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[CIGNA TREE LOGO GRAPHIC APPEARS HERE]
CIGNA VARIABLE PRODUCTS
INVESTMENT GRADE BOND FUND
SEMIANNUAL REPORT
JUNE 30, 1999
[CIGNA TREE LEAVES GRAPHIC APPEARS IN BACKGROUND]
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1
DEAR SHAREHOLDERS:
We are pleased to provide this report for CIGNA Variable Products Investment
Grade Bond Fund (the "Fund"), covering the period ended June 30, 1999.
THE MARKET ENVIRONMENT
The themes which drove the bond market during the second quarter were continued
strong economic growth domestically and the recovering economies in many of the
emerging markets. Though reported inflation remains muted by historical
standards, the impact of a strong U.S. economy and oil price increases on fixed
income markets has been to increase inflation expectations. As a result,
interest rates have steadily increased, and bond prices have declined. April's
reported Consumer Price Index ("CPI") of .7% and the Federal Reserve Board's
(the "Fed") subsequent policy shift to a monetary tightening bias set the stage
for rates to move higher. Overall, the Lehman Brothers Government/Corporate Bond
Index (the "Index") suffered a 1.10% decline for the quarter. Long Treasuries
lost over 3.5% of their value, as interest rates on 10-year and 30-year U.S.
Treasuries rose 50 and 30 basis points respectively, ending the quarter at
yields of 5.78% and 5.96%.
The closing note of the quarter was the Fed's Open Market Committee decision to
raise the Federal Funds rate .25% to 5.00%. Since April's worrisome CPI release
in mid-May, the May CPI release issued in mid-June reported zero inflation in
the aggregate.
The high yield market and emerging markets boasted the highest returns among
fixed income asset classes this quarter. All other spread sectors underperformed
duration matched treasuries as spreads widened in sympathy with the shift in
Federal Reserve policy. In the minds of some investors, higher rates, followed
by a slowing economy, could negatively impact financial conditions of
corporations. In addition, the market began exhibiting concern about burgeoning
new supply in most spread sectors, in addition to concerns over the Fed's
raising rates.
FUND ACTIVITY
The portfolio remains fully invested. On June 30, 1999, domestic corporate bonds
were approximately 22.3% of portfolio holdings, taxable municipal bonds 15.0%,
U.S. Government 55.8%, short-term obligations 5.8% and cash and other assets
1.1%. Per share net asset value was $9.82, down from $10.00 on May 3, 1999
(inception date).
FUND PERFORMANCE
After deducting expenses and allowing for the reinvestment of dividends, based
on the net asset value of its underlying assets, the Fund returned -1.80% during
the two month period since the Fund's inception. This reflects the substantial
decline in bond market prices during this period. The Fund is well-positioned
going forward to take advantage of attractive spreads in the non-Treasury
market. We expect to add consistent value over the long-term through disciplined
sector rotation and name selection, as well as appropriate overweighting of
non-Treasury sectors versus the Index.
OUTLOOK
The most important variable in the outlook right now is the future course of Fed
action. Additional monetary tightening seems necessary to slow the economy down
from a 4% real growth pace to a more desirable and sustainable 3% pace, which
the Fed views as "non-inflationary". The second quarter growth rate should slow
from the first quarter's 4.3% pace on the basis of seasonal factors, higher
interest rates and oil price increases alone. With the appropriate monetary
response, the bond market is set up for reasonably solid relative performance
with long yields approaching 6%. We believe bonds offer attractive relative
value with implied real yields approaching 4%, assuming the economy has achieved
price stability. As non-Treasury spreads have widened recently, potential
risk-adjusted returns have become more favorable. The Fund intends to maintain
an overweighting relative to the Index in non-Treasury sectors such as corporate
bonds, taxable municipal debt, mortgage-backed securities and, to a modest
degree, high yield bonds and emerging markets. Portfolio duration is modestly
longer than the Index, and will be opportunistically brought back to neutral
when the market improves.
Sincerely,
/s/ Richard H. Forde
Richard H. Forde,
PRESIDENT
CIGNA VARIABLE PRODUCTS INVESTMENT GRADE BOND FUND
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CIGNA VARIABLE PRODUCTS INVESTMENT GRADE BOND FUND INVESTMENTS IN SECURITIES 2
June 30, 1999 (Unaudited)
MARKET
PRINCIPAL VALUE
(000) (000)
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BONDS AND NOTES - 93.1%
ENTERTAINMENT & COMMUNICATIONS - 1.5%
Orange PLC, 9.0%, 2009 (144A
security acquired June, 1999 for
$200,000)* $ 200 $ 203
Premier Parks, Inc., 9.75%, 2007 100 100
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303
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FINANCIAL - 9.5%
Beneficial Corp., 6.35%, 2001 425 423
Fairfax Financial Holdings Ltd.,
7.375%, 2006 500 490
Finova Capital Corp., 6.625%, 2001 190 191
First Union National Bank Chase,
6.645%, 2009 250 245
Transamerica Corp., 9.375%, 2008 440 505
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1,854
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OIL & GAS - 2.4%
Enron Oil & Gas Co., 6.0%, 2008 500 459
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TAXABLE MUNICIPALS - 15.0%
Alameda Corridor Transportation
Authority, 6.5%, 2019 500 456
Cerritos Calif. Public Financing
Authority, 8.0%, 2011 500 529
Chesapeake & Potomac Tele. Co.,
7.25%, 2012 250 254
Decatur Texas Hospital Authority,
7.75%, 2009 200 197
Mississippi Business Financial Corp.,
7.81%, 2024 500 498
New York City Transit Authority,
6.5%, 2011 500 483
Texas Water Res. Finance Authority,
6.0%, 2002 500 498
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2,915
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MARKET
PRINCIPAL VALUE
(000) (000)
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TRANSPORTATION - 2.5%
GATX Capital Corp., 6.36%, 2002 $ 500 $ 488
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UTILITIES - 6.4%
AES Corp., 9.5%, 2009 150 154
Texas New Mexico Power Co.,
9.25%, 2000 500 516
Toll Road Investments Partnership,
Zero Coupon, 2010 1,300 588
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1,258
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U.S. GOVERNMENT AND AGENCIES - 55.8%
Federal National Mortgage Assoc.,
6.5%, 2029 7,015 6,768
United States Treasury Bonds,
10.375%, 2012 1,000 1,274
8.125%, 2021 1,975 2,408
United States Treasury Notes,
7.5%, 2002 70 73
5.625%, 2008 400 392
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10,915
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TOTAL LONG-TERM BONDS
(Cost - $18,667,607) 18,192
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SHORT-TERM OBLIGATIONS - 5.8%
U. S. GOVERNMENT & AGENCIES - 3.3 %
Federal Home Loan Banks,
4.47%, 7/1/99 648 648
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BONDS - 2.5%
First Hawaiian, Inc., 6.25%, 8/15/00 500 500
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TOTAL SHORT-TERM OBLIGATIONS
(Cost - $1,150,455) 1,148
TOTAL INVESTMENTS IN SECURITIES - 98.9%
(Total Cost - $19,818,062) 19,340
Cash and Other Assets, Less Liabilities - 1.1% 214
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NET ASSETS - 100% $ 19,554
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* Indicates restricted security; the aggregate value of restricted securities
is $203,000 (aggregate cost $200,000) which is approximately 1.0 % of net
assets. Valuations have been furnished by brokers trading in the securities or
by a pricing service for all restricted securities.
The Notes to Financial Statements are an integral part of these statements.
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CIGNA VARIABLE PRODUCTS INVESTMENT GRADE BOND FUND 3
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999 (UNAUDITED)
(IN THOUSANDS)
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ASSETS:
Investments at market value
(Cost - $19,818,062) $ 19,340
Cash on deposit with custodian 1
Interest receivable 220
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TOTAL ASSETS 19,561
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LIABILITIES:
Accrued advisory fees payable 7
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TOTAL LIABILITIES 7
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NET ASSETS (Equivalent to $9.82 per
share based on 1,991,795 shares of
beneficial interest outstanding;
unlimited number of shares authorized)
$ 19,554
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COMPONENTS OF NET ASSETS:
Paid in capital $ 19,912
Undistributed net investment income 190
Unrealized depreciation of investments (478)
Accumulated net realized loss on
investments (70)
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NET ASSETS $ 19,554
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STATEMENT OF OPERATIONS
FOR THE PERIOD MAY 3, 1999 (COMMENCEMENT OF OPERATIONS)
TO JUNE 30, 1999 (UNAUDITED)
(IN THOUSANDS)
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INVESTMENT INCOME
INCOME:
Interest $ 205
EXPENSES:
Investment advisory fees 15
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NET INVESTMENT INCOME 190
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REALIZED AND UNREALIZED LOSS ON
INVESTMENTS
Net realized loss from investments (70)
Unrealized depreciation of investments (478)
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NET REALIZED AND UNREALIZED LOSS ON
INVESTMENTS (548)
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NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ (358)
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The Notes to Financial Statements are an integral part of these statements.
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CIGNA VARIABLE PRODUCTS INVESTMENT GRADE BOND FUND 4
STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)
FROM MAY 3, 1999* TO
JUNE 30, 1999
(IN THOUSANDS)
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OPERATIONS:
Net investment income $ 190
Net realized loss from
Investments (70)
Unrealized depreciation
on investments (478)
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Net decrease in net assets
from operations (358)
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CAPITAL SHARE TRANSACTIONS:
Net increase from capital share
Transactions 19,912
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NET INCREASE IN NET ASSETS 19,554
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NET ASSETS:
Beginning of period -
End of period (including undistributed
net investment income of $189,941) $19,554
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* Commencement of operations.
The Notes to Financial Statements are an integral part of these statements.
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CIGNA VARIABLE PRODUCTS INVESTMENT GRADE BOND FUND NOTES TO FINANCIAL 5
STATEMENTS (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES. CIGNA Variable Products Investment Grade
Bond Fund (the "Fund") is a separate series of CIGNA Variable Products Group, a
Massachusetts business trust (the "Trust"). The Trust is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Fund's primary objective is to provide the
highest current income attainable consistent with reasonable risk as determined
by the Fund's investment adviser, through investment in a professionally
managed, diversified portfolio of fixed-income securities. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates. The following is a summary of significant accounting
policies consistently followed by the Fund in the preparation of its financial
statements.
A. SECURITY VALUATION - Debt securities traded in the over-the-counter market,
including listed securities whose primary markets are believed to be
over-the-counter, are valued on the basis of valuations furnished by brokers
trading in the securities or a pricing service, which determines valuations for
normal, institutional-size trading units of such securities using market
information, transactions for comparable securities and various relationships
between securities which are generally recognized by institutional traders.
Short-term investments with remaining maturities of up to and including 60 days
are valued at amortized cost, which approximates market. Short-term investments
that mature in more than 60 days are valued at current market quotations. Other
securities and assets of the Fund are appraised at fair value as determined in
good faith by, or under the authority of, the Fund's Board of Trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - Security transactions
are accounted for on the trade date (date the order to buy or sell is executed).
Dividend income is recorded on the ex-dividend date, and interest income is
recorded on the accrual basis. The Fund does not amortize premiums or discounts
for book purposes, except for original issue discounts which are amortized over
the life of the respective securities. Securities gains and losses are
determined on the basis of identified cost.
C. FEDERAL TAXES - It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income and capital gains to its shareholders.
Therefore, no Federal income or excise taxes on realized income have been
accrued.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions are
recorded by the Fund on the ex-dividend date. Payments in excess of financial
accounting income due to differences between financial and tax accounting, to
meet the minimum distribution requirements for tax basis income, are deducted
from paid in capital when such differences are determined to be permanent.
3. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES. Investment
advisory fees are paid or accrued to CIGNA Investments, Inc. ("CII"), certain
officers and directors of which are affiliated with the Fund. Such advisory fees
are based on an annual rate of 0.50% of the Fund's average net asset value.
4. TRUSTEES' FEES. Trustees' fees represent remuneration paid or accrued to
Trustees who are not employees of CIGNA Corporation or any of its affiliates.
Trustees may elect to defer receipt of all or a portion of their fees, which are
invested in mutual fund shares in accordance with a deferred compensation plan.
5. PURCHASES AND SALES OF SECURITIES. Purchases and sales of securities
(excluding short-term obligations) for the period ended June 30, 1999 were
$45,231,994 and $25,998,868, respectively.
As of June 30, 1999, the cost of securities for federal income tax purposes was
$19,858,898. At June 30, 1999 unrealized depreciation for Federal income tax
purposes aggregated $518,942 of which $8,039 related to appreciated securities
and $526,981 related to depreciated securities.
6. CAPITAL STOCK. The Fund offers an unlimited number of shares of beneficial
interest without par value. All of the shares outstanding at June 30, 1999 were
held by Connecticut General Life Insurance Company relating to variable
universal life insurance contracts issued by that company.
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CIGNA VARIABLE PRODUCTS INVESTMENT GRADE BOND FUND Investments in Securities 6
June 30, 1999 (Unaudited)
(Continued)
Transactions in capital stock were as follows:
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For the Period May 3, 1999*
to June 30, 1999
Shares Amount
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Amount sold 2,006 $20,047
Amount issued to shareholders
in reinvestment of dividends
and distributions - -
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2,006 20,047
Amount redeemed (14) (135)
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Net increase 1,992 $19,912
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* Commencement of operations.
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CIGNA VARIABLE PRODUCTS INVESTMENT GRADE BOND FUND INVESTMENTS IN SECURITIES 7
June 30, 1999 (Unaudited)
(Continued)
8. FINANCIAL HIGHLIGHTS. The following table includes data, ratios and
supplemental data for a share outstanding throughout each period and other
performance information:
(UNAUDITED)
FROM MAY 3, 1999*
TO JUNE 30, 1999
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PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (1) 0.10
Net realized and unrealized gains (losses) (0.28)
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TOTAL FROM INVESTMENT OPERATIONS (0.18)
LESS DISTRIBUTIONS:
From net investment income -
From capital gains -
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TOTAL DISTRIBUTIONS -
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NET ASSET VALUE, END OF PERIOD $ 9.82
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TOTAL INVESTMENT RETURN (2) -1.80%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000 omitted) $19,554
Ratio of expenses to average net assets (3) 0.50% +
Ratio of net investment income to average net
assets (3) 6.17% +
Portfolio turnover 483%
(1) Net investment income per share has been calculated in accordance with
SEC requirements, with the exception that end of year accumulated
undistributed/(overdistributed) net investment income has not been adjusted
to reflect current year permanent differences between financial and tax
accounting.
(2) Total investment return based on per share net asset value reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes distributions were reinvested at net asset value.
(3) Annualized ratios of expenses and net investment income to average net
assets prior to the waiver of expenses were 0.65% and 6.02%, respectively.
* Commencement of operations.
+ Annualized.
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CIGNA VARIABLE PRODUCTS INVESTMENT GRADE BOND FUND INVESTMENTS IN SECURITIES 8
June 30, 1999 (Unaudited)
(Continued)
PORTFOLIO COMPOSITION
(Unaudited)
June 30, 1999
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MARKET % OF
QUALITY RATINGS* OF VALUE MARKET
BONDS (000) VALUE
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Aaa/AAA $ 13,231 70.8%
Aa/AA 737 4.0%
A/A 2,078 11.1%
Baa/BBB 2,188 11.7%
Ba/BB 154 0.8%
B 101 0.5%
Not Rated 203 1.1%
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Net increase $18,692 100.0%
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*The higher of Moody's or Standard & Poor Ratings.
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CIGNA VARIABLE PRODUCTS INVESTMENT GRADE BOND FUND 9
<TABLE>
<CAPTION>
TRUSTEES OFFICERS
<S> <C> <C>
Thomas C. Jones
Hugh R. Beath PRESIDENT, CIGNA INVESTMENT Richard H. Forde
ADVISORY DIRECTOR, MANAGEMENT AND CIGNA PRESIDENT
ADMEDIA CORPORATE ADVISORS, INC. INVESTMENTS, INC.
Russell H. Jones Paul J. McDonald Alfred A. Bingham III
VICE PRESIDENT AND TREASURER SENIOR EXECUTIVE VICE PRESIDENT VICE PRESIDENT AND TREASURER
KAMAN CORPORATION AND CHIEF ADMINISTRATIVE OFFICER,
FRIENDLY ICE CREAM CORPORATION Jeffrey S. Winer
VICE PRESIDENT AND SECRETARY
</TABLE>
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CIGNA Variable Products Investment Grade Bond Fund is an open-end, diversified
management investment company that invests primarily in fixed-income securities.
The investment adviser is CIGNA Investments, Inc., 900 Cottage Grove Road,
Hartford, Connecticut 06152.
