Market Sector Update

• Domestic markets stabilized in the second quarter after a choppy start of the year noted by bouts of volatility.
• The S&P 500 Index, the Portfolio’s equity benchmark, advanced 3.4% for the quarter. This return on performance was led by the energy sector (up by 13%) and followed by consumer discretionary (up by 8%) and information technology (up by 7%.) Offsetting this strength were financials and industrials (each down 3%), as well as consumer staples continuing its decline from the previous quarter (down 2%.)
• Yields on the 10-year U.S. Treasury increased 12 basis points (bps) over the course of the quarter to 2.86%, and the Treasury curve flattened. The spread relationship between the two-year and 10-year U.S. Treasuries ended the quarter at 33 basis points, down from 52 basis points at the start of the year.
• The Portfolio’s fixed income benchmark, the Bloomberg Barclays U.S. Govternment/Credit Index, declined approximately 0.33% during the quarter due to rising interest rates and a modest widening of credit spreads for corporates.

Portfolio Strategy

• The Portfolio outperformed the Morningstar U.S. Fund Allocation 50%-70% Equity category average. Performance benefited from an overweight of equities, which outperformed fixed income during the quarter as well as a positive impact from security selection.
• During the quarter, the Portfolio’s equity portion advanced and was in line with the benchmark. The health care, consumer discretionary and energy sectors were the primary drivers of the Portfolio’s absolute return. Relative to the benchmark, healthcare and industrials were areas of stock selection outperformance.
• Areas of weakness included a relative underweight position to technology, which continued to perform well during the quarter; a relative overweight position to financials, which had poor returns for the period and poor stock selection in the materials sector.
• The fixed income portion of the Portfolio advanced slightly, outperforming the benchmark return. Our relative underweight of Treasuries helped performance in the quarter as interest rates rose and our long-standing short duration position relative to the benchmark benefited performance. Strong security selection in the energy and industrial sectors also complemented the Portfolio’s return during the period. The Portfolio continues to be short duration with a growing emphasis in high grade bonds as we look to minimize both credit and duration risk.

Outlook

• As we look ahead, global economic growth looks durable with some particularly encouraging signs of stabilization and recovery in the energy and industrial sectors. Domestically, factors like individual and corporate tax reform is a meaningful positive for the economy which, along with less regulatory oversight and a generally more businessfriendly political climate are supportive for the growth outlook.
• However, the uncertainties around political policies and economic growth are stubbornly persistent as evidenced by the recent rhetoric over trade disputes. In addition, the valuation of asset markets gives us some pause. We continue to believe global growth will improve as readily available access to credit and improving confidence readings translate into higher spending; growing clarity around fiscal, trade and monetary policies inspire confidence in the durability of economic expansion; and the lagged effect of historical stimulus continues to provide a persistent tailwind to growth.
• We continue to believe global growth will improve as readily available access to credit and improving confidence readings are likely to translate into higher spending; growing clarity around fiscal, trade and monetary policies may inspire confidence in the durability of economic expansion; and the lagged effect of historical stimulus continues to provide a tailwind to growth.
• We are closely watching inflation rates and inflation expectations which have been modest and must remain so in order to allow global central banks to pursue a gradual pace of monetary policy normalization through reduced monetary stimulus and higher short-term interest rates. As the domestic economy improves, we expect the U.S. Federal Reserve to raise interest rates at a modest pace and continue the process of winding down its balance sheet.
• While we continue to monitor macroeconomic forces and trends, we maintain an emphasis on finding high quality, growing companies whose securities are trading at a reasonable valuation with visible catalysts to drive relative outperformance over the next twelve months. This approach has served investors well over time, and our confidence in it has not waned.

The opinions expressed are those of the Portfolio's managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through June 30, 2018, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Rick Perry served as a portfolio manager on the Fund until April 12, 2018.

The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-cap U.S. equity market. The index includes 500 of the top companies in leading industries of the U.S. economy. It is not possible to invest directly in an index.

The Bloomberg Barclays U.S. Government/Credit Index measures the performance of U.S. dollar-denominated United States Treasuries, government-related, and investment-grade U.S. corporate securities that have a remaining maturity of greater than or equal to one year. In addition, the securities have $250 million or more of outstanding face value and are fixed-rate and non-convertible securities. It is not possible to invest directly in an index.

Risk factors: The value of the Portfolio's shares will change, and you could lose money on your investment. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed-income securities are subject to interest rate risk and, as such, the net asset value of the Portfolio may fall as interest rates rise. The lower-rated securities in which the Portfolio may invest may carry greater risk of nonpayment of interest or principal then higher-rated bonds. In addition to the risks typically associated with fixed-income securities, loan participations in which the Portfolio may invest carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loan participations may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. The Portfolio's emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform nondividend paying stocks and the market as a whole over any period of time. In addition, there is no guarantee that the companies in which the Portfolio invests will declare dividends in the future or that dividends, if declared, will remain at current levels or increase over time. The amount of any dividend the company may pay may fluctuate significantly. In addition, the value of dividend-paying common stocks can decline when interest rates rise as fixed-income investments become more attractive to investors. This risk may be greater due to the current period of historically low interest rates. The Portfolio typically holds a limited number of stocks (generally 45 to 55). As a result, the appreciation or depreciation of any one security held by the Portfolio will have a greater impact on the Portfolio's net asset value than it would if the Portfolio invested in a large number of securities. The value of a security believed by the Portfolio's managers to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.