Market Sector Update

• Domestic markets rebounded sharply in the first quarter of 2019, with the S&P 500 Index, the Portfolio’s equity benchmark, positing its strongest quarterly performance in nearly 10 years.
• The S&P 500 Index advanced nearly 14% with information technology, industrials energy and consumer discretionary sectors leading the way. Every sector posted a positive return for the quarter with the laggards being health care and financials.
• Despite the pro-cyclical bias of the equity market, the 10-year U.S. Treasury yield declined 11 basis points (bps) to 2.57%. The yield curve continued to flatten with the spread relationship between the 2-year and 10-year U.S. Treasuries ending the quarter at 14 bps, down from 19 bps at the start of the year.
• The Portfolio’s fixed income benchmark, the Bloomberg Barclays U.S. Government/Credit Index, increased 3.26% during the quarter as the Treasury market rallied due to falling interest rates and the duration benefit from curve flattening. Investment grade credit spreads tightened to 113 bps, which also contributed to the benchmark's positive return for the quarter.

Portfolio Strategy

• The Portfolio’s equity portfolio delivered a positive return for the period, and was in line with the benchmark before the effect of sales charges. Overweight positions to the industrials and energy sectors positively impacted relative performance. In addition, strong stock selection in the consumer staples and energy sectors was a tailwind.
• The fixed income portion of the Portfolio advanced slightly, outperforming the benchmark return. The portfolio’s relative underweight of Treasuries positively impacted performance as credit spreads tightened, resulting in stronger performance from corporate credit. In addition, strong security selection in corporate credit was a positive contributor to performance. Duration stands at approximately 90% of the benchmark. The portfolio’s Treasuries position has increased and is in line with the benchmark.
• The Portfolio outperformed the Morningstar U.S. Fund Allocation 50%-70% Equity category average. Performance was positively impacted by an overweight of equities, which outperformed fixed income during the quarter, and strong security selection in the fixed-income sleeve.

Outlook

• As we look ahead, global economic growth is likely to decelerate over the next several months, but we expect it to remain positive. As we have previously highlighted, individual and corporate tax reform was a meaningful positive for the domestic economy which, along with lighter regulation and a generally more business-friendly political climate, was supportive for growth.
• However, the uncertainties around political, monetary and trade policies have been stubbornly persistent and are likely to linger for most of this year. While we believe domestic economic growth will continue, the lagged effects of tighter monetary policy and waning benefits from fiscal stimulus will be a headwind.
• As a result, we are closely watching inflation rates and inflation expectations which have been modest, and must remain so, in order to allow our central bank to respond to slower growth and adjust the pace of monetary policy normalization. As the domestic economy grows, we expect the Federal Reserve to raise interest rates at a very 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 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 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 March 31, 2019, 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 strategy 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.