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CIGNA
CORPORATE VARIABLE
UNIVERSAL LIFE
SEMI-ANNUAL
REPORT
[GRAPHIC]
[LOGO] JUNE 30, 1998
CIGNA CORPORATE INSURANCE
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TABLE OF CONTENTS
PRESIDENT'S LETTER
ECONOMIC REVIEW AND OUTLOOK
SCHEDULE OF CHANGES IN UNIT VALUES
FUND REPORTS
THE ALGER AMERICAN FUND SEMI-ANNUAL REPORT
Alger American Small Cap Portfolio
Alger American MidCap Growth Portfolio
Alger American Growth Portfolio
BT INSURANCE FUNDS TRUST SEMI-ANNUAL REPORT
EAFE-Registered Trademark- Equity Index Fund
Small Cap Index Fund
CIGNA VARIABLE PRODUCTS GROUP SEMI-ANNUAL REPORT
CIGNA Money Market Fund
S&P 500 Index Fund
FIDELITY VARIABLE INSURANCE PRODUCTS FUND SEMI-ANNUAL REPORT
VIP High Income Portfolio
VIP Equity-Income Portfolio
VIP II Investment Grade Bond Portfolio
JANUS ASPEN SERIES TRUST SEMI-ANNUAL REPORT
Janus Aspen Series Worldwide Growth Portfolio
MFS-Registered Trademark- VARIABLE TRUST-Registered Trademark- SEMI-ANNUAL
REPORT
MFS Emerging Growth Series
MFS Total Return Series
OCC ACCUMULATION TRUST SEMI-ANNUAL REPORT
Small Cap Portfolio
Managed Portfolio
Equity Portfolio
TEMPLETON VARIABLE PRODUCTS SERIES FUND SEMI-ANNUAL REPORT
Templeton International Fund Class I
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[PHOTO] [LOGO]
BYRON D. OLIVER CIGNA Retirement &
President Investment Services
P.O. Box 2975
Routing H17C
Hartford, CT 06104
Dear CIGNA Client:
It is a pleasure to provide you with this semi-annual report on the performance
of your Corporate Variable Life Insurance product for the period ending June 30,
1998.
The report includes financial data for each of the portfolio options available
under your product. In addition, we have included an Economic Overview and
Outlook for the Second Quarter 1998 by Robert DeLucia of CIGNA Investment
Management. This overview deals with significant national and international
trends affecting key markets. I hope you will take a few minutes to read it
carefully.
Your Corporate Variable Universal Life Product is designed specifically to meet
your needs in the corporate marketplace. The CIGNA Corporate Insurance Team is
dedicated to meeting your executive benefit funding needs with the sophisticated
financial solutions that are essential to attracting and retaining executive
talent... the talent needed to grow a business in this increasingly competitive
market.
We're extremely proud to have you as a client and look forward to an enduring
partnership built on understanding, trust, and our ability to provide financial
solutions of recognized value to your organization.
If you have any questions or comment about this report, please feel free to call
Mary Ellen Jaske in our CIGNA Corporate Insurance Department at 860 534-4154.
Mary Ellen is available Monday through Friday, 8 am to 5 pm.
Sincerely,
/s/ Byron D. Oliver
Byron D. Oliver
President, CIGNA Retirement & Investment Services
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ECONOMIC REVIEW & OUTLOOK
SECOND QUARTER 1998
ECONOMIC REVIEW
Following six consecutive quarters of consistently above-average growth, the U.S
economy expanded at a more moderate pace during the second quarter. While
domestic demand remained robust, production slowed abruptly as a result of the
rapid deterioration in Asian economic conditions. In a perverse sense, the
initial economic effect of the Asian crisis has been a positive for consumers,
who have benefitted from enhanced purchasing power, as cheap imported goods from
Asia have flooded U.S. consumer markets. On average, imported goods satisfy
approximately one third of domestic demand. The drop in market interest rates
in general and mortgage rates in particular has also helped to boost the housing
market. Conversely, on the producer side, manufacturing output, employment, and
profitability have begun to suffer from both a bulge in the U.S. merchandise
trade deficit, which spiked to a record level during the quarter, and a build-up
of excess inventories.
As expected, consumer inflation remained under excellent control, with most
measures of domestic inflation at or below the 2% level. At the same time,
however, the tightest labor market in more than two decades is resulting in a
steady acceleration in wage inflation, currently running well in excess of 4%,
the fastest rate of increase in nearly a decade. The consequence of these two
divergent trends is an evolving squeeze in profit margins for U.S. corporations.
Profit growth has slowed abruptly during the past several quarters, from the 15%
pace during the 1992 - 1997 period. Businesses have zero pricing power and
consequently have been unable to pass along rising unit labor costs in the form
of higher prices. Corporate profits increased by less than 5% in the first
quarter, the worst quarterly performance in several years, and appear to be
running flat in the second quarter.
On a global basis, major regions of the world continued to exhibit divergent
economic trends during the quarter. Production in virtually all economies in
the Pacific region has collapsed, accompanied by a sharp rise in unemployment
and widespread financial failures. Of greatest concern is Japan, the second
largest economy in the world, which is officially in recession following more
than five years of economic stagnation. The Japanese economy is in a classical
"liquidity trap," an economic condition in which relentless monetary stimulus by
the Bank of Japan has driven interest rates close to zero, but has failed to
revive the severely debilitated economy. Conversely, the European economies
continued to register healthy growth and low inflation during the quarter, in
virtually all eleven countries which will comprise the new European Monetary
Union. Industrial production continued to accelerate in Euroland, and averaged
a robust 5 - 6% growth rate during the second quarter, while inflation remained
below 2%, and corporate profits are in an accelerating trend.
The behavior of world financial markets during the second quarter reflected the
growing anxiety among investors regarding the heightened global financial
instability and powerful deflationary forces emanating from the turmoil in Asia.
The result was a
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significant increase in market volatility, and a classical "flight to quality,"
as investment capital abandoned virtually all emerging markets of the world and
gravitated into high-grade U.S. dollar-denominated assets, principally U.S.
Treasury debt, but also a very select group of blue-chip U.S. stocks. The U.S.
dollar rose sharply against most currencies and U.S. high-grade bonds performed
best in the quarter. The yield on the 30-year Treasury bond fell to 5.58% in
June, its lowest level since its initial government issuance in 1977 (chart).
As a result, long Treasury bonds registered a strong return in the quarter.
European equity funds also performed well benefitting from both healthy
fundamental economic trends as well as growing enthusiasm for the new European
Monetary Union. Japanese assets performed poorly, as the yen fell to an eight-
year low against the U.S. dollar, while Japanese equities slumped in conjunction
with falling production, profits and consumer confidence. The value of emerging
market equities plunged, with the average emerging market equity mutual fund
declining by roughly 20% in the quarter. As additional evidence of the
spreading deflationary forces around the globe, commodity prices fell sharply,
gold prices remained depressed, and crude oil prices fell to their lowest levels
since 1986, a nearly 50% decline from the highs of the past year.
Within the U.S. market, a majority of individual stocks within the broad equity
market were down in the quarter as a similar "flight to quality" was evident.
Small cap stocks suffered a decline as measured by the Russell 2000, while a
very select group of highly liquid large capitalization blue-chip stocks
propelled the S&P 500 to an all-time high at quarter end. Natural resource
stocks and economically-sensitive cyclical stocks performed worst, reflecting
investor concerns over future economic growth and the lack of pricing power
within the manufacturing sector. Similarly, low-grade corporate bonds
underperformed both high-grade corporate and government bonds, further evidence
of the flight to quality.
OUTLOOK
As we look ahead to the remainder of 1998, the outlook calls for a slowdown in
the rate of economic growth in both the domestic and global economy. As
discussed in some detail last quarter, we believe that the economic turmoil in
Asia is the most important factor in the outlook; and that the economic
fundamentals within Asia continue to deteriorate, and will not begin to
stabilize until year-end at the earliest. Because of the size and importance of
this region, and the severity of the problems, we continue to believe that the
economic and financial ramifications will impact all other regions of the globe,
particularly Japan, Latin America, Russia and Eastern Europe, and to a lesser
extent, the U.S. and Western Europe. The contagion effect will principally hit
the manufacturing sector, but will also negatively impact personal income,
consumer spending and corporate profits.
Conversely, both inflation and interest rates should benefit from these trends.
Specifically, our forecast for the U.S. economy assumes a slowdown in real GDP
growth to a 2% rate, from the nearly 4% growth rate for the previous six
quarters. Inflation
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should remain in the 2% zone, while corporate profits will show little or no
growth during the next several quarters. In this economic environment, the
Federal Reserve is expected to implement a mildly accommodative monetary policy
for the remainder of the year, with an official reduction in rates around
year-end.
For 1999 and beyond, the longer-term risk to the U.S. economy is that with
slower world economic demand and shrinking corporate profitability and cash
flow, along with abundant global capacity in most industries, businesses will
abruptly scale-back their aggressive expansion plans through reduced hiring and
capital investment. The secondary effect of these actions would be a further
reduction in household incomes and spending which could precipitate a more
serious and prolonged slowdown. But, the course of events in 1999 and beyond
will be determined by private sector and government policy decisions which will
take place over the next 6 - 9 months, and cannot be predicted at this time, but
will be monitored closely.
Our global financial markets outlook remains essentially unchanged from last
quarter, and is driven by the powerful deflationary forces emanating from Asia.
The overall economic environment which appears to be unfolding in combination
with relative valuation measures currently in place would appear to be favorable
for high-grade U.S. fixed income markets, and negative for domestic equities.
The expected slowdown in economic growth, continued favorable inflation news,
and large capital flows into high quality dollar-denominated assets will likely
push U.S. bond prices higher, and yields lower through year-end. Conversely,
the negative trends relating to corporate profits in combination with the
stretched valuation of U.S. equities make domestic equities vulnerable to
further negative surprises, despite the benign inflation and interest rate
backdrop. Consequently, we reiterate our conclusion from last quarter that
domestic bonds are likely to outperform equities during the next 6 - 9 month
period. In general, in an environment of low inflation, we expect U.S. stocks
and bonds to exhibit less correlation than has been evident over the past
quarter century.
We would also expect most equity markets worldwide to remain under pressure for
the balance of the year. Economic fundamentals in Asia will get worse before
they begin to stabilize toward year-end, and further financial market turbulence
lies ahead, in the form of falling currencies and stock prices, and rising
interest rates. And while the economic fundamentals within the European
economies remain favorable, market valuations have become stretched following
several years of excellent performance. Moreover, it is unlikely that these
markets will buck the trend of the U.S. and Asian equity markets in an
environment of global economic and financial instability.
Commercial Real Estate trends remain positive, despite four years of broad
recovery from the severe 1990 - 93 property downturn. Rents and property values
will continue to increase, and occupancy rates will remain tight in most markets
through year-end. However, we are beginning to see some classic signs which are
typically a prelude to a market peak, namely property values rising faster than
rents; an increase in rents to a level which economically justifies and triggers
new construction; an abundant supply of capital available to finance new
construction; and an actual rise in construction activity
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in virtually all major markets. These trends will likely lead to a market peak
during the next two years. Meanwhile, we expect a diversified portfolio of
institutional quality commercial property to continue to show excellent relative
performance and to produce an annualized total return of 10 - 12% or better
during the next several quarters.
On balance, the outlook for the remainder of the year remains positive, although
less favorable than during the past several years of truly extraordinary
economic performance. Our forecast assumes a combination of moderate economic
growth and low inflation, along with a continued firm U.S. dollar, and stable to
declining interest rates. The principal offsets to these positives are a
reversal in the previously healthy trends in productivity and corporate profits;
a continued widening in the U.S. merchandise trade deficit; and heightened
financial risk and global instability resulting from the spreading contagion
from the Pacific economic region, which will result in significantly increased
volatility in all financial markets.
Robert F. DeLucia
Managing Director
Portfolio Advisors
CIGNA Investment Management
June 30, 1998
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CG CORPORATE INSURANCE VARIABLE UNIVERSAL LIFE
SCHEDULE OF CHANGES IN UNIT VALUES
PERIOD ENDED JUNE 30, 1998 (UNAUDITED)
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<CAPTION>
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ACCUMULATION
DATE INITIALLY ACCUMULATION ACCUMULATION UNIT VALUE % CHANGE % CHANGE
FUNDED UNIT VALUE UNIT VALUE 06/30/1998 INCEPTION 12/31/1997
SUB-ACCOUNT (INCEPTION DATE) AT INCEPTION 12/31/1997 YTD TO YTD TO YTD
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<S> <C> <C> <C> <C> <C> <C>
Alger American Growth Portfolio 02/24/1997 $ 10.000000 $ 11.709279 $ 14.805122 48.1 26.4
Alger American MidCap Growth Portfolio 02/24/1997 10.000000 11.260065 13.50502 35.1 19.9
Alger American Small Capitalization
Portfolio 03/31/1997 10.000000 12.546933 14.151437 41.5 12.8
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Bankers Trust - EAFE Equity Index Fund ** 10.000000 0.000000 10.000000 0.0 100.0
Bankers Trust - Small Cap Index Fund ** 10.000000 0.000000 10.000000 0.0 100.0
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CIGNA VP Money Market Fund 12/24/1996 10.008961* 10.428840 10.598109 5.9 1.6
CIGNA VP S&P 500 Index Fund 02/24/1997 10.000000 12.052632 14.111373 41.1 17.1
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Fidelity VIP Equity-Income Portfolio 02/24/1997 10.000000 11.881678 13.070795 30.7 10.0
Fidelity VIP High Income Portfolio 01/29/1997 10.000000 11.534462 12.003466 20.0 4.1
Fidelity VIP II Investment Grade Bond
Portfolio 01/29/1997 10.000000 10.845876 11.151571 11.5 2.8
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Janus Aspen Series Worldwide Growth
Portfolio 02/24/1997 10.000000 11.384653 14.392404 43.9 26.4
Janus Institutional Shares Short Term
Bond 01/29/1998 10.000000 0.000000 10.157452 1.6 0.0
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MFS Emerging Growth Series 01/29/1997 10.000000 11.669186 13.755541 37.6 17.9
MFS Total Return Series 02/24/1997 10.000000 11.495360 12.433795 24.3 8.2
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OCC Equity Portfolio 02/24/1997 10.000000 11.873582 13.335229 33.4 12.3
OCC Managed Portfolio 01/29/1997 10.000000 11.733393 12.744513 27.4 8.6
OCC Small Cap Portfolio 02/24/1997 10.000000 12.008588 11.833313 18.3 (1.5)
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Templeton International Fund 02/24/1997 10.000000 10.926369 12.441081 24.4 13.9
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* Accumulation unit value as of 12/31/96.
Accumulation Unit Values are net of charges against the assets of the Variable
Account for the assumption of mortality and expense risks and for administrative
expenses.
** Funds offered beginning June 1, 1998. As of the period ended June 30, 1998,
no contributions were invested in funds.
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THIS REPORT MAY BE DISTRIBUTED ONLY TO CURRENT CONTRACT HOLDERS OR TO PERSONS
WHO HAVE RECEIVED A CURRENT CORPORATE VARIABLE UNIVERSAL LIFE PROSPECTUS.
National Distributor
CIGNA Financial Services, Inc.
One Commercial Plaza
280 Trumbull Street
Hartford, CT 06103
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