N-30B-2 1 cis3q01.txt THIRD QUARTER REPORT TO SHAREHOLDERS 2001 ________________________________________________________________________________ DEAR SHAREHOLDERS: OUR THOUGHTS AND PRAYERS GO TO THE FAMILIES AND FRIENDS OF ALL THOSE WHO WERE IMPACTED BY THE HORRENDOUS ATTACKS ON THE U.S. ON SEPTEMBER 11. THE IMPRESSIVE DEDICATION OF RESCUE WORKERS AND THE OVERWHELMING CONCERN OF CITIZENS THROUGHOUT THE UNITED STATES AND THE WORLD HAS HELPED TO UNITE US ALL, AS WE MOVE FORWARD WITH RESOLVE. OUR REPORT FOR CIGNA INVESTMENT SECURITIES, INC. (THE "FUND") COVERING THE NINE MONTHS ENDED SEPTEMBER 30, 2001 FOLLOWS. MARKET SUMMARY Weakening business conditions, the further decline in corporate profits, and the enormous uncertainties surrounding the unprecedented events of September 11 caused investors to become highly risk averse. As expected, investors fled from all risk assets and, in a classic "flight to quality", stampeded into money market funds and short- and intermediate-term U.S. Treasury securities. Investment-grade corporate bonds, as measured by the Lehman Brothers U.S. Credit Index, posted an absolute return of 3.83% and a negative excess return of approximately 1.84 % for the third quarter, underperforming all other major investment-grade fixed income classes on an absolute and duration-adjusted basis. According to Lehman Brothers, September was the second worst month of negative excess returns since 1990, when records of this type were first tracked. High yield bonds, after a stellar performance in July and August when the Lehman Brothers High Yield Bond Index gained 1.47% and 1.18%, respectively, declined a whopping 6.72% in September. This sudden reversal brought third quarter performance to a negative 4.23%, one of the largest declines on record. Mortgage rates are near 30-year lows, sparking a wave of refinancing. This anticipated deluge in supply has caused mortgage-backed securities (MBS) to underperform the bond market, as measured by the Lehman Brothers Aggregate Bond Index. The mortgage market, as measured by the Salomon Smith Barney Mortgage Securities Index, returned 4.30% for the quarter and 8.13% for the year to date. PERFORMANCE The Fund underperformed the Lehman Brothers Aggregate Bond Index for the third quarter by 226 basis points, as it posted a net total return of 2.35% for the quarter and 6.43% year-to-date, versus returns of 4.61% and 8.39%, respectively, for the Index. The Fund's return, based on the market value of its shares traded on the New York Stock Exchange was 1.98% and 8.65% for the quarter and year-to-date, respectively. (CONTINUED ON PANEL 4) 1
-------------------------------------------------------------------------------------------------------------------------- CIGNA INVESTMENT SECURITIES, INC. FINANCIAL SUMMARY For the Nine Months Ended September 30 (Unaudited) (In Thousands) --------------------------------------------------------------------------------------------------- 2001 2000 ---- ---- Net investment income $3,930 $4,196 Net realized and unrealized gain (loss) $1,579 $214 Per share: Net investment income $0.82 $0.88 Dividends from net investment income $0.84 $0.84 Net asset value at end of period $18.42 $17.87
-------------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME PER SHARE For the Nine Months Ended September 30 (Unaudited) -------------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ----- ---- ---- ---- ---- $0.82 $0.88 $0.88 $0.90 $0.93
-------------------------------------------------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES September 30, 2001 (Unaudited) (In Thousands) --------------------------------------------------------------------------------------------------------------------------- ASSETS: Investments in securities at value (Cost - $119,792) $ 119,313 Cash 18 Receivable for investments sold 26,870 Interest and dividends receivable 926 Investment for Directors' deferred compensation plan 185 Net receivable for open forward currency contracts 53 Futures variation margin receivable 6 ------------------- Total assets 147,371 ------------------- LIABILITIES: Payable for investments purchased 58,642 Deferred Directors' fees payable 185 Net swap interest payable 144 Accrued advisory fees payable 41 Audit and legal fees payable 24 Transfer agent fees payable 22 Administrative services fees payable 18 Other accrued expenses 23 ------------------- TOTAL LIABILITIES 59,099 ------------------- NET ASSETS $ 88,272 =================== NET ASSET VALUE PER SHARE Applicable to 4,792 shares of $0.10 par value capital stock outstanding (12,000 shares authorized) $ 18.42 ===================
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--------------------------------------------------------------------------------------------- CIGNA INVESTMENT SECURITIES, INC. STATEMENT OF OPERATIONS AND CHANGE IN NET ASSETS For the Nine Months Ended September 30, 2001 (Unaudited) (In Thousands) --------------------------------------------------------------------------------------------- INVESTMENT INCOME: Interest and swap income $4,488 Dividend income 75 ----------- 4,563 EXPENSES: Investment advisory fees $348 Custodian fees 81 Transfer agent fees 56 Shareholder reports 38 Administrative services 38 Auditing and legal fees 27 State taxes 17 Directors' fees 15 Stock exchange fees 12 Other 1 633 ----------- ----------- NET INVESTMENT INCOME 3,930 Net realized gain from investments 3,049 Net realized gain from forward currency contracts 11 Net realized loss from futures contracts (87) Net unrealized depreciation on investments (1,334) Net unrealized depreciation on forward currency contracts (98) Net unrealized appreciation on futures contracts 38 ----------- NET INCREASE IN NET ASSETS FROM OPERATIONS 5,509 DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (4,026) ----------- NET INCREASE IN NET ASSETS 1,483 NET ASSETS: Beginning of period 86,789 ----------- End of period (includes undistributed net investment income of $75) $88,272 ===========
3 The main drivers of the Fund's underperformance were our underweight position in U.S. Treasury and Agency securities and overweight in investment-grade corporate bonds and high yield bonds. The Fund's selection of corporate securities was relatively defensive over the period. While we did a reasonably good job of selecting industries that produced a number of positive results, our overall security selection contributed negatively to performance due to one credit, AT&T Canada (AT&T), whose bonds fell 40% during the quarter, as the market began to question the Canadian firm's strategic value to AT& T Corporation as well as the AT&T's contractual commitment to AT&T Canada. While our allocation to the high yield sector was more conservative than historical portfolio allocations, high yield spreads, widened 200 bps during the quarter, due to a longer and deeper economic slowdown. Bonds hit particularly hard in our portfolio during September include Budget Group, Global Crossing, and Northwest Airlines. We expect to see increased defaults on companies that do not have the balance sheet strength to sustain revenue decline. OUTLOOK We had viewed the massive monetary easing by the Federal Reserve in early 2001 as setting the stage for diminishing the negative earnings momentum and for the gradual acceleration of economic growth. Now, we expect the economic recovery to be delayed until the first or second quarter of 2002. Nevertheless, we remain constructive on the corporate market given our positive view of the credit quality and leverage ratios for corporate America. We continue to believe that the corporate bond sector offers better relative value on an absolute basis than alternative spread classes. Sincerely, /s/ Richard H. Forde Richard H. Forde CHAIRMAN OF THE BOARD AND PRESIDENT CIGNA INVESTMENT SECURITIES, INC. CIGNA Investment Securities, Inc. is a closed-end, diversified management investment company that invests primarily in debt securities. The investment adviser is TimesSquare Capital Management, Inc., 900 Cottage Grove Road, Hartford, Connecticut 06152. Shareholders may elect to have dividends automatically invested in additional shares of CIGNA Investment Securities, Inc. by participating in the Automatic Dividend Investment Plan (the "Plan"). For a brochure describing this Plan or general inquiries about your account, contact EquiServe, Stock Transfer Department, P.O. Box 8200, Boston, Massachusetts, 02266-8200, or call 1.800.426.5523. [CIGNA TREE LOGO GRAPHIC APPEARS HERE/R/] CIGNA CIGNA Investment Securities, Inc. [CIGNA TREE LEAVES GRAPHIC APPEARS HERE] P.O. Box 13856 Philadelphia, PA 19101 CIGNA INVESTMENT SECURITIES, INC. -------------------- ________________________________________ PRESORTED STANDARD U.S. POSTAGE SEMIANNUAL REPORT PAID SEPTEMBER 30, 2001 SO. HACKENSACK, NJ PERMIT 750 -------------------- PRINTED ON RECYCLED PAPER 542775 9/01 Q3-9/01 [CIGNA TREE LOGO GRAPHIC APPEARS HERE /R/] CIGNA