Market Sector Update

• Equity and fixed-income markets rallied in the second quarter of 2017 although the pace of the advance slowed from the rate experienced in the first quarter.
• During the second quarter, the S&P 500 Index (the Portfolio’s equity benchmark) rose approximately 3.1%, led by health care (up by 7%), then industrials, financials and technology (each up by 4%). Offsetting this strength were telecommunications (down by 7%) and energy (down by 6%).
• The 10 year Treasury yield fell 9 basis points over the course of the quarter to 2.3% despite a 25 basis points increase in the Federal Funds Rate in June due to a flattening of the treasury yield curve.
• The Bloomberg Barclays U.S. Government/Credit Index (the Portfolio’s fixed-income benchmark) rose approximately 1.7% during the quarter due to the positive duration impact from curve flattening in the treasury market along with continued spread compression for corporates.

Portfolio Strategy

• The Portfolio rose in the quarter but underperformed its Morningstar peer group. Both the equity and fixed-income portions of the portfolio underperformed their respective benchmarks and detracted from the relative performance of the strategy versus peers.
• During the quarter, the equity portfolio advanced. The technology, financials, health care, industrials and consumer discretionary sectors were the primary drivers of the Portfolio’s performance during the quarter. In addition, relative performance benefited from strong stock selection in the financials sector. Positions in Carnival, Autodesk, Applied Materials, Las Vegas Sands, Intercontinental Exchange, Knight Transportation, United Health and Anthem exhibited particularly strong returns.
• Offsetting this strength was an overweight of the energy sector and poor stock selection in the energy sector. Positions in Newfield Exploration, Noble Energy, O Reilly Automotive, Schlumberger, Twenty-first Century Fox and Helmerich & Payne were notable detractors. Over the course of the quarter, the Portfolio increased its weight in financials primarily due to the initiation of a position in Wells Fargo.
• The fixed-income portion of the Portfolio advanced but underperformed the benchmark. Our relative overweight of corporate credit helped performance in the quarter as spreads compressed but was entirely offset by a short duration position relative to the benchmark. The yield curve continued to flatten during the quarter as the Federal Reserve (Fed) signaled a steady path of forecasted interest rate increases over the next 12 months while expectations for future economic growth and inflation faltered.
• Credit spreads narrowed in both the Investment Grade and High Yield debt markets, continuing their recovery from a dramatic widening that climaxed in February of 2016. The portfolio continues to be short duration with an emphasis in high-grade bonds as we look to reduce both credit and duration risk.

Outlook

• As we look ahead, the optimism of the past several months is enticing and persuasive in many respects. We think individual and corporate tax reform is a meaningful positive for the domestic economy which, along with less regulatory oversight and a generally more business-friendly political climate, is supportive for the growth outlook. However, the uncertainties around political policies and economic growth are stubbornly persistent. In addition, the recognition of the benefits associated with many of the proposed political changes are more likely to be recognized in the form of corporate revenue, earnings and cash flow growth in 2018, which leads us to believe that volatility is likely to be elevated in the near term.
• We believe global growth will improve modestly as clarity around fiscal and monetary policy improve; strong balance sheets (corporate and consumer) and improving confidence readings translate into higher spending; and the lagged effect of historical stimulus continues to provide a persistent 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 provide support to their local economies as needed. As the domestic economy gradually improves, we expect the Fed to raise interest rates at a very modest pace.
• 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 12 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 manager 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, 2017, 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.

Top 10 holdings (%) as of 06/30/2017: Apple, Inc. 2.4, JPMorgan Chase & Co. 2.3, Carnival Corp. 2.3, Comcast Corp. 2.0, Autodesk, Inc. 2.0, PNC Financial Services Group, Inc. 1.9, Intercontinental Exchange, Inc. 1.9, Shire Pharmaceuticals Group 1.8, Johnson Controls, Inc. 1.8. and Microsoft Corp. 1.7.

The S&P 500 Index is composed of 500 selected common stocks chosen for market size, liquidity, and industry grouping, among other factors. The Bloomberg Barclays U.S. Gov’t/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 50 to 65). 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 manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Portfolio’s prospectus.

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.