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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 Growth Portfolio
Alger American MidCap Growth Portfolio
Alger American Small Cap Portfolio
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
DEUTSCHE ASSET MANAGEMENT VIT FUNDS SEMI-ANNUAL REPORT
Deutsche Asset Management VIT EAFE-Registered Trademark- Equity Index Fund
Deutsche Asset Management VIT Small Cap Index Fund
FIDELITY VARIABLE INSURANCE PRODUCTS FUNDS 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 Balanced Portfolio
Janus Aspen Series Worldwide Growth Portfolio
MFS-REGISTERED TRADEMARK- VARIABLE TRUST-SM- SEMI-ANNUAL REPORT
MFS Emerging Growth Series
MFS Total Return Series
NEUBERGER BERMAN ADVISORS MANAGEMENT TRUST
Neuberger Berman AMT Partners Portfolio
OCC ACCUMULATION TRUST SEMI-ANNUAL REPORT
OCC Equity Portfolio
OCC Managed Portfolio
OCC Small Cap Portfolio
FRANKLIN TEMPLETON VARIABLE INSURANCE
PRODUCTS TRUST SEMI-ANNUAL REPORT
Templeton International Fund Class I
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[PHOTO] THOMAS C. JONES [LOGO]
President
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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, 2000.
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 2000 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 Ilia Castellano, Director of Administration for CIGNA's Corporate
Insurance Department at 860. 534.7175. Ilia is available Monday through
Friday, 8 am to 5 pm.
Sincerely,
/s/ Thomas C. Jones
Connecticut General Life Insurance Company
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ECONOMIC REVIEW AND OUTLOOK
SECOND QUARTER 2000
SUMMARY
- U.S. economic growth has downshifted from the boom conditions of the
previous several quarters; a period of more moderate growth lies ahead.
- Growth will still likely prove excessive for a fully employed economy, and
mild inflationary pressures will continue to build.
- The Federal Reserve (Fed) tightening cycle has further to go, with
additional monetary restraint likely during the second half of the year.
- World Gross Domestic Product (GDP) growth will peak during 2000 at its
fastest rate since 1988.
- Financial markets continue to face a difficult cyclical economic
environment, with equities at greater risk than bonds.
ECONOMIC REVIEW
The growth of the U.S. economy appeared to slow significantly during the
second quarter, following six quarters of economic boom. Based on preliminary
monthly indicators of retail sales, housing and employment, the growth in real
GDP seemed to slow to a rate of around 3%. This change was a sudden and sharp
deceleration from the 6% rate the prior three quarters and the 5% annualized
rate of GDP over the prior six quarters, following the Fed's first easing of
monetary policy in response to the 1998 "world financial crisis."
It is safe to say that the rate of economic growth has slowed, but probably
not to the extent suggested by the most recent monthly Government economic
reports. The basic underlying fundamentals appear to support continued steady,
albeit less robust, growth for the remainder of the year.
CYCLICAL INFLATIONARY PRESSURES CONTINUE TO BUILD:
The rate of inflation continued to drift moderately higher during the
quarter, and inflationary pressures are still evident. The Consumer Price Index
(CPI) has risen at a 3.1% rate over the past year, while the "core" CPI, which
excludes volatile food and energy components, has risen at a 2.3% annual rate.
Labor costs also remain in a steady accelerating trend, with recent total
compensation (wages and benefits) rising at close to a 5% annual rate. Energy
prices surged during the spring, with crude oil reaching $33 a barrel, while
natural gas prices rose to an all-time high.
Primarily in response to the tight labor market and concern over future wage
inflation, the Fed raised short-term interest rates during May to 6.50%, but
left rates unchanged at its June FOMC (Federal Open Market Committee) meeting.
The cumulative increase in the Fed's target interest rate during the past 12
months has been 1.75%.
The recovery in world economies that began during 1999 continued to gather
momentum during the quarter, with healthy economic growth evident in the
emerging market economies of Asia and Latin America as well as continental
Europe. Only Japan, the world's second-largest economy, continues to lag, as a
self-sustaining economic expansion remains elusive and deflationary forces
continue to prevail.
Just as in the U.S., many central banks around the world raised official
interest rates during the second quarter -- in an attempt to sustain the current
low rate of inflation worldwide and maintain a steady and consistent rate of
economic growth.
FINANCIAL MARKET REVIEW
World financial markets slumped during the second quarter in response to
widespread central bank monetary restraint, shrinking financial liquidity, and
the threat of rising inflation. Financial markets exhibited considerable
volatility, as stock and bond markets reacted to often-conflicting indicators of
U.S. economic growth and, consequently, the probability of future Fed action.
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FINANCIAL MARKET REVIEW (CONTINUED)
During the first six weeks of the quarter, interest rates rose steadily and
bond prices slumped. As economic data during late May and June suggested a sharp
economic slowdown, interest rates declined and bond prices rallied, diminishing
the perceived risk of further Fed tightening. The domestic equity markets also
reacted, declining early in the quarter, then rallying during late May and June
on growing expectations that economic weakness would cause the Fed to shift to a
less restrictive credit policy. The technology-laden NASDAQ Index followed this
same pattern in an extremely volatile fashion, declining by 30% early in the
second quarter, but rallying by 25% later in the period.
HIGH-GRADE BONDS AGAIN OUTPERFORMED EQUITIES:
For the second quarter as a whole, domestic equities declined, while bonds
registered a modest increase of 1.74%, as measured by the Lehman Brothers
Aggregate Bond Index. Virtually all domestic equity market indicators were down,
including the S&P 500 Index, which reported a -2.66% total return and the Dow
Jones Industrials and NASDAQ Composite, which posted a -3.99% and -13.27%
return, respectively.
World equity markets also declined, with Japan, Asia and Latin America all
suffering major losses. Perhaps most significant during the quarter was the
apparent bursting of the Internet "bubble," as shares of many marginal Internet
companies lost more than 75% of their value in a very short period.
During the first six months of the year, fixed income markets have
consistently outperformed equities, as measured by the Lehman Brothers Aggregate
Bond Index's total return of 3.99% and the S&P 500 Index's total return of
-0.42%. The single best-performing asset class for the six-month period was
long-term Treasury securities, with a total return of nearly 10.00%.
Foreign equities suffered a negative 4.06% total return, as measured by the
Morgan Stanley Europe, Australia and Far East (EAFE) Index, while U.S. high
yield bonds declined 1.21% in the first half of the year. Within the U.S. equity
market, energy stocks, utilities, semiconductors, and drugs performed best
during the first half, while industrial commodity producers (metals, paper,
chemicals) and consumer cyclicals performed worst.
ECONOMIC OUTLOOK
While it seems clear that the U.S. economy is no longer in an economic boom
and the rate of economic growth has peaked for the cycle, we nonetheless believe
that the most recent Government data exaggerates the magnitude of the slowdown.
It is likely that the second quarter witnessed a temporary pause, to be followed
by a moderate reacceleration in economic growth during the second half of the
year.
Our expectation for continued economic strength is based upon two critical
factors: current financial conditions and current income growth, from both a
personal and business perspective. Financial conditions remain generally
accommodative in our view, despite the Fed's tightening of the past year, in
that: (a) real effective borrowing costs have not reached prohibitive levels;
and (b) credit is readily available to most borrowers. Growth in real wage and
salary income, along with the recent surge in corporate earnings, will also
provide the stimulus for continued growth in consumer spending and capital
investment.
We expect the domestic economy to expand at a 4% annual rate during the
remainder of the year, a growth rate above current market and consensus
expectations. The implications of this forecast are very significant. In the
context of a fully employed economy, a 4% rate of growth is simply too rapid to
alleviate inflationary pressures. Consequently, the Fed will likely continue to
tighten monetary conditions during the remainder of this year. As 2001 unfolds,
we expect the domestic economy to exhibit a pattern of progressive weakness with
increasing recession risk.
INFLATIONARY RISKS REMAIN:
Despite the anticipated moderation in the rate of economic growth, the
inflation risk has not diminished because the economy is operating at full
employment and at high levels of resource utilization. It is our view that the
rate of GDP growth needs to slow to 2% or lower for at least several consecutive
quarters so that a better balance between supply and demand can be restored.
This would create some slack in labor markets, thus alleviating
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ECONOMIC OUTLOOK (CONTINUED)
cumulative inflationary pressures that have been building over the past two
years. In the absence of such a slowdown, we expect "core" inflation to continue
to drift higher, reaching 3% around year end and 3.5% during 2001.
WORLD GDP GROWTH WILL PEAK DURING 2000:
Most foreign economies should continue to maintain their current rates of
growth for the balance of this year, with perhaps only a moderate slowdown next
year. This scenario is in contrast to the more pronounced slowdown expected in
the U.S. economy during 2001. Full-year 2000 global GDP is expected to approach
4.5%, which would be the fastest growth in the world economy since 1988. World
trade is expected to grow at a better than 8% rate for the year. With most major
economies expecting some slowdown in 2001, it appears that the current year will
likely mark the business cycle peak in global GDP growth.
FINANCIAL MARKET OUTLOOK
Financial markets face a difficult environment for the remainder of this
year, the result of an increasingly uncertain economic outlook, rising
inflation, continued tight monetary conditions, and heightened financial risk,
all pressures associated with a business cycle expansion that has reached a
mature stage. Moreover, these forces inevitably result in a significant economic
slowdown, which leads to a weakening in corporate profits and deterioration in
credit. To cope with these pressures, important financial market adjustments in
both fixed income and equities, as well as in foreign exchange markets, will be
required.
The primary influence on the markets will be the need for continued monetary
restraint by the Fed in order to counter the emerging inflation risk, which
inevitably exerts downward pressure on the price of all financial assets. The
big unknown is the intensity of these opposing forces -- specifically, the
duration and severity of the monetary tightening necessary to effectively reduce
economic growth to a non-inflationary rate.
On a short-term basis, we continue to believe that fixed income markets are
better positioned than equity markets to withstand the economic and financial
pressures that lie ahead for two main reasons:
ECONOMIC FUNDAMENTALS FAVOR BONDS:
First, and most important, the principal fundamental factor supporting
equities -- corporate profitability -- is more vulnerable than inflation, which
is the primary fundamental determinant of fixed income markets.
The Fed, in its determination not to squander the enormous progress made in
the battle against inflation during the past two decades, is prepared to tighten
monetary conditions to the extent necessary to achieve and maintain price
stability. The economic consequence of sustaining this monetary restraint policy
will likely be a gradual slowdown in economic activity during the next 12
months, with negative implications for corporate profits.
TRADITIONAL VALUATION MEASURES FAVOR BONDS:
The second reason for equity market vulnerability relates to valuation and
investor sentiment.
High-grade fixed income markets offer excellent fundamental value in the
form of high current market yields, which provide a comfortable premium over the
current and prospective rates of inflation. Consistent with this attractive
valuation, bond market sentiment remains negative, which is positive from a
contrarian perspective. The most attractive segments of the market are
high-grade corporates and residential mortgage bonds, offering market yields to
maturity in excess of 8%.
Conversely, the domestic equity market is characterized by excessive
valuation along with a high degree of investor complacency.
Consequently, we expect bonds to outperform equities for full-year 2000 --
for the first calendar year since 1990. However, a significant rally in bonds
must await evidence that a sustained and decisive slowdown in economic growth is
underway, which may not occur until 2001.
TECHNOLOGY VERSUS NON-TECHNOLOGY EQUITIES:
While the overall domestic equity market appears to be vulnerable to a
setback, it is important
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FINANCIAL MARKET OUTLOOK (CONTINUED)
to differentiate between the technology and non-technology segments. In
aggregate, the non-tech sectors of the market have performed poorly in recent
years. In fact, while the overall S&P 500 Index has appreciated by nearly 30%
for the two years ending June 30, the remaining non-tech components of the Index
in the aggregate have been flat and seem to offer reasonable value. Overall, the
non-tech components of the Index have a current median price-to-earnings ratio
(P/E multiple) of only 15, quite reasonable by historical standards. This
compares with the median P/E multiple of 25 for the entire Index and 50 for
technology stock components. Both valuations seem excessive relative to
sustained long-term earnings growth prospects.
Despite a sharp sell-off in the spring, the technology sector, which
currently represents 30% of the S&P 500 Index weighting, remains vulnerable to
further stock price declines. Most institutional fund managers remain
overweighted in tech stocks, investor sentiment toward the group appears highly
complacent and valuations remain excessive.
Using the NASDAQ Composite as a proxy for technology sector valuations, the
price-to-earnings ratio for the Index is still well in excess of 100. The likely
catalyst for a renewed sell-off in the technology sector could be either a
severe tightening in monetary conditions and/or disappointments on the earnings
front. While current technology industry fundamentals remain excellent, it is
unlikely that orders, shipments and, therefore, earnings for high-tech companies
will be immune to an inevitable weakening in business conditions over the next
12 to 18 months. This scenario would result in a significant shortfall in
technology sector reported earnings relative to aggressive Wall Street
estimates.
SHIFT IN MARKET LEADERSHIP:
On a longer-term secular basis, we continue to believe that equity markets
are at a very significant turning point that will involve major changes in
market leadership. The most important shift is that value stocks and value
funds, which have been laggards for five consecutive years, will likely enjoy a
multi-year period of significantly superior performance relative to growth
stocks and growth stock funds.
The market dominance since 1995 of large capitalization technology and
select large-cap consumer growth companies appears to be nearing an end. We also
believe that small- and mid-capitalization equities will outperform large
capitalization stocks.
Finally, we expect that well-diversified foreign equity funds will
outperform domestic equities in local currencies and particularly in dollar-
denominated portfolios. This is based on our view that the bull market in the
U.S. dollar since 1995 is at an end and that a several-year period of steady
dollar depreciation could lie ahead. The most attractive currency within the
foreign exchange market is the euro, which appears to be an undervalued
currency, based on traditional fundamental factors pertaining to relative growth
rates, relative profitability and relative costs of production.
ROBERT F. DELUCIA
Managing Director
CIGNA Investment Management
[LOGO]
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CG CORPORATE INSURANCE VARIABLE UNIVERSAL LIFE SEPARATE ACCOUNT 02
SCHEDULE OF CHANGES IN UNIT VALUES
PERIOD ENDED JUNE 30, 2000
UNAUDITED
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Accumulation
Date Initially Accumulated Accumulation Unit Value % Change % Change
Funded Unit Value Unit Value 06/30/2000 Inception 12/31/1999
Sub-Account (Inception Date) at Inception 12/31/1999 YTD to YTD to YTD
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CONTRACTS SOLD BEFORE MAY 1, 1998
Alger American Growth Portfolio 02/24/1997 10.000000 22.753794 23.436829 134.37 3.00
Alger American MidCap Growth Portfolio 02/24/1997 10.000000 18.981572 21.657712 116.58 14.10
Alger American Small Capitalization
Portfolio 03/31/1997 10.000000 20.398939 20.299701 103.00 (0.49)
Bankers Trust - EAFE-Registered
Trademark- Equity Index Fund 03/08/1999 10.000000 12.881229 12.094684 20.95 (6.11)
Bankers Trust - Small Cap Index Fund 03/08/1999 10.000000 12.614069 12.846619 28.47 1.84
CIGNA VP Money Market Fund 12/24/1996 10.008961* 11.278484 11.547423 15.37 2.38
CIGNA VP S&P 500 Index Fund 02/24/1997 10.000000 18.379394 18.188841 81.89 (1.04)
CIGNA VP Investment Grade Bond Fund 05/11/1999 10.000000 9.851835 10.073022 0.73 2.25
Fidelity VIP Equity-Income Portfolio 02/24/1997 10.000000 13.838011 13.405275 34.05 (3.13)
Fidelity VIP High Income Portfolio 01/29/1997 10.000000 11.711075 11.091160 10.91 (5.29)
Fidelity VIP II Investment Grade Bond
Portfolio 01/29/1997 10.000000 11.462104 11.841556 18.42 3.31
Janus Aspen Series Worldwide Growth
Portfolio 02/24/1997 10.000000 23.684224 24.059089 140.59 1.58
MFS Emerging Growth Series 01/29/1997 10.000000 27.146504 26.398798 163.99 (2.75)
MFS Total Return Series 02/24/1997 10.000000 13.061631 13.342313 33.42 2.15
OCC Equity Portfolio 02/24/1997 10.000000 13.363501 12.528965 25.29 (6.24)
OCC Managed Portfolio 01/29/1997 10.000000 12.949336 12.503700 25.04 (3.44)
OCC Small Cap Portfolio 02/24/1997 10.000000 10.523062 11.864922 18.65 12.75
Templeton International Fund Class I 02/24/1997 10.000000 14.489634 14.504231 45.04 0.10
CONTRACTS SOLD AFTER APRIL 30, 1998
Alger American Growth Portfolio 01/21/1999 10.000000 13.257221 13.669262 36.69 3.11
Alger American MidCap Growth Portfolio 01/21/1999 10.000000 13.340647 15.237194 52.37 14.22
Alger American Small Capitalization
Portfolio 06/17/1998 10.000000 15.105161 15.047192 50.47 (0.38)
Bankers Trust - EAFE-Registered
Trademark- Equity Index Fund 11/11/1999 10.000000 11.038066 10.374769 3.75 (6.01)
Bankers Trust - Small Cap Index Fund 04/21/1999 10.000000 11.774734 12.004191 20.04 1.95
CIGNA VP Money Market Fund 06/17/1998 10.000000 10.632584 10.897351 8.97 2.49
CIGNA VP S&P 500 Index Fund 06/17/1998 10.000000 13.373636 13.248621 32.49 (0.93)
CIGNA VP Investment Grade Bond Fund 06/02/1999 10.000000 9.996680 10.231661 2.32 2.35
Fidelity VIP Equity-Income Portfolio 01/21/1999 10.000000 10.769746 10.443713 4.44 (3.03)
Fidelity VIP High Income Portfolio 01/21/1999 10.000000 10.533846 9.986542 (0.13) (5.20)
Fidelity VIP II Investment Grade Bond
Portfolio 06/17/1998 10.000000 10.282392 10.633746 6.34 3.42
Janus Aspen Series Worldwide Growth
Portfolio 01/21/1999 10.000000 15.896172 16.164430 61.64 1.69
Janus Aspen Series Balanced Fund 06/19/2000 10.000000 ** 9.771982 (2.28) N/A
MFS Emerging Growth Series 01/21/1999 10.000000 17.140484 16.685566 66.86 (2.65)
MFS Total Return Series 05/17/1999 10.000000 9.834193 10.055878 0.56 2.25
Neuberger & Berman AMT Partners Fund 06/06/2000 10.000000 ** 9.779454 (2.21) N/A
OCC Equity Portfolio 09/01/1999 10.000000 10.056584 9.438286 (5.62) (6.15)
OCC Managed Portfolio 01/21/1999 10.000000 10.771008 10.411064 4.11 (3.34)
OCC Small Cap Portfolio 01/21/1999 10.000000 10.056968 11.351085 13.51 12.87
Templeton International Fund Class I 06/17/1998 10.000000 11.794910 11.818974 18.19 0.20
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* Accumulation unit value as of 12/31/96.
** As of 12/31/1999, 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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