
Z57-838LL
<PAGE> 85
PART C
OTHER INFORMATION
ITEM 28. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE NUMBERS
IN 1999
ANNUAL REPORT
TO PARTICIPANTS
---------------
<S> <C>
Financial Statements of Continental Assurance Company
Separate Account (B):
Schedule of Investments................................... 5
Balance Sheet............................................. 11
Statement of Operations................................... 11
Statement of Changes in Participants' Equity.............. 12
Notes to Financial Statements............................. 12
Independent Auditors' Report.............................. 16
Management's Discussion of Impact of Year 2000 on Separate
Account (B)............................................ 17
</TABLE>
<TABLE>
<CAPTION>
PAGE NUMBERS
IN STATEMENT
PAGE NUMBERS OF ADDITIONAL
IN PROSPECTUS INFORMATION
------------- ---------------
<S> <C> <C>
Condensed Financial Information of Continental
Assurance Company Separate Account (B).................... 12
Independent Auditors' Report on Condensed Financial
Information of Continental Assurance Company Separate
Account (B)............................................... 39
Financial Statements of Continental Assurance Company:
Independent Auditors' Report............................................... 10
Consolidated Balance Sheets................................................ 11
Statements of Consolidated Operations...................................... 12
Statements of Consolidated Stockholder's Equity............................ 13
Statements of Consolidated Cash Flows...................................... 14
Notes to Financial Statements.............................................. 15
</TABLE>
(B) EXHIBITS:
<TABLE>
<C> <S> <C>
(6) Amendment to Exhibit 6(a) for Group Annuity Contract issued
to The Joint Retirement Board of the Rabbinical Assembly,
The United Synagogue of America, and the Jewish Theological
Seminary of America.
(11)(a) Amendments to the Administrative Services Agreement with the
Joint Retirement Board of the Rabbinical Assembly of
America, et al.
(13) Consent of Independent Auditors.
(14) 1999 Annual Report to Participants of Separate Account (B).
(16) Calculation of Performance Data.
(17) Code of Ethics, dated February 5, 1987, as amended on
February 4, 1998 and February 5, 1999, adopted by the
Committee for Separate Account (B)
(27) Financial Data Schedules.
</TABLE>
C-1
<PAGE> 86
ITEM 29. DIRECTORS AND OFFICERS OF THE INSURANCE COMPANY.
The following table sets forth certain information regarding:
(a) each director or officer of CAC who is engaged directly or
indirectly in activities relating to Separate Account (B) or the variable
annuity contracts offered by Separate Account (B); and
(b) each executive officer of CAC (including CAC's president,
secretary, treasurer and certain vice presidents).
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES WITH
NAME AND PRINCIPAL BUSINESS ADDRESS POSITIONS AND OFFICES WITH CAC SEPARATE ACCOUNT (B)
- ----------------------------------- ------------------------------ --------------------
<S> <C> <C>
*Bernard L. Hengesbaugh................ Director, Chairman and Chief Executive None
Officer
*Robert V. Deutsch..................... Director, Senior Vice President and Chief None
Financial Officer
*Jonathan D. Kantor.................... Director, Senior Vice President, General None
Counsel and Secretary
*Thomas Pontarelli..................... Director and Senior Vice President None
*Thomas F. Taylor...................... Director, Executive Vice President
*Pamela S. Dempsey..................... Vice President and Treasurer None
</TABLE>
- ---------------
* The principal business address is CNA Plaza, Chicago, Illinois 60685.
**
ITEM 31. NUMBER OF CONTRACTOWNERS.
As of February 1, 2000, Separate Account (B) had 179 qualified
Contractholders.
**
ITEM 37. UNDERTAKINGS.
**
The registrant hereby represents that the fees and charges deducted under
the Contracts, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred and the risks assumed by the
insurance company.
- ---------------
** Indicates that all or a portion of an item has been omitted because the
omitted information has not changed since it was disclosed in this
Registration Statement or prior Amendments hereto.
C-2
<PAGE> 87
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 1st day of May, 2000.
CONTINENTAL ASSURANCE COMPANY SEPARATE
ACCOUNT (B)
/s/ MARILOU R. MCGIRR
By:
Marilou R. McGirr, Chairman of
Committee
CONTINENTAL ASSURANCE COMPANY
/s/
BERNARD L. HENGESBAUGH
By:
Bernard L. Hengesbaugh, 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 Member of May 1, 2000
- --------------------------------------------- Committee of Separate Account (B)
Marilou R. McGirr (Principal Executive Officer, Principal
Financial Officer and Principal
Accounting Officer)
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD W. DUBBERKE Member of Committee of Separate Account May 1, 2000
- --------------------------------------------- (B)
Richard W. Dubberke
/s/ RICHARD T. FOX Member of Committee of Separate Account May 1, 2000
- --------------------------------------------- (B)
Richard T. Fox
/s/ WILLIAM W. TONGUE Member of Committee of Separate Account May 1, 2000
- --------------------------------------------- (B)
William W. Tongue
/s/ PETER J. WRENN Member of Committee of Separate Account May 1, 2000
- --------------------------------------------- (B)
Peter J. Wrenn
/s/ BERNARD L. HENGESBAUGH Director, Chairman of the Board and Chief May 1, 2000
- --------------------------------------------- Executive Officer of Continental
Bernard L. Hengesbaugh Assurance Company (Principal Executive
Officer)
/s/ ROBERT V. DEUTSCH Director, Senior Vice President and Chief May 1, 2000
- --------------------------------------------- Financial Officer of Continental
Robert V. Deutsch Assurance Company (Principal Financial
and Accounting Officer)
/s/ JONATHAN D. KANTOR Director, Senior Vice President, General May 1, 2000
- --------------------------------------------- Counsel and Secretary of Continental
Jonathan D. Kantor Assurance Company
/s/ THOMAS PONTARELLI Director and Senior Vice President of May 1, 2000
- --------------------------------------------- Continental Assurance Company
Thomas Pontarelli
/s/ THOMAS F. TAYLOR Director, Executive Vice President of May 1, 2000
- --------------------------------------------- Continental Assurance Company
Thomas F. Taylor
</TABLE>
<PAGE> 89
INSERT B
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
(6) Amendment to Exhibit 6(a) for Group Annuity Contract issued
to The Joint Retirement Board of the Rabbinical Assembly,
The United Synagogue of America, and the Jewish Theological
Seminary of America
(11)(a) Amendment dated as of January 1, 2000 to the Administrative
Services Agreement with the Joint Retirement Board of the
Rabbinical Assembly of America, et al.
(13) Consent of Independent Auditors
(14) 1999 Annual Report to Participants of Separate Account (B)
(16) Calculation of Performance Data
(17) Code of Ethics, dated May 1, 1981, adopted by the Committee
for Separate Account (B)
27 Financial Data Schedule
</TABLE>
- ---------------
** Exhibits incorporated by reference from prior filings
<PAGE> 1
Exhibit 6
[Letterhead of CONTINENTAL ASSURANCE COMPANY] [CNA LOGO]
AMENDMENT
AMENDMENT TO BE ATTACHED TO AND BECOME A PART OF GROUP ANNUITY CONTRACT NUMBER
GP-261-A-2 ISSUED BY THE CONTINENTAL ASSURANCE COMPANY (herein called the
Company) TO THE JOINT RETIREMENT BOARD OF THE RABBINICAL ASSEMBLY, THE UNITED
SYNAGOGUE OF AMERICA, AND THE JEWISH THEOLOGICAL SEMINARY OF AMERICA, (herein
call the Contractholder).
At the request of the Contractholder, the following change is hereby made in
the Contract:
Section 2.19 entitled "SERVICE FEE" is hereby deleted in its entirety and
replaced by the following:
2.19 SERVICE FEE
The service fee is determined at the end of each calendar quarter (March
31, June 30, September 30 and December 31). It is paid to the
Contractholder not later than 30 days following the date of determination.
The service fee compensates the Contractholder for the duties it performed
and services it provided in administering the Joint Retirement Board of
the Rabbinical Assembly, et al. Pension and Insurance Plan with respect to
this Contract during the immediately preceding 3 month period. Payment on
this basis will begin with the March 31, 2000 account values. The service
fee will be withdrawn from the account of each Participant.
The service fee equals the product of a multiplied by b, as defined below.
The Company shall liquidate Accumulation Units to pay the service fee. The
number of units liquidated shall equal (a multiplied by b) divided by c,
where:
a = The value of the Individual Account on the date on which the service
fee is determined.
b = The service fee rate of .08%.
c = The value of an Accumulation Unit on the date on which the service
fee is determined.
This Amendment shall be effective January 1, 2000.
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be duly
executed this _____ day of _________, 19___.
THE JOINT RETIREMENT BOARD OF THE RABBINICAL ASSEMBLY, THE UNITED SYNAGOGUE
OF AMERICA, AND THE JEWISH THEOLOGICAL SEMINARY OF AMERICA
BY:
- --------------------------------- ---------------------------------
Witness Title
CONTINENTAL ASSURANCE COMPANY
BY:
------------------------------ ---------------------------------
Group Vice President Assistant Secretary
<PAGE> 1
EXHIBIT(11)(A)
CONTINENTAL ASSURANCE COMPANY
6
CNA Plaza A Stock Company
Chicago, Illinois 60685 Herein called the Company 78
AMENDMENT
AMENDMENT TO BE ATTACHED TO AND BECOME A PART OF THE ADMINISTRATIVE SERVICES
AGREEMENT DATED JUNE 28, 1996, BY AND BETWEEN CONTINENTAL ASSURANCE COMPANY
(herein called the Company) AND THE JOINT RETIREMENT BOARD OF THE RABBINICAL
ASSEMBLY, THE UNITED SYNAGOGUE OF AMERICA, AND THE JEWISH THEOLOGICAL SEMINARY
OF AMERICA (herein called the Joint Retirement Board).
The following changes are hereby made in the Agreement:
1) Section 2. entitled "Fee Schedule" is hereby deleted in its entirety and
replaced by the following:
2. Fee Schedule.
For all of the Joint Retirement Board's services to Participants hereunder, the
Company agrees to pay fees to the Joint Retirement Board as follows:
2.1 The Joint Retirement Board shall be entitled to administrative fees
calculated and payable quarterly at a rate of 8 basis points (.08%) of
the Net Asset Value of the account of each participant under the Group
Annuity Contract on each March 31, June 30, September 30 and December
31. Payment on this basis will begin with the March 31, 2000 account
values.
2.2 The Company shall furnish to the Joint Retirement Board a statement
setting forth the computation of the quarterly administrative fees
promptly following each calendar quarter. The total quarterly fees
shall be due and payable within 30 calendar days after each calendar
quarter.
2.3 Expenses arising in connection with the Joint Retirement Board's
services to the Company under this Agreement shall be the
responsibility of the Joint Retirement Board.
<PAGE> 2
2) In Annex A, entitled Administrative Services, the last sentence is deleted
and replaced by the following:
Testing fees debited for accuracy.
This Amendment shall be effective January 1, 2000.
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be duly
executed this ___ day of _______, 19____.
THE JOINT RETIREMENT BOARD OF THE RABBINICAL ASSEMBLY, THE UNITED SYNAGOGUE
OF AMERICA, AND THE JEWISH THEOLOGICAL SEMINARY OF AMERICA
BY:
- ------------------------------------- -------------------------------------
Witness Title:
CONTINENTAL ASSURANCE COMPANY
BY:
---------------------------------- -------------------------------------
Group Vice President Assistant Secretary
<PAGE> 1
EXHIBIT 13
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 48 to Registration
Statement No. 2-25483 and Post-Effective Amendment No. 28 to Registration
Statement No. 811-1402, both filed 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 18, 2000, accompanying the financial statements of
Continental Assurance Company Separate Account (B) for the year ended December
31, 1999 (two years ended December 31, 1999 for the statement of changes in
participants' equity), and the financial highlights of Continental Assurance
Company Separate Account (B) for the ten years ended December 31, 1999, and our
report dated February 23, 2000, (March 14, 2000 as to Note 16) accompanying the
consolidated financial statements of Continental Assurance Company as of and for
the years ended December 31, 1999 and 1998 for the three years in the period
ended December 31, 1999 appearing in or incorporated by reference in the
Prospectus and the Statement of Additional Information, which are parts of the
Registration Statements. We also consent to the reference to us under the
heading "Independent Auditors" in the Statement of Additional Information, which
is part of such Registration Statements.
Deloitte & Touche LLP
Chicago, Illinois
April 28, 2000
<PAGE> 1
- --------------------------------------------------------------------------------
Dear Participant:
- --------------------------------------------------------------------------------
Continental Assurance Company Separate Account (B) ended 1999 with an
Accumulated Unit Value increases of 33.55% for the year, while the
dividend-adjusted Standard & Poor's Composite Index of 500 stocks (S&P 500) had
a total return of 21.04%. The average stock mutual-fund, as reported in the Wall
Street Journal, returned 27.11% for this time period.
The market advance was the fifth consecutive year of returns exceeding 20%.
This is the longest streak of 20% plus returns in U.S. equity markets. It is
also the longest run of consecutive years with positive returns -- the nine
years from 1991 through 1999. The previous record was eight straight from 1982
through 1989 and from 1922 through 1929. 1999 was an interesting year in that
there was a divergence between the direction of bond prices and stock prices,
and also that approximately 28% of the year's total return for the S&P 500 came
in one month, December. During the year the Federal Reserve raised the fed funds
rate target three times from 4.75% to 5.50% with the last rate hike coming in
November. Because of Y2K concerns, the Chairman of the Federal Reserve, Alan
Greenspan, gave indications in November that no further action would be taken
until the next meeting of the Federal Reserve in February of 2000. The stock
market took that as a "go" sign and proceeded to have an exceptionally strong
December.
The U.S. financial market environment has deteriorated somewhat since our
mid-year 1999 report. Although inflation remains subdued and the economy has
continued to grow at a strong pace, the bond market traded lower throughout 1999
and the Federal Reserve raised interest rates three times. Stock prices
generally reflect three major influences: earnings, interest rates and risk
perception. Corporate earnings continue to be relatively strong, with the S&P
500 earnings having gained approximately 13% in 1999. Expectations are for
earnings to gain 8-12% in 2000. Interest rates are currently the major negative
for the market, although the stock and bond markets seemed to be disconnected
throughout 1999. Risk perception is reflected in the market multiple that is
attached to earnings to create market value. The market multiple has climbed
over the past several years, reflecting reduced risk perception based on
non-inflationary growth of the economy, apparent productivity gains created by
rapidly advancing technology, and reduced cyclicality of the U.S. economy. The
reduced cyclicality is at least partly attributable to better inventory and
receivables management. The market volatility so far this year is a reflection
of the conflict between rising interest rates and the high levels of
capitalization rates, or market multiples. Higher rates affect stocks negatively
in several ways. Most importantly, as the risk free return increases,
capitalization rates for long duration assets, such as common stock, tend to
decline. Secondly, bonds can become an attractive asset alternative to common
stocks. So far this has not been much of a factor because of the double-digit
returns that stocks have had over the past five years. Higher interest rates can
also have an economic effect of narrowing profit margins in a period of low
inflation, thus reducing earnings gains. Thus far, productivity gains apparently
have been able to blunt this effect.
Your Separate Account (B) portfolio is structured for growth, with a core
holding of high quality, large capitalization growth companies. The median
market capitalization for the portfolio was $41.5 billion as of December 31,
1999, with five holdings exceeding $200 billion and only one holding, Bank
United, under $1 billion. The portfolio has strong representation in the
technology area, which helped Separate Account (B)'s performance for 1999. At
year-end approximately 36% of the portfolio was classified as Technology versus
approximately 30% in the S&P 500 index. Only 2.3% of the portfolio, American
Online and PSI Net, could be considered Internet related companies, although
some of the major holdings such as Cisco, Sun Microsystems, and IBM provide
infrastructure for the Internet. The portfolio continues to have exposure to the
health care industry with equity holdings in Pfizer, Schering-Plough, Eli Lilly,
Medtronics and Cardinal Health. Although these are quality companies, this area
underperformed the market during 1999. The portfolio was relatively
underweighted in
- --------------------------------------------------------------------------------
1
<PAGE> 2
Financials and did not have exposure to the traditional income stocks, such as
electric utilities and Real Estate Investment Trusts.
Separate Account (B) employs a program of writing options on stocks held in
the portfolio. This program has enhanced portfolio cash flow and generated net
premium of approximately $2.1 million during 1999.
2000 could present some challenges to the stock market. It is anticipated
that the Federal Reserve could raise interest rates at least
twice and maybe three times during the first half of the year to temper economic
growth. Rising interest rates traditionally put pressure on high growth, high
multiple companies that have earnings discounted well into the future. We
anticipate a particularly volatile first half of 2000, with short-term concerns
sometimes overwhelming continuing long-term positives. On balance, we continue
to believe that long-term growth fundamentals and favorable demographics will
prevent an extended bear market from occurring.
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
- --------------------------------------------------------------------------------
2
<PAGE> 3
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------
(PER ACCUMULATION UNIT OUTSTANDING DURING THE PERIOD) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Value at the beginning of the period $21.55 $17.69 $14.14 $11.74 $8.85
----- ----- ----- ----- -----
Investment income .17 .20 .23 .19 .19
Fees .20 .16 .13 .10 .09
----- ----- ----- ----- -----
NET INVESTMENT INCOME/(LOSS) (.03) .04 .10 .09 .10
----- ----- ----- ----- -----
Net gain on investments 7.26 3.82 3.45 2.31 2.79
----- ----- ----- ----- -----
NET INCREASE IN PARTICIPANTS' EQUITY RESULTING
FROM OPERATIONS 7.23 3.86 3.55 2.40 2.89
----- ----- ----- ----- -----
VALUE AT END OF PERIOD $28.78 $21.55 $17.69 $14.14 $11.74
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Ratio of investment income -- net to average
participants' equity (0.13)% 0.20% 0.60% 0.70% 1.00%
Ratio of fees to average participants equity .83% .83% .83% .83% .83%
Portfolio turnover rate 34% 41% 45% 53% 46%
Number of accumulation units outstanding at end of
period 7,908,845 8,320,912 8,612,630 8,502,140 8,763,186
</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
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.
- --------------------------------------------------------------------------------
3
<PAGE> 4
- --------------------------------------------------------------------------------
RECORD OF ACCUMULATION UNIT VALUES RECORD OF ANNUITY UNIT VALUES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNIT
VALUATION MARKET
DATE VALUE
- -------------------------
<S> <C> <C>
1999 December 31 $28.78
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
</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>
2000 January 1 $8.71
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
</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 stock
prices. These values should not be considered representations of values which
may be achieved in the future.
Unit Value Bar Graph
- --------------------------------------------------------------------------------
4
<PAGE> 5
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES COST VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS:
PAPER & FOREST PRODUCTS-(0.6%)
Georgia-Pacific Corporation 25,000 $1,109,376 $ 1,278,125
-----------
Total preferred stocks-(0.6%) 1,278,125
-----------
COMMON STOCKS:
BANKS-(4.2%)
Bank United Corp 70,000 2,251,875 1,907,500
Citigroup Inc. 73,125 1,137,760 4,063,008
Wells Fargo & Company 90,000 1,988,150 3,639,375
-----------
9,609,883
-----------
BEVERAGES-(2.4%)
Anheuser-Busch Companies, Inc. 30,000 2,313,875 2,126,250
PepsiCo, Inc. 92,000 2,925,018 3,243,000
-----------
5,369,250
-----------
BIOTECHNOLOGY-(1.6%)
Amgen Inc.* 60,000 2,876,562 3,603,750
-----------
BROADCASTING-RADIO-(1.1%)
Infinity Broadcasting Corporation* 70,000 2,230,762 2,533,125
-----------
CABLE SERVICES-(9.3%)
AT&T Corp.-Liberty Media-A* 266,624 1,257,516 15,130,912
Comcast Corporation 120,000 2,964,297 6,067,500
-----------
21,198,412
-----------
COMMUNICATION EQUIPMENT-(2.9%)
L-3 Communications Holdings, Inc.* 43,700 1,871,582 1,819,012
Tellabs, Inc.* 76,000 2,901,125 4,878,250
-----------
6,697,262
-----------
COMPUTER HARDWARE-(2%)
Sun Microsystems, Inc.* 60,000 1,555,938 4,646,250
-----------
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
5
<PAGE> 6
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES COST VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMPUTER SOFTWARE-(3.2%)
First Data Corp. 75,000 $1,756,600 $ 3,698,437
Microsoft Corporation* 31,000 2,360,266 3,619,250
-----------
7,317,687
-----------
COMPUTER SYSTEMS-(9.4%)
Cisco Systems, Inc.* 115,000 2,238,090 12,319,375
EMC Corporation * 60,000 1,564,100 6,555,000
International Business Machines Corporation 25,000 2,104,187 2,700,000
-----------
21,574,375
-----------
COSMETICS AND TOILETRIES-(1.5%)
The Gillette Company 84,000 1,546,470 3,459,750
-----------
DRUG DISTRIBUTION-(1.5%)
Cardinal Health, Inc. 69,625 3,211,142 3,333,297
-----------
DRUGS-(4.8%)
Eli Lilly and Company 30,000 2,153,462 1,995,000
Pfizer Inc. 133,000 147,049 4,314,188
Schering-Plough Corporation 110,000 951,712 4,640,625
-----------
10,949,813
-----------
ELECTRONIC CONNECTORS-(1.5%)
Molex Incorporated/Class A 77,595 926,660 3,511,174
-----------
ELECTRONICS EQUIPMENT-(5.7%)
Applied Materials, Inc.* 58,000 3,383,250 7,347,875
Motorola, Inc. 39,000 2,698,402 5,742,750
-----------
13,090,625
-----------
ELECTRONIC - SEMI-(3.9%)
Intel Corp. 49,600 3,059,762 4,082,700
Texas Instruments Incorporated 50,000 2,213,150 4,843,750
-----------
8,926,450
-----------
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
6
<PAGE> 7
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES COST VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ELECTRICAL EQUIPMENT - MAJOR-(2.7%)
General Electric Company 40,000 $2,014,213 $ 6,190,000
-----------
ENTERTAINMENT-(0.9%)
Carnival Corporation 45,000 2,169,913 2,151,563
-----------
FINANCIAL MULTISERVICE-(1.8%)
American Express Company 25,000 2,471,481 4,156,250
-----------
HOUSEHOLD PRODUCTS-(2.1%)
Procter & Gamble Co. 43,800 1,504,771 4,798,837
-----------
INTERNET-(2.3%)
America Online, Inc. 40,000 2,651,513 3,017,500
PSINet Inc.* 35,000 2,142,563 2,161,250
-----------
5,178,750
-----------
LIFE SCIENCES-(1.3%)
Monsanto Company 80,000 2,821,024 2,850,000
-----------
MACHINERY-INDUSTRIAL-(4.6%)
Illinois Tool Works, Inc. 51,800 217,625 3,499,737
Tyco International Ltd. 102,000 2,705,075 3,965,250
United Technologies Corporation 46,400 1,258,970 3,016,000
-----------
10,480,987
-----------
MEDICAL INSTRUMENTS-(1.9%)
Medtronic, Inc. 120,000 2,025,850 4,372,500
-----------
MERCHANDISING-FOODS-(2.2%)
The Kroger Co.* 120,000 3,024,930 2,265,000
Safeway Inc.* 80,000 2,223,050 2,845,000
-----------
5,110,000
-----------
MERCHANDISING-HARDLINES-(1.4%)
Tandy Corporation 65,000 1,948,563 3,197,188
-----------
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
7
<PAGE> 8
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) SHARES COST VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MERCHANDISING-MASS-(1.2%)
Wal-Mart Stores, Inc. 40,000 $1,991,325 $ 2,765,000
-----------
METALS-ALUMINUN-(1.5%)
Alcoa Inc. 40,000 2,524,794 3,320,000
-----------
NATURAL GAS DIVERSIFIED-(3.5%)
Enron Corp. 140,000 1,797,453 6,212,500
The Williams Companies, Inc. 60,000 2,251,700 1,833,750
-----------
8,046,250
-----------
OFFICE EQUIPMENT & SUPPLIES-(0.7%)
Pitney Bowes Inc. 35,000 2,326,225 1,690,938
-----------
OIL SERVICES-(1.8%)
Schlumberger Limited 64,600 2,173,701 3,633,750
Transocean Sedco Forex Inc. 12,506 231,634 421,315
-----------
4,055,065
-----------
PUBLISHING-NEWS-(1.7%)
Tribune Company 70,000 2,018,025 3,854,375
-----------
TELECOMMUNICATIONS-(3.2%)
Equant NV * 30,000 2,182,988 3,360,000
Loral Space & Communications* 161,500 2,602,899 3,926,468
-----------
7,286,468
-----------
UTILITIES-COMMUNICATIONS-(6.2%)
Intermedia Communications Inc.* 100,000 2,482,812 3,881,250
MCI Worldcom, Inc.* 90,000 2,321,875 4,775,625
Sprint Corporation 80,000 2,738,033 5,385,000
-----------
14,041,875
-----------
TOTAL COMMON STOCKS-(96.0%) $219,367,149
-----------
TOTAL COMMON & PREFERRED STOCKS-(96.6%) $220,645,274
-----------
SHORT-TERM NOTES:
FINANCIAL SERVICES-BANK-(3.4%)
Bank One NA Illinois Time Deposit, 5.0% due 1/05/00 7,851,000 7,853,181
-----------
TOTAL SHORT-TERM NOTES-(3.4%) 7,853,181
------------
TOTAL INVESTMENTS-(100.0%) $228,498,455
-----------
-----------
=======================================================================================================
</TABLE>
*Non-income producing security in 1999.
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
8
<PAGE> 9
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER OF MARKET
(ALL INVESTMENTS ARE IN SECURITIES OF UNAFFILIATED ISSUERS) CONTRACTS VALUE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
OPTIONS:
America Online Inc. 100 $ 17,624
American Express Company 50 (11,500)
Amgen Inc. 200 (148,502)
EMC Corporation 50 62
Motorola, Inc. 50 (3,688)
PSINet Inc. 50 2,250
Schering-Plough Corporation 100 6,374
Schlumberger Limited 100 4,499
Transocean Sedco Forex Inc. 100 0
Sun Microsystems, Inc. 50 (563)
Tandy Corporation 100 2,874
Tellabs, Inc. 50 6,312
Texas Instruments Incorporated 100 8,375
Tyco International Ltd. 200 (101,001)
------------
TOTAL OPTIONS (216,884)
------------
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
9
<PAGE> 10
- --------------------------------------------------------------------------------
TEN LARGEST COMMON STOCK HOLDINGS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET % OF NET
DECEMBER 31, 1999 VALUE ASSETS
- ----------------------------------------------------------------------------------------
<S> <C> <C>
AT&T Corp-Liberty Media-A $15,130,912 6.7%
Cisco Systems, Inc. 12,319,375 5.4
Applied Materials, Inc. 7,347,875 3.2
EMC Corp. 6,555,000 2.9
Enron Corporation 6,212,500 2.7
General Electric Company 6,190,000 2.7
Comcast Corporation 6,067,500 2.7
Motorola, Inc. 5,742,750 2.5
Sprint Corporation 5,385,000 2.4
Tellabs, Inc. 4,878,250 2.1
- ----------------------------------------------------------------------------------------
TEN LARGEST COMMON STOCK HOLDINGS $75,829,162 33.3%
========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALLOCATION OF EQUITY INVESTMENTS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1999
- --------------------------------------------------------------------------------------
<S> <C> <C>
Technology 36.2%
Consumer Staples 18.4
Consumer Services 15.0
Utilities 6.4
Financial Services 6.2
Capital Goods 7.6
Energy 5.5
Consumer Cyclicals 2.7
Basic Industries 2.0
- --------------------------------------------------------------------------------------
ALLOCATION OF EQUITY INVESTMENTS 100%
======================================================================================
</TABLE>
- --------------------------------------------------------------------------------
10
<PAGE> 11
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31 1999
- --------------------------------------------------------------------------
<S> <C>
ASSETS:
Investment in securities of unaffiliated issuers: - Note
1
Common stocks, at market ( Cost $113,411,767 ) $219,367,149
Preferred stocks, at market ( Cost $1,109,376 ) 1,278,125
Short-term notes, at amortized cost (approximates market) 7,853,181
------------
TOTAL INVESTMENTS 228,498,455
Cash 54,295
Dividends receivable - Note 1 68,767
------------
TOTAL ASSETS 228,621,517
------------
LIABILITIES:
Fees Payable to Continental Assurance Company - Note 4 71,006
Liability for open call options written - Note 5 216,884
Deferred income on call options written 261,866
Payable for securities purchased 320,000
Payable to Continental Assurance Company for fund
withdrawals 97,420
------------
TOTAL LIABILITIES 967,176
- --------------------------------------------------------------------------
PARTICIPANTS' EQUITY--NET ASSETS(7,908,845 units issued and
outstanding at $28.78 per unit) - Note 2 $227,654,341
==========================================================================
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999
- -------------------------------------------------------------------------
<S> <C>
Investment income:
Dividends $ 1,137,744
Interest and other 239,510
-----------
Total investment income 1,377,254
-----------
Fees to Continental Assurance Company: - Note 4
Investment advisory fees 988,661
Service fees 652,517
-----------
Total fees 1,641,178
-----------
NET INVESTMENT INCOME/(LOSS) (263,924)
-----------
Investments: - Note 3
Net realized gain
Stock 22,415,616
Calls written 1,957,316
Change in unrealized gain 34,080,402
-----------
NET GAIN ON INVESTMENTS 58,453,334
- -------------------------------------------------------------------------
NET INCREASE IN PARTICIPANTS' EQUITY RESULTING FROM
OPERATIONS $58,189,410
=========================================================================
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
11
<PAGE> 12
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN PARTICIPANTS' EQUITY
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
From operations:
Net investment income/(loss) $ (263,924) $ 309,022
Net realized gain on investments 24,372,932 13,986,986
Change in unrealized gain on investments 34,080,402 18,682,566
------------ -------------
Net increase in participants' equity resulting from
operations 58,189,410 32,978,574
From unit transactions:
Sales 2,513,319 3,226,883
Withdrawals (12,394,214) (9,238,525)
------------ -------------
Net decrease in participants' equity resulting from
unit transactions (9,880,895) (6,011,642)
------------ -------------
TOTAL INCREASE IN PARTICIPANTS' EQUITY 48,308,515 26,966,932
Participants' equity, January 1 179,345,826 152,378,894
- ---------------------------------------------------------------------------------------------
PARTICIPANTS' EQUITY, DECEMBER 31 $227,654,341 $ 179,345,826
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
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 the 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 86% 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 the loaned securities. As
of December 31, 1999 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 the net investment income and net gain on investments, 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 principals 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.
- --------------------------------------------------------------------------------
12
<PAGE> 13
- --------------------------------------------------------------------------------
NOTE 2. PARTICIPANTS' EQUITY - NET ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Participants' equity--net assets consisted of the following:
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
DECEMBER 31 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
From operations:
Accumulated investment income--net $ 52,230,262 $ 52,494,186
Accumulated net realized gain on investment transactions 134,434,867 110,061,935
Accumulated unrealized gain 108,747,051 74,723,866
Accumulated unrealized loss (2,839,804) (2,897,021)
------------ ------------ ---
Accumulated income 292,572,376 234,382,966
From unit transactions:
Accumulated proceeds from sale of units, net of
withdrawals (64,918,035) (55,037,140)
- ---------------------------------------------------------------------------------------------
TOTAL PARTICIPANTS' EQUITY--NET ASSETS $227,654,341 $179,345,826
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET REALIZED GAIN ON INVESTMENTS
YEAR ENDED DECEMBER 31 1999
- ------------------------------------------------------------------------------
<S> <C> <C>
Aggregate proceeds $981,783,250
Aggregate cost 957,410,318
- ------------------------------------------------------------------------------
Net realized gain $ 24,372,932
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAIN ON INVESTMENTS
YEAR ENDED DECEMBER 31 1999
- ------------------------------------------------------------------------------
<S> <C> <C>
Unrealized gain on investments:
Balance December 31 $105,907,247
Less Balance, January 1 71,826,845
- ------------------------------------------------------------------------------
Change in net unrealized gain $ 34,080,402
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE COST OF SECURITIES PURCHASED
YEAR ENDED DECEMBER 31 1999
- ------------------------------------------------------------------------------
<S> <C> <C>
Common stocks $ 64,693,999
Preferred stocks 1,109,376
Short-term notes 906,391,650
- ------------------------------------------------------------------------------
Total purchases $972,195,025
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE> 14
- --------------------------------------------------------------------------------
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 service fees is computed at the rate of 0.33 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>
YEAR ENDED DECEMBER 31 1999
- --------------------------------------------------------------------------
<S> <C>
Investment advisory fees $ 988,661
Service fees 652,517
----------
Total fees charged to participants equity 1,641,178
Sales and administrative fees paid by participants 7,961
- --------------------------------------------------------------------------
Total $1,649,139
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Separate Account (B) invests from time to time in certain derivative
financial instruments, namely call options, to increase investment 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 underlying stock price. The credit risk associated with these
instruments is minimal as all transactions are cleared through security
exchanges.
A summary of the aggregated notional amounts and estimated market values of
call options at December 31, 1999, as well as the monthly average market values
and the average market values and the recognized gain, are presented below.
CALL OPTIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999
- ---------------------------------------------------------------------------
<S> <C>
NOTIONAL VALUE $ 8,900,000
MARKET VALUE (216,884)
MONTHLY AVERAGE (28,106)
- ---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999
- ---------------------------------------------------------------------------
NET REALIZED GAIN $ 1,957,316
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
These options were collateralized by stock with a market value of
$8,373,969 at December 31, 1999.
- --------------------------------------------------------------------------------
14
<PAGE> 15
- --------------------------------------------------------------------------------
NOTE 6. ACCOUNTING STANDARDS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, which is effective for all fiscal
years beginning after June 15, 2000. Under SFAS 133, certain contracts that were
not formerly considered derivatives may now meet the definition of a derivative.
Separate Account (B) intends to adopt SFAS 133 effective January 1, 2001.
Management has not yet evaluated the impact of the adoption of this standard on
the Separate Account (B) financial statements.
- --------------------------------------------------------------------------------
15
<PAGE> 16
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS REPORT
CONTINENTAL ASSURANCE COMPANY SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Committee Members and the Participants of
Continental Assurance Company Separate Account (B)
We have audited the accompanying statement of assets and liabilities of
Continental Assurance Company Separate Account (B) ("Separate Account") (a
separate account of Continental Assurance Company, which is an affiliate of CNA
Financial Corporation, an affiliate of Loews Corporation), including the
schedule of investments, as of December 31, 1999, and the related statements of
operations for the year then ended, the statement of changes in participants'
equity for each of the two years in the period then ended, and the financial
highlights (shown on page three) for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Separate Account'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. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and per share data
and ratios are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999, 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 and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Continental Assurance Company Separate Account (B) as of December 31, 1999, and
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and financial
highlights for each of the five years in the period then ended, in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 18, 2000
- --------------------------------------------------------------------------------
16
<PAGE> 17
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF IMPACT OF YEAR 2000 ON SEPARATE ACCOUNT (B)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Separate Account(B) does not maintain any systems instead it relies on the
systems of CNA and the systems of other business partners.
CNA believes that it has successfully resolved the Year 2000 issue. There
were no problems observed that would affect the normal processing of CNA
business. No significant processing or other computer problems related to Year
2000 have arisen at CNA nor in any of the systems of Separate Account (B)
business partners. Going forward, CNA does not expect any Year 2000 systems
processing problems that would have a material impact on the results of
operations or equity of CNA or of Separate Account (B).
- --------------------------------------------------------------------------------
17
<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, 1999.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
1-1-99 TO 1-1-95 TO 1-1-90 TO
12-31-99 12-31-99 12-31-99
- ---------------------------------------------------------------------------------------
<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 $1,255.37 $3,056.86 $5,094.76
- ---------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN 25.54% 25.04% 17.68%
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
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 $1,238.72 $2,835.90 $4,312.04
- ---------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN 23.87% 23.18% 15.74%
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
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 $1,171.98 $2,836.55 $4,597.48
- ---------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN 17.20% 23.19% 16.48%
- ---------------------------------------------------------------------------------------
</TABLE>
P(1+T)0n=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> 2
<TABLE>
<CAPTION>
Level Deduction Contract for 403(b) Plans
Ten Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/1989 5.31 1.0000 1,000.00 6 0 24.78 964.78 -3.52
12/31/1990 5.45 0.0264 964.78 0 0 325.73 1,290.51 33.76
12/31/1991 7.29 0.3376 1,290.51 0 0 72.58 1,363.09 5.62
12/31/1992 7.70 0.0562 1,363.09 0 0 214.20 1,577.29 15.71
12/31/1993 8.91 0.1571 1,577.29 0 0 -10.62 1,566.67 -0.67
12/31/1994 8.85 -0.0067 1,566.67 0 0 511.60 2,078.27 32.66
12/31/1995 11.74 0.3266 2,078.27 0 0 424.86 2,503.13 20.44
12/31/1996 14.14 0.2044 2,503.13 0 0 628.44 3,131.56 25.11
12/31/1997 17.69 0.2511 3,131.56 0 0 683.31 3,814.88 21.82
12/31/1998 21.55 0.2182 3,814.88 0 0 1279.89 5,094.76 33.55
12/31/1999 28.78 0.3355 5,094.76
end 5,094.76
begin 1,000.00
time 10.00
IRR 17.68%
Five Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
12/31/1989 5.31 #REF! #REF! 0 0 #REF! #REF! #REF!
12/31/1990 5.45 0.0264 #REF! 0 0 #REF! #REF! #REF!
12/31/1991 7.29 0.3376 #REF! 0 0 #REF! #REF! #REF!
12/31/1992 7.70 0.0562 #REF! 0 0 #REF! #REF! #REF!
12/31/1993 8.91 0.1571 #REF! 0 0 #REF! #REF! #REF!
12/31/1994 8.85 -0.0067 1,000.00 6 0 306.96 1,246.96 24.70
12/31/1995 11.74 0.3266 1,246.96 0 0 254.92 1,501.88 20.44
12/31/1996 14.14 0.2044 1,501.88 0 0 377.06 1,878.94 25.11
12/31/1997 17.69 0.2511 1,878.94 0 0 409.99 2,288.93 21.82
12/31/1998 21.55 0.2182 2,288.93 0 0 767.93 3,056.86 33.55
12/31/1999 28.78 0.3355 3,056.86
end 3,056.86
begin 1,000.00
time 5.00
IRR 25.04%
One Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
12/31/1989 5.31 #REF! #REF! 0 0 #REF! #REF! #REF!
12/31/1990 5.45 0.0264 #REF! 0 0 #REF! #REF! #REF!
12/31/1991 7.29 0.3376 #REF! 0 0 #REF! #REF! #REF!
12/31/1992 7.70 0.0562 #REF! 0 0 #REF! #REF! #REF!
12/31/1993 8.91 0.1571 #REF! 0 0 #REF! #REF! #REF!
12/31/1994 8.85 -0.0067 #REF! 0 0 #REF! #REF! #REF!
12/31/1995 11.74 0.3266 #REF! 0 0 #REF! #REF! #REF!
12/31/1996 14.14 0.2044 #REF! 0 0 #REF! #REF! #REF!
12/31/1997 17.69 0.2511 0.00 0 0 0.00 0.00 #DIV/0!
12/31/1998 21.55 0.2182 1,000.00 6 0 315.37 1,255.37 25.54
12/31/1999 28.78 0.3355 1,255.37
end 1,255.37
begin 1,000.00
time 1.00
IRR 25.54%
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Graded Deduction Contract for 403(b) Plans
Ten Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/1989 5.31 1.0000 1,000.00 5 30 25.05 945.05 -5.50
12/31/1990 5.45 0.0264 945.05 0 30 319.06 1,234.11 30.59
12/31/1991 7.29 0.3376 1,234.11 0 30 69.41 1,273.52 3.19
12/31/1992 7.70 0.0562 1,273.52 0 30 200.12 1,443.64 13.36
12/31/1993 8.91 0.1571 1,443.64 0 30 -9.72 1,403.92 -2.75
12/31/1994 8.85 -0.0067 1,403.92 0 30 458.46 1,832.37 30.52
12/31/1995 11.74 0.3266 1,832.37 0 30 374.59 2,176.97 18.81
12/31/1996 14.14 0.2044 2,176.97 0 30 546.55 2,693.52 23.73
12/31/1997 17.69 0.2511 2,693.52 0 30 587.73 3,251.25 20.71
12/31/1998 21.55 0.2182 3,251.25 0 30 1090.79 4,312.04 32.63
12/31/1999 28.78 0.3355 4,312.04
end 4,312.04
begin 1,000.00
time 10.00
IRR 15.74%
Five Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
12/31/1989 5.31 #REF! #REF! 0 0 #REF! #REF! #REF!
12/31/1990 5.45 0.0264 #REF! 0 0 #REF! #REF! #REF!
12/31/1991 7.29 0.3376 #REF! 0 0 #REF! #REF! #REF!
12/31/1992 7.70 0.0562 #REF! 0 0 #REF! #REF! #REF!
12/31/1993 8.91 0.1571 0.00 0 0 0.00 0.00 #DIV/0!
12/31/1994 8.85 -0.0067 1,000.00 5 30 310.23 1,230.23 23.02
12/31/1995 11.74 0.3266 1,230.23 0 30 251.49 1,451.72 18.00
12/31/1996 14.14 0.2044 1,451.72 0 30 364.47 1,786.19 23.04
12/31/1997 17.69 0.2511 1,786.19 0 30 389.75 2,145.94 20.14
12/31/1998 21.55 0.2182 2,145.94 0 30 719.96 2,835.90 32.15
12/31/1999 28.78 0.3355 2,835.90
end 2,835.90
begin 1,000.00
time 5.00
IRR 23.18%
One Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
12/31/1989 5.31 #REF! #REF! 0 0 #REF! #REF! #REF!
12/31/1990 5.45 0.0264 #REF! 0 0 #REF! #REF! #REF!
12/31/1991 7.29 0.3376 #REF! 0 0 #REF! #REF! #REF!
12/31/1992 7.70 0.0562 #REF! 0 0 #REF! #REF! #REF!
12/31/1993 8.91 0.1571 #REF! 0 0 #REF! #REF! #REF!
12/31/1994 8.85 -0.0067 #REF! 0 0 #REF! #REF! #REF!
12/31/1995 11.74 0.3266 #REF! 0 0 #REF! #REF! #REF!
12/31/1996 14.14 0.2044 #REF! 0 0 #REF! #REF! #REF!
12/31/1997 17.69 0.2511 #REF! 0 0 #REF! #REF! #REF!
12/31/1998 21.55 0.2182 1,000.00 5 30 318.72 1,238.72 23.87
12/31/1999 28.78 0.3355 1,238.72
end 1,238.72
begin 1,000.00
time 1.00
IRR 23.87%
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
HR-10 Plans
Ten Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/1989 5.31 1.0000 1,000.00 8.5 20 24.12 919.12 -8.09
12/31/1990 5.45 0.0264 919.12 0 10 310.31 1,219.43 32.67
12/31/1991 7.29 0.3376 1,219.43 0 10 68.58 1,278.02 4.80
12/31/1992 7.70 0.0562 1,278.02 0 10 200.83 1,468.85 14.93
12/31/1993 8.91 0.1571 1,468.85 0 10 -9.89 1,448.96 -1.35
12/31/1994 8.85 -0.0067 1,448.96 0 10 473.16 1,912.12 31.97
12/31/1995 11.74 0.3266 1,912.12 0 10 390.89 2,293.01 19.92
12/31/1996 14.14 0.2044 2,293.01 0 10 575.69 2,858.70 24.67
12/31/1997 17.69 0.2511 2,858.70 0 10 623.77 3,472.47 21.47
12/31/1998 21.55 0.2182 3,472.47 0 10 1165.01 4,627.48 33.26
12/31/1999 28.78 0.3355 4,627.48 0 30 4,597.48
end 4,597.48
begin 1,000.00
time 10.00
IRR 16.48%
Five Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
12/31/1989 5.31 #REF! #REF! 0 0 #REF! #REF! #REF!
12/31/1990 5.45 0.0264 #REF! 0 0 #REF! #REF! #REF!
12/31/1991 7.29 0.3376 #REF! 0 0 #REF! #REF! #REF!
12/31/1992 7.70 0.0562 #REF! 0 0 #REF! #REF! #REF!
12/31/1993 8.91 0.1571 0.00 0 0 0.00 0.00 #DIV/0!
12/31/1994 8.85 -0.0067 1,000.00 8.5 20 298.80 1,193.80 19.38
12/31/1995 11.74 0.3266 1,193.80 0 10 244.05 1,427.84 19.61
12/31/1996 14.14 0.2044 1,427.84 0 10 358.48 1,776.32 24.41
12/31/1997 17.69 0.2511 1,776.32 0 10 387.60 2,153.92 21.26
12/31/1998 21.55 0.2182 2,153.92 0 10 722.64 2,866.55 33.09
12/31/1999 28.78 0.3355 2,866.55 0 30 2,836.55
end 2,836.55
begin 1,000.00
time 5.00
IRR 23.19%
One Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
12/31/1989 5.31 #REF! #REF! 0 0 #REF! #REF! #REF!
12/31/1990 5.45 0.0264 #REF! 0 0 #REF! #REF! #REF!
12/31/1991 7.29 0.3376 #REF! 0 0 #REF! #REF! #REF!
12/31/1992 7.70 0.0562 #REF! 0 0 #REF! #REF! #REF!
12/31/1993 8.91 0.1571 #REF! 0 0 #REF! #REF! #REF!
12/31/1994 8.85 -0.0067 #REF! 0 0 #REF! #REF! #REF!
12/31/1995 11.74 0.3266 #REF! 0 0 #REF! #REF! #REF!
12/31/1996 14.14 0.2044 #REF! 0 0 #REF! #REF! #REF!
12/31/1997 17.69 0.2511 #REF! 0 0 #REF! #REF! #REF!
12/31/1998 21.55 0.2182 1,000.00 8.5 20 306.98 1,201.98 20.20
12/31/1999 28.78 0.3355 1,201.98 30 1,171.98
end 1,171.98
begin 1,000.00
time 1.00
IRR 17.20%
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
HR-10 Plans
Ten Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/1989 5.31 1.0000 1,000.00 8.5 20 24.12 919.12 -8.09
12/31/1990 5.45 0.0264 919.12 0 10 310.31 1,219.43 32.67
12/31/1991 7.29 0.3376 1,219.43 0 10 68.58 1,278.02 4.80
12/31/1992 7.70 0.0562 1,278.02 0 10 200.83 1,468.85 14.93
12/31/1993 8.91 0.1571 1,468.85 0 10 -9.89 1,448.96 -1.35
12/31/1994 8.85 -0.0067 1,448.96 0 10 473.16 1,912.12 31.97
12/31/1995 11.74 0.3266 1,912.12 0 10 390.89 2,293.01 19.92
12/31/1996 14.14 0.2044 2,293.01 0 10 575.69 2,858.70 24.67
12/31/1997 17.69 0.2511 2,858.70 0 10 623.77 3,472.47 21.47
12/31/1998 21.55 0.2182 3,472.47 0 10 1165.01 4,627.48 33.26
12/31/1999 28.78 0.3355 4,627.48 0 30 4,597.48
end 4,597.48
begin 1,000.00
time 10.00
IRR 16.48%
Five Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
12/31/1989 5.31 #REF! #REF! 0 0 #REF! #REF! #REF!
12/31/1990 5.45 0.0264 #REF! 0 0 #REF! #REF! #REF!
12/31/1991 7.29 0.3376 #REF! 0 0 #REF! #REF! #REF!
12/31/1992 7.70 0.0562 #REF! 0 0 #REF! #REF! #REF!
12/31/1993 8.91 0.1571 0.00 0 0 0.00 0.00 #DIV/0!
12/31/1994 8.85 -0.0067 1,000.00 8.5 20 298.80 1,193.80 19.38
12/31/1995 11.74 0.3266 1,193.80 0 10 244.05 1,427.84 19.61
12/31/1996 14.14 0.2044 1,427.84 0 10 358.48 1,776.32 24.41
12/31/1997 17.69 0.2511 1,776.32 0 10 387.60 2,153.92 21.26
12/31/1998 21.55 0.2182 2,153.92 0 10 722.64 2,866.55 33.09
12/31/1999 28.78 0.3355 2,866.55 0 30 2,836.55
end 2,836.55
begin 1,000.00
time 5.00
IRR 23.19%
One Year Example
Yearly Int
Time Unit Val Return Beg Bal % fees $ fees Earned End Bal Return
12/31/1989 5.31 #REF! #REF! 0 0 #REF! #REF! #REF!
12/31/1990 5.45 0.0264 #REF! 0 0 #REF! #REF! #REF!
12/31/1991 7.29 0.3376 #REF! 0 0 #REF! #REF! #REF!
12/31/1992 7.70 0.0562 #REF! 0 0 #REF! #REF! #REF!
12/31/1993 8.91 0.1571 #REF! 0 0 #REF! #REF! #REF!
12/31/1994 8.85 -0.0067 #REF! 0 0 #REF! #REF! #REF!
12/31/1995 11.74 0.3266 #REF! 0 0 #REF! #REF! #REF!
12/31/1996 14.14 0.2044 #REF! 0 0 #REF! #REF! #REF!
12/31/1997 17.69 0.2511 #REF! 0 0 #REF! #REF! #REF!
12/31/1998 21.55 0.2182 1,000.00 8.5 20 306.98 1,201.98 20.20
12/31/1999 28.78 0.3355 1,201.98 30 1,171.98
end 1,171.98
begin 1,000.00
time 1.00
IRR 23.87%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 5,784,235
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 170,092
<MORTGAGE> 15,408
<REAL-ESTATE> 2,689
<TOTAL-INVEST> 6,878,640
<CASH> 30,628
<RECOVER-REINSURE> 518,594
<DEFERRED-ACQUISITION> 1,307,115
<TOTAL-ASSETS> 14,435,158
<POLICY-LOSSES> 5,843,263
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 577,409
<NOTES-PAYABLE> 10,000
0
0
<COMMON> 21,831
<OTHER-SE> 2,356,846
<TOTAL-LIABILITY-AND-EQUITY> 14,435,158
3,318,507
<INVESTMENT-INCOME> 455,812
<INVESTMENT-GAINS> (48,060)
<OTHER-INCOME> 85,963
<BENEFITS> 3,195,297
<UNDERWRITING-AMORTIZATION> 135,916
<UNDERWRITING-OTHER> 300,414
<INCOME-PRETAX> 180,595
<INCOME-TAX> 48,359
<INCOME-CONTINUING> 132,236
<DISCONTINUED> 0
<EXTRAORDINARY> (2,314)
<CHANGES> 0
<NET-INCOME> 129,922
<EPS-BASIC> 29.76
<EPS-DILUTED> 29.76
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 228,498
<RECEIVABLES> 69
<ASSETS-OTHER> 54
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 228,621
<PAYABLE-FOR-SECURITIES> 320
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 647
<TOTAL-LIABILITIES> 967
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 7,908,845
<SHARES-COMMON-PRIOR> 8,320,912
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 105,907
<NET-ASSETS> 227,654
<DIVIDEND-INCOME> 1,138
<INTEREST-INCOME> 239
<OTHER-INCOME> 0
<EXPENSES-NET> 1,641
<NET-INVESTMENT-INCOME> (264)
<REALIZED-GAINS-CURRENT> 24,373
<APPREC-INCREASE-CURRENT> 34,080
<NET-CHANGE-FROM-OPS> 58,189
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 106,092
<NUMBER-OF-SHARES-REDEEMED> 518,159
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 48,309
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 21.55
<PER-SHARE-NII> (0.03)
<PER-SHARE-GAIN-APPREC> 7.26
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 28.78
<EXPENSE-RATIO> .83
</TABLE>
<PAGE> 1
EXHIBIT 17
CODE OF ETHICS
This Code of Ethics, dated this 5th day of February, 1987, as amended on
February 4, 1998 and February 5, 1999, adopted by the Committee Members of
CONTINENTAL ASSURANCE COMPANY Separate Account (B) (The "Account"), is for the
guidance of its officers, and employees. It may be amended by appropriate action
of the Committee Members or Participants of the Account.
1. Definitions:
1.1 Interested Person. The term "Interested Person" shall have the
meaning defined in Section 2(a)(19) of the Investment Company Act of
1940 (the "Act"). All officers and employees of the Account, their
spouses, minor children and any parent or other person who shares a
household with such officers and employees are interested persons.
Committee Members who are not officers or employees of the Account,
Continental Assurance Company, CNA Financial Corporation ("CNAF") or
of any Company controlled by CNAF (collectively, the "Investment
Adviser") are not normally interested persons.
1.2 Security. The term "Security" shall have the meaning defined in
Section 2(a) (36) of the Act.
1.3 Exempt Security. The term "Exempt Security" shall mean any security
which is issued by the United States Government, bankers'
acceptances, bank certificates of deposit, commercial paper and
shares of registered open-end investment companies."
1.4 Non-Exempt Security. The term "Non-Exempt Security" shall mean any
security which is not an exempt security.
1.5 Transaction. The term "Transaction" shall mean any acquisition or
disposition of any interest in or right to a security.
1.6 Exempt Transaction. The term "Exempt Transaction" shall have the
following meanings:
1. Any transaction in Exempt Securities.
2. Purchases effected upon exercise of rights issued by an issuer
pro rata to all holders of a class of its securities to the
extent such rights were acquired from such issuer and sales of
such rights so acquired.
-1-
<PAGE> 2
CODE OF ETHICS
3. Any transaction by an interested person for his or her own
account in any Non-Exempt Security made at a time when the
Account is not engaged in a program which (a) involves, (b)
proposes to involve, or (c) reasonably and foreseeably might
involve within the next thirty days after the date of such
transaction, any transaction in such security or any other
security which is convertible into the Non-Exempt Security
described in this paragraph.
4. Any transaction by an interested person made for the account of
CNAF or for the account of any subsidiary or affiliate of CNAF.
1.7 Access Person. The term "Access Person" shall mean any director,
officer, or employee of the Investment Adviser or any Committee
Member, officer or employee of the Account: (a) who makes any
recommendation, or participates in the determination of which
recommendation shall be made to the Account; (b) whose principal
duties relate to the determination of which recommendations shall be
made by the Investment Adviser to the Account; or (c) who, in
connection with his duties obtained any information concerning
securities recommendations by the Account within 15 days of the date
of such recommendation.
1.8 Security held or to be acquired. The phrase "Security held or to be
acquired" means any security which, during the most recent 15 days,
(i) is or has been held by the Account or (ii) is being considered or
has been considered by the Account or the Investment Adviser for
purchase by the Account; (iii) and any option to purchase or sell,
and any security convertible into or exchangeable for, a security
described in sections (I) and (ii) of this paragraph.
2. Transactions
2.1 No access person shall, in connection with any Security (which is not
an Exempt Security) held or to be acquired by the Account, enter into
any transaction, directly or indirectly, unless said transaction
complies with condition 3. of Sub-Section 1.6.
2.2 No interested person shall make any transactions for any account in
which he or she has any direct or indirect interest unless such
transaction is an Exempt Transaction.
2.3 In any matter involving the investments of any account in which an
interested person has any beneficial interest, or over which he has
any management or control, other than an account of CNAF, or of any
subsidiary or affiliate of CNAF, and the investments of the Account,
the interested person shall resolve any known or reasonably
anticipated conflicts of interest in favor of the Account. Questions
as to possible conflicts shall be referred to the Chairman of the
Account for resolution.
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CODE OF ETHICS
2.4 All matters involving conflicts or possible conflicts between the
investments of any account of CNAF or of any subsidiary or affiliate
of CNAF and the investments of the Account shall be referred to the
Chairman of the Account for resolution.
3. Other Rules
3.1 No interested person shall, in any calendar year, accept from any
securities broker or dealer any gift or gifts of a value exceeding
$50.00 in the aggregate.
3.2 No interested person shall disclose to any person any information
regarding any investment program or security transaction being
contemplated, planned or executed for or on behalf of the Account
except to (a) another officer, employee or a Committee Member of the
Account, (b) another officer, employee or Director of the Investment
Adviser, (c) brokers or dealers when mutually executing the
transactions in question to the extent necessary to execute the
transaction properly, (d) brokers or dealers to ensure that necessary
trading information or research is obtained from brokers or dealers
on a timely basis, and (e) custodians and others who are necessarily
involved in such aspects of any transactions as are necessary to be
disclosed.
4. Report
4.1 Each access person shall, within ten days after the end of each
calendar quarter in which he or she, or any other person residing in
his or her household has made a security transaction, other than in
an Exempt Security in any account in which he or she, or any other
person residing in his or her household, has any beneficial interest,
or over which he or she has any management or control, other than an
account for CNAF or an account for any subsidiary or affiliate of
CNAF, report such transaction in reasonable detail in writing to the
Secretary to the Account or such other official as the Chairman of
the Account may designate.
4.2 The Account shall prescribe forms for all reports to be made under
these rules. All such reports shall be maintained in the custody of
the Secretary of the Account or such other official or officials as
the Chairman may designate.
4.3 If any officers and employees of the Account are subject to any other
code of ethics, or similar regulations, established by CNAF or any
subsidiary or affiliate of CNAF, with similar requirements for filing
reports, then such officers and employees may file any required
reports for this Account on the format required by such other code or
regulation.
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CODE OF ETHICS
5. Exceptions and Exemptions
5.1 Any provision of these rules may be waived by the Chairman of the
Account if, in his opinion, such action is not detrimental to the
Account.
5.2 All such waivers must be in writing.
6. Implementation
6.1 Each officer and employee of the Account shall indicate by his or her
signature on a copy of this code that he or she has read the same and
will abide by it.
6.2 The copy so signed shall be kept in the custody of the Secretary to
the Committee of Continental Assurance Account Separate Account (B)
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Date Signature
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Name (Please Print)
