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CIGNA
CORPORATE VARIABLE
UNIVERSAL LIFE
SEMI-ANNUAL REPORT
[GRAPHIC]
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JUNE 30, 1999
CORPORATE INSURANCE
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SEMI-ANNUAL REPORT
CIGNA
CORPORATE VARIABLE
UNIVERSAL LIFE II
[GRAPHIC]
[LOGO]
JUNE 30, 1999
CORPORATE INSURANCE
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TABLE OF CONTENTS
PRESIDENT'S LETTER
ECONOMY AND FINANCIAL MARKETS
SCHEDULE OF CHANGES IN UNIT VALUES
FUND REPORTS
THE ALGER AMERICAN FUND SEMI-ANNUAL REPORT
Alger American Growth Portfolio
Alger American MidCap Growth Portfolio
Alger American Small Cap Portfolio
BT INSURANCE FUNDS TRUST SEMI-ANNUAL REPORT
Bankers Trust EAFE-Registered Trademark-Equity Index Fund
Bankers Trust Small Cap Index Fund
CIGNA VARIABLE PRODUCTS GROUP SEMI-ANNUAL REPORT
CIGNA VP Investment Grade Bond Fund
CIGNA VP Money Market Fund
CIGNA VP S&P 500 Index Fund
FIDELITY VARIABLE INSURANCE PRODUCTS FUND SEMI-ANNUAL REPORT
Fidelity VIP Equity-Income Portfolio
Fidelity VIP High Income Portfolio
Fidelity 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
OCC Equity Portfolio
OCC Managed Portfolio
OCC Small Cap Portfolio
TEMPLETON VARIABLE PRODUCTS SERIES FUND SEMI-ANNUAL REPORT
Templeton International Fund Class I
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(PHOTO) BYRON D. OLIVER
President
(LOGO)
P.O. Box 2975
Routing 17C
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 Universal Life Insurance product for
the period ending June 30, 1999.
The report includes financial data for each of the portfolio options available
under your product. In addition, we have included a review of the Economy and
Financial Markets for the Second Quarter 1999 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 comments about this report, please feel free to
call Mike Dunn, Director of Administration for CIGNA's Corporate Insurance
Department at 860.534.4144. Mike is available Monday through Friday, 8am to 5pm.
Sincerely,
/s/ Byron D. Oliver
Byron D. Oliver
President, CIGNA Retirement & Investment Services
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ECONOMY AND FINANCIAL MARKETS
SECOND QUARTER 1999
ECONOMIC REVIEW
The U.S. economy continued to defy all predictions and performed in a superb
fashion during the second quarter: solid economic growth, continued low
inflation, excellent productivity, and a rebound in corporate profits. Most
impressive is the combination of strong economic growth and continued low
inflation. It appears that U.S. GDP expanded at a 3.5% rate in the second
quarter, only slightly below the roughly 4% compound annual growth rate of the
prior three-year period. Consumer spending and capital investment continue to be
the twin engines of growth, although most other areas within the private sector
participated in the strong second quarter advance. Importantly, the
manufacturing sector has begun to strengthen, following more than a year of
sustained weakness, as factory output accelerates to keep pace with surging
final demand.
By way of contrast, foreign economies continue to struggle, despite some
preliminary evidence that a turnaround might not be far away. Economic reports
coming out of Europe, Japan, Latin America, the U.K., and emerging Asia were all
somewhat better than expected, suggesting that the slide in foreign economies
might be ending, and that a bottoming process has begun. Nevertheless, global
GDP growth remained sluggish during the second quarter, with the U.S. still the
only economic locomotive in the world.
With the exception of crude oil prices, general inflation remains under
excellent control. The "core" CPI has risen at a 1.8% rate on a year-to-date
basis, while core wholesale prices are flat over the past 12 months. GDP
inflation is rising at only a 1% rate. Finally, the most important measure of
economy-wide cost pressures - unit labor costs - have increased at less than a
1.5% rate over the past four quarters. We estimate the current base rate of
inflation to be under 2%, and perhaps closer to 1%.
The combination of robust demand, rising output, and healthy productivity growth
resulted in a strong rebound in corporate profits during both the first and
second quarters. Following a dismal performance in 1998, corporate earnings for
the companies within the S&P 500 increased by an estimated 10% during the first
two quarters of this year.
FINANCIAL MARKET REVIEW
For the third consecutive quarter, stocks outperformed bonds, with the U.S.
equity market rising to an all-time high in mid-May and again on the final day
of the quarter. The massive global monetary reflation of the past 6-9 months,
resulting in a sharp acceleration in the growth of money and credit, has been
beneficial to global equities, and detrimental to fixed income markets. Equity
markets have also benefitted from a boom in corporate mergers and acquisitions.
Investors have become more confident that the U.S. economic boom is sustainable,
and that pro-growth government policies outside the U.S. will eventually lead to
a revival in global economic growth. However, the prospect of a global economic
recovery has once again
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raised inflation fears, along with a tightening by the Federal Reserve,
resulting in a steady rise in U.S. interest rates, and a decline in bond prices.
Also putting upward pressure on bond yields was the record levels of new
corporate and mortgage-backed bond issuance during the first half of the year.
The domestic bond market declined during the quarter, with the Lehman Brothers
Aggregate index registering a negative return of 0.9%. As in the first quarter,
the worst performing bond was the 30-year U.S. Treasury, which lost 3.7% in the
quarter, and has a six-month negative total return of nearly 10%, its worst
year-to-date performance in many years. The High-yield Bond Market, which tends
to track the equity market somewhat more closely than the bond market, showed a
slight gain in the quarter, and is up about 2.2% year-to-date 1999. Overseas
bond markets declined by 7% in the six months, as measured by the Lehman Global
Bond Index.
Domestic equity markets rose during the quarter by nearly 7% as measured by the
S&P 500. However, the big story in domestic equities during the second quarter
was the extraordinary group rotation and shift in leadership which took place,
the most sudden and dramatic in many years, as the once mighty large
capitalization consumer growth and healthcare sectors declined, while the
economically-sensitive stock groups, such as aluminum, metals, machinery,
chemicals, and papers, and small and mid-capitalization stocks rose sharply in
value. Consequently, the Dow Jones Industrials, which has a heavy concentration
of large-cap cyclicals, rose by 12% in the quarter, significantly outperforming
the S&P 500, which has clearly evolved over the years into a large-cap "growth"
stock index. The small-cap Russell 2000 rose by 15%, while the high
technology-laden NASDAQ Composite rose by 9%, ending the quarter at an all-time
record high. Consistent with these market trends, "value-style" equity fund
managers generally outperformed "growth-style" managers for the first time in
several years. Globally, the Dow Jones World (ex-U.S.) Equity Index is up
roughly 7% through June.
The relative strength of cyclicals and small cap stocks was fully consistent
with second quarter economic fundamentals. These stocks tend to outperform large
cap growth stocks during periods of massive monetary stimulus, as we have seen
over the past 6-9 months, accompanied by a broadly-based improvement in the
corporate profit outlook. A rebound in the general industrial/manufacturing
sector, a bottoming in world commodity prices, and improved prospects for a
global industrial recovery are also supportive of cyclical and commodity-based
stock groups.
ECONOMIC OUTLOOK
The U.S. economy appears to be on track to register an unprecedented fourth
consecutive year of nearly 4% economic growth. There is very little evidence
that the steady rise in market interest rates over the past nine months has
negatively impacted the U.S. economy in any meaningful way. Continuation of the
current expansion through February 2000, which appears highly likely, would
replace the 1960's business expansion as the longest business cycle in American
history. The factors which have contributed to the momentum in the economy over
the past three quarters remain intact: a very strong labor market; rapid growth
in consumer purchasing power; abundant credit availability; rising household
wealth; and near record-high consumer confidence. And in the U.S. business
sector, strong profitability and an intense desire by management to maintain
global competitiveness and make productivity improvements will continue to fuel
high levels of
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capital investment, particularly in high technology business equipment. Overall,
we expect domestic real GDP to expand at a 3.5% rate during the remainder of
this year.
At the same time, the outlook for inflation remains excellent. While it is
possible that core inflation will drift modestly higher over the next 6-12
months, the rate of inflation is unlikely to move much above 2%. And in the very
near term, U.S. corporate profits are likely to strengthen, following the
downturn of late 1997 and 1998. Profits for the S&P 500 are likely to rise by
10% for all of 1999, significantly above our estimate of its long-term secular
growth rate.
The outlook for economic growth outside the U.S. appears to be improving. In
typical lagged response to the more than 150 central bank interest rate
reductions which have been implemented since the global financial crisis of last
summer and fall, economic activity in most foreign economies appears to be
reviving. However, it must be emphasized that the world economic recovery during
the remainder of 1999 and 2000 will be sluggish and uneven, and anyone
anticipating a steady and robust world economic recovery will be disappointed.
Many key economies of the world remain quite fragile and are in need of
significant structural reform, particularly Japan, but also Germany and the
emerging economies of Asia and Lain America, and these will likely be
implemented very slowly over time. We are highly skeptical of the recent
government GDP data coming out of Japan, and anticipate only minimal economic
growth during the 1999-2000 period, given the weak fundamentals within the
private sector, both business and household. The European Union will likely
experience growth of 2% or less during 1999, with some moderate acceleration
during 2000, while the economies of Latin America and emerging Asia, although in
a bottoming process, are still quite fragile, and will likely experience only
modest economic recovery. Overall, we expect World GDP to increase by 2.5% for
all of calendar 1999, compared with around 2% during the "crisis year" of 1998,
and 4% in both 1996 and 1997.
Looking beneath the favorable economic headlines, we remain concerned about
several cyclical imbalances which could have a destabilizing influence on the
economy beyond 1999. These include: the rapid growth in private sector debt,
with consumer debt at a record share of GDP; the rapid increase in the money
supply; excess capacity in many industries; the tightest labor market in three
decades; the record U.S. current account deficit; and the heavy dependence of
consumer spending on the strength of the U.S. equity market. In short, with the
notable exception of inflation, the domestic economy is showing classic signs of
overheating.
MARKET OUTLOOK
The single most important factor impacting the global financial markets during
the next 6-12 months is the likely deterioration in monetary and liquidity
conditions, as the massive central bank reflation of the past nine months is
terminated and then gradually reversed, beginning with the U.S. Federal Reserve.
It was principally the enormous central bank monetary stimulus in response to
last summer's financial crisis that provided fuel for the global equity boom
since last October. Looking forward, the combination of a revival in global
economies, albeit gradual, along with a period of tightening by the Fed will
lead to a progressive deterioration in liquidity/monetary conditions, raising
the near-term cyclical risks for both stocks and bonds. Despite the Fed's
declaration of neutrality at its June 29-30 FOMC meeting, we believe that
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additional monetary tightening by the Fed will be necessary to slow the pace of
U.S. economic growth below 3%, which the Fed views as the maximum rate of
"non-inflationary growth."
The relative performance of the debt and equity markets during the remainder of
1999 will depend critically on the course of Federal Reserve policy. If the Fed
moves decisively, and adopts a restrictive policy in response to what it
perceives as an overheating economy, the bond market will outperform the equity
market. Alternatively, if the Fed maintains a neutral policy in the face of a
booming domestic economy, bond yields will drift higher, and bond prices lower,
while the equity market is likely to sustain its current high valuation, albeit
with considerable volatility, churning, and group rotation.
Beyond the near-term cyclical risks faced by both the equity and fixed income
markets in this uncertain monetary environment, the longer-term fundamentals for
each appear to be favorable. The combination of low inflation, a favorable
government approach toward the conduct of monetary and fiscal policies, and
beneficial demographic trends will all result in a decline in interest rates
over time, and a rise in bond prices. These same trends are also beneficial to
the equity market, in addition to greater stability of economic growth, rising
productivity and corporate profitability, and the additional boost to corporate
profitability from globalization and the revolution in information technology.
However, the bond market is far better positioned than the equity market in one
critical respect: valuation. In a trend inflation environment of 2%, long-term
treasury bonds with yields above 6% offer compelling long-term investment
values, as do high-grade corporates and mortgage-backed bonds at market yields
of 7-8%. Conversely, the domestic equity market appears to be significantly
overvalued, given the current level of corporate earnings and interest rates. In
addition to the rich valuation of U.S. equities, other symptoms of speculative
excess can be seen in the record level of margin debt outstanding and the record
pace of initial public offerings. Consequently, using a 12-month time horizon,
high-grade bonds appear likely to outperform equities. In the absence of either
a recession or a major acceleration in inflation, neither of which is probable,
the equity market is unlikely to collapse, although a sell-off is likely if the
Fed once again adopts a tightening bias. More likely, a prolonged period of
sideways movement with considerable volatility lies ahead, which would permit
the level of corporate earnings to "catch-up" with current stock prices.
In this highly volatile equity market environment, "value" managers should
outperform "growth" managers, as during the most recent quarter. Also, cyclical
stock groups will probably outperform both traditional consumer growth stocks
and the high technology sector. Finally, while small capitalization stocks
typically suffer relative underperformance during periods of restrictive
monetary policy, from current depressed levels of valuation the Russell 2000
should outperform the S&P index using a 2-3 year time horizon.
Robert F. DeLucia
June 30, 1999
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CG CORPORATE INSURANCE VARIABLE UNIVERSAL LIFE
SCHEDULE OF CHANGES IN UNIT VALUES
PERIOD ENDED JUNE 30, 1999
(UNAUDITED)
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<CAPTION>
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Accumulation
Date Initially Accumulated Accumulation Unit Value % Change % Change
Funded Unit Value Unit Value 06/30/1999 Inception 12/31/1998
Sub-Account (Inception Date) at Inception 12/31/1998 YTD to YTD to YTD
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<S> <C> <C> <C> <C> <C> <C>
CONTRACTS SOLD BEFORE MAY 1, 1998
Alger American Growth Portfolio 02/24/1997 10.000000 17.174509 19.829791 98.30 15.46
Alger American MidCap Growth Portfolio 02/24/1997 10.000000 14.533269 16.332437 63.32 12.38
Alger American Small Capitalization Portfolio 03/31/1997 10.000000 14.358496 16.196344 61.96 12.80
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Bankers Trust - EAFE Equity Index Fund 03/08/1999 10.000000 ** 10.560503 5.61 N/A
Bankers Trust - Small Cap Index Fund 03/08/1999 10.000000 ** 11.375750 13.76 N/A
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CIGNA VP Investment Grade Bond Fund 05/11/1999 10.000000 ** 9.866736 (1.33) N/A
CIGNA VP Money Market Fund 12/24/1996 10.008961* 10.861410 11.055707 10.46 1.79
CIGNA VP S&P 500 Index Fund 02/24/1997 10.000000 15.363576 17.167465 71.67 11.74
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Fidelity VIP Equity-Income Portfolio 02/24/1997 10.000000 13.137868 14.737049 47.37 12.17
Fidelity VIP High Income Portfolio 01/29/1997 10.000000 10.930880 11.746216 17.46 7.46
Fidelity VIP II Investment Grade Bond Portfolio 01/29/1997 10.000000 11.693725 11.441104 14.41 (2.16)
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Janus Aspen Series Worldwide Growth Portfolio 02/24/1997 10.000000 14.538727 16.316538 63.17 12.23
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MFS Emerging Growth Series 01/29/1997 10.000000 15.507615 17.412236 74.12 12.28
MFS Total Return Series 02/24/1997 10.000000 12.791189 13.382863 33.83 4.63
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OCC Equity Portfolio 02/24/1997 10.000000 13.156140 14.342632 43.43 9.02
OCC Managed Portfolio 01/29/1997 10.000000 12.450284 13.285507 32.86 6.71
OCC Small Cap Portfolio 02/24/1997 10.000000 10.821353 11.155577 11.56 3.09
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Templeton International Fund Class I 02/24/1997 10.000000 11.832899 12.988400 29.88 9.77
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CONTRACTS SOLD AFTER APRIL 30, 1998
Alger American Growth Portfolio 01/21/1999 10.000000 ** 11.544929 15.45 N/A
Alger American MidCap Growth Portfolio 01/21/1999 10.000000 ** 11.470178 14.70 N/A
Alger American Small Capitalization Portfolio 06/17/1998 10.000000 10.616506 11.984214 19.84 12.88
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Bankers Trust - Small Cap Index Fund 04/21/1999 10.000000 ** 10.610860 6.11 N/A
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CIGNA VP Investment Grade Bond Fund 06/02/1999 10.000000 ** 10.004296 0.04 N/A
CIGNA VP Money Market Fund 06/17/1998 10.000000 ** 10.414756 4.15 N/A
CIGNA VP S&P 500 Index Fund 06/17/1998 10.000000 11.162600 12.482423 24.82 11.82
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Fidelity VIP Equity-Income Portfolio 01/21/1999 10.000000 ** 11.460838 14.61 N/A
Fidelity VIP High Income Portfolio 01/21/1999 10.000000 ** 10.557538 5.58 N/A
Fidelity VIP II Investment Grade Bond Portfolio 06/17/1998 10.000000 10.474584 10.255861 2.56 (2.09)
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Janus Aspen Series Worldwide Growth Portfolio 01/21/1999 10.000000 ** 10.943012 9.43 N/A
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MFS Emerging Growth Series 01/21/1999 10.000000 ** 10.985989 9.86 N/A
MFS Total Return Series 05/17/1999 10.000000 ** 10.068496 0.68 N/A
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OCC Managed Portfolio 01/21/1999 10.000000 ** 11.042339 10.42 N/A
OCC Small Cap Portfolio 01/21/1999 10.000000 ** 10.653471 6.53 N/A
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Templeton International Fund Class I 06/17/1998 10.000000 9.617966 10.564955 5.65 9.85
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* Accumulation unit value as of 12/31/96.
** As of 12/31/1998, no contributions were invested in funds.
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.
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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.
[LOGO]
NATIONAL DISTRIBUTOR
CIGNA FINANCIAL SERVICES, INC
ONE COMMERCIAL PLAZA
280 TRUMBULL STREET
HARTFORD, CT 06103
CIGNA RETIREMENT & INVESTMENT SERVICES
IS A DIVISION OF CIGNA
570564 7/1999
<PAGE>
THIS REPORT MAY BE DISTRIBUTED ONLY TO CURRENT CONTRACT HOLDERS OR TO PERSONS
WHO HAVE RECEIVED A CURRENT CORPORATE VARIABLE UNIVERSAL LIFE II PROSPECTUS.
[LOGO]
NATIONAL DISTRIBUTOR
CIGNA FINANCIAL SERVICES, INC
ONE COMMERCIAL PLAZA
280 TRUMBULL STREET
HARTFORD, CT 06103
CIGNA RETIREMENT & INVESTMENT SERVICES
IS A DIVISION OF CIGNA
570565 7/1999
