2003: A BETTER TIME FOR GIC ISSUERS

Throughout our seventeen-year history, FCM has primarily focused its stable value investment activities in diversified portfolios of guaranteed investment contracts (GICs) issued by major life insurance companies. We have found several relative value advantages in using GICs over other stable value products including their policyholder status and superior yield premiums relative to other high-grade obligations. In general, GIC issuers represent the most creditworthy segment of a high quality, mature industry that exhibits strong credit fundamentals including: solid capital levels, diversified revenue and earnings sources, consistent operating cash flows, and conservative balance sheets.

The credit fundamentals of FCM's GIC issuer universe and the life insurance industry as a whole rebounded in 2003. During 2001 and 2002, the economic downturn and financial markets resulted in pressures on the credit profile of the life insurance industry. While GIC issuers tended to fare better than other life companies and the life insurance industry in general fared better than most, several GIC issuers did experience lower operating results and some deterioration in their capital positions.During 2003, market conditions improved significantly as the stock markets rebounded from three years of negative returns; the credit markets stabilized following unprecedented levels of corporate bond defaults; and interest rates rose steadily off their historic lows. This translated into solid improvements in earnings and capital positions for GIC issuers, which benefited from lower investment losses and improved profitability on equity-linked products. Although the low interest rate environment will continue to challenge GIC issuers, FCM believes that the significant improvement in the operating environment over the last year will continue to translate into improving credit fundamentals.

During 2003, the universe of GIC issuers that FCM follows reported solid improvement in aggregate capital positions with total statutory surplus increasing by 13.5% to $94 billion, compared to more modest growth of 6% in 2002. The median ratio of total surplus to general account assets increased from 7.88% in 2002 to 8.65% in 2003, still somewhat below the levels reported in the late nineties. As of year-end 2003, FCM's GIC universe reported an average risk-based capital (RBC) ratio of 355% (total adjusted capital to company action level), an increase from 325% in 2002. Contributing to the improved capital positions were strong gains in statutory earnings with total after-tax operating income increasing almost 10% to $10.2 billion and net income doubling to $9.7 billion. Operating earnings benefited from the strong performance of the equity markets, which translated into higher asset balances and fee income on equity-linked products, along with higher demand for variable products. The large jump in statutory net income was primarily attributable to the much improved credit environment during 2003. According to Moody's Investors Service, the global default rate for all corporate issuers, on a dollar volume-weighted basis, fell to .97% in 2003 from a record high 5.3% in 2002. As a result, GIC issuers reported significantly lower realized investment losses in 2003, compared to the large write-downs taken in 2002 and 2001 that included some of the largest corporate bankruptcies in history. In fact, the GIC universe reported an aggregate net capital gain (realized and unrealized) of nearly $4 billion in 2003, compared to a net capital loss of $7.7 billion in 2002.

GIC issuers for the most part have traditionally maintained conservative investment portfolios. Since the commercial real estate problems of the early nineties, issuers have increasingly focused their investing activities into diversified bond portfolios, which currently represent almost 75% of the average GIC issuer's invested assets. In general, GIC issuer bond portfolios are conservatively managed with over 90% invested in investment grade securities and significant diversification by individual issuer and sector. As of year-end 2003, average below investment grade (BIG) bond holdings decreased to 8.0% of total bonds from 8.8% in 2002, as issuers reduced their exposures after a record number of "fallen angels" inflated BIG levels. The majority of holdings are in the highest BIG rating class of BB, and FCM considers current levels to be manageable given the sizable financial resources available to GIC issuers to absorb potential losses. After bond holdings, commercial mortgages represent the second largest investment allocation representing approximately 10% of the average GIC issuer's invested assets. Over the past few years, this asset class has performed very well with the average ratio of non-performing loans to total mortgages declining to only .2% in 2003. Going forward, the commercial real estate markets may weaken as vacancy rates rise and higher interest rates deflate property values. Nonetheless, a moderate degree of deterioration would have only a negligible impact on overall asset quality.

In summary, we expect stronger results to continue to be reported and view recent operating environment trends as positive for the credit profiles of GIC issuers.