2005: A STABLE TIME FOR GIC ISSUERS

Throughout our nineteen-year history, FCM has primarily focused its stable value investment activities in diversified portfolios of traditional 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 comparable 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 remained solid in 2005, continuing the improving trend from the difficult environment back in 2001 and 2002. After the strong rebound in 2003, financial market conditions continued to stabilize in 2004 and 2005 with relatively low levels of corporate defaults, positive returns for the equity markets, and steadily higher interest rates. This has translated into solid earnings performance and improved balance sheet profiles of GIC issuers with credit fundamentals making a full recovery from the effects of the economic and equity market downturn just a few years ago. In response to the stable operating environment and solid financial performance, all of the major credit rating agencies currently maintain a "stable outlook" for the life insurance industry and the vast majority of GIC issuers have stable outlooks for their financial strength ratings (typically AA or higher).

As of year-end 2005, the universe of GIC issuers that FCM follows continued to report sound capitalization with total statutory surplus of $98 billion, down slightly from the historically high total surplus level of $100 billion at year-end 2004, but well above the $80 billion reported at year-end 2002. Despite the slight decline in total surplus, individual issuer capital positions remained favorable when compared to historical levels with the average ratio of total surplus to general account assets ending 2005 at 9.9%, down slightly from 10.1% at year-end 2004, as surplus augmentation remained in line with asset growth. On a risk-adjusted basis, capital ratios improved modestly with FCM's GIC universe reporting an average NAIC Risk-Based Capital (RBC) ratio of 417% (total adjusted capital to company action level), an increase from 404% at year-end 2004. Although declining somewhat from the record levels achieved in 2004, GIC issuers reported healthy statutory earnings in 2005 with aggregate operating income of nearly $11 billion and net income of nearly $13 billion. Overall, statutory earnings performance continued to benefit from low realized investment losses, higher fee revenue on augmented asset balances for equity-linked products, and stabilizing net interest spreads.

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 2005, average below investment grade bond holdings decreased to only 6.0% of total bonds, compared to 6.7% in 2004 and close to 9% in 2002. This decline in high yield holdings has resulted largely from the improved credit environment with lower levels of "fallen angels", along with strategic decisions to reduce exposure to this asset class due to historically high valuations. Moreover, the majority of these bonds are in the highest below investment grade rating class of BB. That being said, FCM considers current positions in these higher risk assets to be very manageable given the sizable financial resources available to GIC issuers to absorb potential losses. After bond holdings, commercial mortgages comprise 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 at only 0.1% as of year-end 2005. Going forward, the commercial real estate market is expected to weaken somewhat if interest rates continue their upward trend. Nonetheless, a moderate degree of deterioration would have only a negligible impact on overall GIC issuer asset quality.

In summary, we expect GIC issuers to continue to be one of the most creditworthy segments of the high-grade fixed income market and FCM views recent operating trends as further supporting credit fundamentals.