WIXLIB

Long Treasuries Outperform in “Risk-Off” PeriodsOctober 31, 2016Calendar Year Returns Since the Turn of the CenturyS&P500Long Treasury403020Percent100-10-20-30-402000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTDAnnualized Return Since 2000 (%)Correlation (2000 to Oct. 2016)Source: Bloomberg Barclays, Western Asset11S&P 5004.17-0.29Long Treasury7.88

Long Treasuries Have Provided Favorable Diversification BenefitsOctober 31, 2016Growth of 1S&P50060/40 Aggregate60/40 Long Treasury3.0 2.772.5 2.27Percent2.0 2.001.51.00.50.0Dec Sep Jun Mar Dec Sep Jun Mar Dec Sep Jun Mar Dec Sep Jun Mar Dec Sep Jun Mar Dec Sep Jun99 00 01 02 02 03 04 05 05 06 07 08 08 09 10 11 11 12 13 14 14 15 16Annualized Return (2000 to Oct. 2016, %)Peak-to-Trough Equity DrawdownsAug-'00 to Mar-'03 Drawdown (%)Oct-'07 to Feb-'09 Drawdown (%)Source: Bloomberg Barclays, Western Asset12S&P 5004.1760/40 S&P/Agg4.9460/40 S&P/Tsy6.18-42.51-50.95-19.82-32.54-18.05-29.59

People, Philosophy and Process13

PeopleThe US Government investment team leverages Western Asset’s global investment capabilitiesS. Kenneth LeechPortfolio Manager / CIOInvestment Management Professionals Chief Investment Officer: S. Kenneth Leech Deputy CIO: Michael C. Buchanan 127 Investment Professionals on five continents andseven offices, as of June 30, 2016 21 years of average experienceAmit Chopra, CFAPortfolio ManagerFrederick R. Marki, CFAPortfolio ManagerKeith A. Luna, CFAPortfolio ManagerRisk ManagementJay Lin, CFAPortfolio AnalystAlan M. Nadel, PhDPortfolio Risk ManagerNicholas MastroianniPortfolio AnalystScott A. Spear, PhDManager, US Portfolio RiskRafael Zielonka, CFAPortfolio Analyst14Western Asset Investment TeamJohn L. Bellows, PhD, CFAPortfolio ManagerPortfolio AnalystsAs of 31 Aug16US Government Investment TeamProduct SpecialistsJames J. So, CFAProduct SpecialistMajor Investment Committees Global Investment Strategy Committee Global Credit Committee US Broad Strategy Committee Global Emerging Markets Strategy Committee Unconstrained Asset Allocation CommitteeSector and Regional Teams Global credit Investment-grade High-yield Emerging markets MBS/ABS Long duration US municipal Liquidity Insurance USEuropeUKJapanAsiaBrazilAustralia /New ZealandIndependent Risk Management Function Chief Risk Officer: Kenneth J. Winston, PhD Independent evaluation of strategies and risks inportfolios Market and Credit Risk Committee 40 investment risk professionals of which 10 arePhDs, across four offices, as of June 30, 2016

PeopleThe US Broad Strategy Committee sets the overall themes for the US broad market investment strategies.US Broad Strategy CommitteeS. Kenneth LeechChief Investment OfficerAnup AgarwalMortgage andAsset-BackedJohn L. Bellows,CFAFed PolicyRyan K. Brist, CFAInvestment-GradeCreditMichael C.Buchanan, CFADeputy CIO /Global CreditAmit Chopra, CFALong DurationCarl L. Eichstaedt,CFAUS Broad MarketKevin K. KennedyLiquidityChia-Liang Lian,CFAEmerging MarketsMark S. LindbloomUS Broad MarketFrederick R. Marki,CFAInflation-LinkedDennis J.McNamara, CFALimited DurationRajiv SachdevaPortfolio &Quantitative Analysis Sets macro and sector investment themes Meets weekly to evaluate and establish the USinvestment outlook over a 6-9 month horizon.– Within the context of our global investmentoutlook– Based on long-term economic developmentsand market valuations– Leveraging sector input and broad top-downanalysis Evaluates risk factors and potential scenarios.Sets the risk tone for US investment strategiesJulien A. Scholnick,CFAUS Broad MarketAs of 31 Oct 1615Timothy J. SettelBank Loans

Investment PhilosophyThese are the core beliefs that drive our investment decision-making Markets often misprice securities. Prices can deviate from fundamental fair value, butover time, they typically adjust to reflect inflation, credit quality fundamentals and liquidityconditions. Consistently investing in undervalued securities may deliver attractiveinvestment returns.Long-term fundamentalvalue We can systematically identify mispricings. We believe we can identify and capitalizeon markets and securities that are priced below fundamental fair value. We do thisthrough disciplined and rigorous analysis, comparing prices to the fundamental fair valuesestimated by our macroeconomic and credit research teams around the globe. Our portfolios emphasize our highest convictions. The greater the difference betweenour view of fair value and markets’ pricing, the bigger the potential value opportunity. Thegreater the degree of confidence in our view of fundamentals, the greater the emphasis ofthe strategies in our portfolios. We seek diversified sources of returns. Our objective is to meet or exceed ourMultiple diversifiedstrategies16investors’ performance objectives within their tolerances for risk. We seek to diversifyinvestments and add value across interest rate duration, yield curve, sector allocation,security selection, country and currency strategies. We deploy multiple diversifiedstrategies that benefit in different environments so no one strategy dominatesperformance, helping to dampen volatility.

Investment ProcessOur time-tested investment process is designed around our value philosophy and our team-based approach.US Government Investment Process and Team InteractionMacro and CreditInvestment OutlookPortfolio ConstructionInterest Rate DurationYield CurveClient Objectivesand GuidelinesStrategicPortfolioSector / SubsectorRisk ManagementStrategy Committees US Broad Strategy Committee17US Government TeamSecuritySelectionClientPortfolio

Risk ManagementIn our culture, effective risk management is critical to successful portfolio managementIntegrating risk management into portfolio construction and in Risk management is a team effort. Robust communicationthe independent review of portfolio risks strengthens itsand escalation procedures underpin the independence andeffectiveness.transparency of risk management.Client Objectives andRisk nitoredSource: Western Asset18Client ServiceExecutivesPortfolioManagersRisk ManagersRisk Systems and ToolsCompliance ProcessMarket and CreditRisk CommitteeAlignedInvestment CommitteesClient

Model Portfolio19

Model Portfolio ConsiderationsCURRENT UNDERSTANDING OF MANDATEMODEL PORTFOLIO COMMENTSStrategic ObjectiveStructural Biases for Long Treasury Portfolios “Crisis risk offset” allocationBenchmark Bloomberg Barclays US Treasury Long Index Curve-steepener Overweight duration Liquidity premium Volatility premiumEligible Securities and limits Tracking error: 2% Agency MBS: max. 50% U.S. Treasuries: max. 100% Non-U.S. Dollar Treasury Denominated: No Only Treasuries and Agencies are allowed Non-benchmark: max. 50% Duration range: /- 10% of benchmark¹Separate Trading of Registered Interest and Principal of Securities20Portfolio Construction Notes SUMMARY: high quality portfolio with specific tilts to enhancebase case yield Curve-steepener ( 1.25yrs) provides additional “carry”/return Duration is flat relative to the benchmark due to the risks aroundpotential changes to fiscal, monetary, and regulatoryenvironment Model portfolio out-yields the benchmark by 22 basis points(0.22%)– Yield enhanced through modest allocations to less liquidsecurities such as agency debentures,STRIPS¹, and off-therun Treasuries

Sector ExposureDecember 5, 2016Model Portfolio (%)Cash Flow Yield: 3.16TreasuryDurationContrinbution (years)0.2100.0Agency0.0Cash & Cash Equivalents0.013.2Cash & Cash Equivalents2520151050Treasury93.1AgencyMarket ValueBloomberg Barclays U.S. Long Treasury Index (%)Cash Flow Yield: 2.94Notional Market ValueModel PortfolioDerivativesBloomberg Barclays U.S. Long Treasury Index17.516.01.5TreasuryNameBarclays U.S. Long Treasury IndexModel Portfolio17.517.50.0AgencyKey Rate DurationTotalDuration0.5-Year 2-Year 5-Year 10-Year 20-Year 30-Year 0.140.900.20-1.27-0.04*Represents active exposureNote: Sector exposure includes look-through to any underlying commingled vehicles if held. All weightings are a percentage of total market value. A negative cash position may be reported, which is primarily due to the portfolio’sunsettled trade activity. Data may not sum due to rounding. The benchmark does not provide an allocation to the “Emerging Markets” sector. The emerging market sector allocation shown for the benchmark above is based onWestern Asset’s emerging market countries definition for comparison purposes.21

WISER Risk Report, US Long Treasury Model PortfolioBenchmark: Bloomberg Barclays U.S. Long Treasury IndexPortfolio MV (millions, USD): 315Spread19Spread27DiversifiedRisk47As of December 5, 2016Annual Tracking Error Standard Deviation(bps)Ex-PostEx-Ante47Risk T argetUndiversifiedRisk62Rates29Volatility n Benefit:24%Spread RiskAgencyTreasuriesCashActive MV (%)13.2%-13.4%0.2%Undiversified Risk (bps)2700Diversified Risk (bps)1900Rates RiskUSD RatesDuration by TenorsShort (6m 2y)Intermediate (5y 10y)Long (20y 30y)Duration by Level/Slope FactorsLevel (10y)Slope (5/30s)Active Duration (yrs)-0.04Undiversified Risk (bps)35Diversified Risk nario Analysis: ScenariosHistoricalReturn to pre-LehmanReturn to November 2008Replay Jun '07 to Nov. '08 with CarryReturn to June 2007Replay Russia Crisis 1998Return to LT MedianReplay May and June 2013ForwardMarket Unchanged, 1y horizonLookingEurozone Continued UncertaintyEurozone Controlled BreakupChina 41,0681,424FX00000000000Credit Total Return-102-2,668 -158-1,146 -1413,244-17-3,921 0727-7-876 -11-1,129 0316-11203-211,047-741,350Note: This risk dashboard is for illustrative purposes only and reflects Western Asset's best efforts to identify and measure the major sources of risk in the portfolio. Results depicted are dependent on an underlying statistical modeland/or varying market conditions and are therefore subject to change without notice. There is no guarantee that ex-ante risk measures will be in line with their ex-post realizations.22

Appendix23

BiographiesAMIT CHOPRA18 Years Experience– Western Asset Management Company – Portfolio Manager, 2016– Pacific Investment Management Company – Senior Vice President, Portfolio Management, 2008-2016– Pacific Investment Management Company – Vice President, Supervisor Trade and Portfolio Analytics, 2001-2007– Blackrock Financial – Associate, 1998-2001– University of Southern California, B.S.– Chartered Financial AnalystFRANCES L. COOMBES18 Years Experience– Western Asset Management Company – Client Service Executive, 1998–– Columbia University, School of International and Public Affairs, M.P.P.– University of California, Berkeley, B.A.Western Asset experience reflects current position title and hire date.24

Long Duration Investment Outlook25

SummaryGlobal growth will remain slow and sustainable with US GDP potentially getting a near-termboost from Trump policiesGlobal Inflation will remain subduedCentral banks will continue aggressive accommodative policies but the FED may divergeTreasuries and sovereign bonds continue to be underpinned by global factors and low policyratesSpread sectors, especially the US consumer dependent, will continue to provide attractivereturns but valuations will be challenged if discount rates move higher26

New Considerations: President-Elect Trump’s policies and their potential impactFiscal Policy – Higher spendingStructural Policies – Tax and Regulation reliefTrade Policy – Greater protectionismMonetary Policy – More hawkishImmigration Policy – More restrictiveForeign Policy – Unclear and a potential risk27

Trump Has Proposed Looser Fiscal PolicyOutstanding questions: Will deficit concerns constrain size of fiscal easing? Will Senate Democrats backinfrastructure spending?US Federal Budget Deficit4CBO Forecast2Percent of 61986199620062016Source: Congressional Budget Office, Tax Policy Center. As of 15 Sep 16Note: The Tax Policy Center estimates the House Republican tax reform would increase the deficit by 1.3% in 2017 and 2% in 2018 and 2019. Estimates foradditional spending are less precise, but here assumed to be 500bn over coming five years.28

Tax Reform is Likely to Be Early FocusOutstanding questions: Which “loopholes” will be closed? How will foreign profits be treated? Will there be moresignificant changes to structure of corporate taxes (e.g. taxing imports, deductibility of interest payments)?Top Marginal Individual Tax Rate100Corporate Tax Rates in the OECDCorporate Income Tax Rate (%)807060PercentCurrent US Rate 35%31-359050403020House RepublicanProposal 33%1026-3021-25House RepublicanProposal 20%16-2011-15 1001910193019501970Source: Tax Policy Center. As of 31 Dec 1519902010051015Number of OECD CountriesSource: OECD. As of 30 Jun 162920

Trade PolicyTrump pledged to name China a currency manipulator and suggested he would renegotiate NAFTA. This could bevery disruptive to growth given the gross amount of US exports and imports of goods.US Goods Trade Balance1510Exports To:ChinaEuropeNAFTAPercent of GDP5Rest of World0Imports From:Goods Trade BalanceRest of ource: US Census Bureau. As of 30 Sep 16Note: This chart shows only the goods trade balance.The US runs a services trade surplus with the world of about 1.25% equal to approximately of GDP.The US current account deficit is approximately 2.5% of GDP: -3.75% goods deficit 1.25% of service surplus.3020152020

Monetary Policy Will Respond to Changes in the OutlookFollowing the change in the outlook for fiscal policy and growth, expectations for Fed hikes have moved closer to theFOMC’s own expectationsFOMC and Market Expectations for Rate HikesOIS - As of 02 Nov 16OIS - As of 28 Nov 163.0FOMC Dots Median2.5Percent2.01.51.00.50.020152016Source: Bloomberg, Federal Reserve. As of 28 Nov 16OIS Overnight indexed swap31201720182019Long Run

Inflation Expectations Suggest "Gradual" Approach to Rate HikesAlthough they have rebounded significantly following Trump’s election, inflation expectations remain lower than mid2014 levels10-Year Breakeven Inflation2.82.6Nov '16 FOMC Meeting:"Market-based measures ofinflation compensation havemoved up but remain low."2.4Percent2.22.01.8Jan '15 FOMC Meeting:"Market-based measures of inflationcompensation have declinedsubstantially in recent months."1.61.4Dec '15 FOMC Meeting:"Market-based measures ofinflation compensationremain low."1.21.0201020112012Source: Bloomberg, Federal Reserve. As of 28 Nov 163220132014201520162017

Alternative Trump Investment Themes – Markets leaning towards risk-on caseCase – Risk-off Protectionism (Mexico, China) Immigration (Mexico) Currency policy (China) Anti-globalization — Global recession?Case – Risk-on Cut taxes Increased infrastructure spending Reduced regulations Most pro-business president ever?33

Macro Outlook – Growth and InflationGlobal growth is slow but sustainable at about 3%. The US likely gets a boost but global structural impediments togrowth remain. Namely debt levels, demographics, reduced trade, productivity and a growing public sector. Astronger USD and higher rates in the US will also hold back growth.World GDP64504005Japan350Percent of GDP4Percent GrowthTotal Public and Private Debt to GDP by Region321300250UKEuro AreaUS200150100050-120012003200520072009Source: International Monetary Fund. As of 31 Dec 15Note: Reflects real GDP34201120132015000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Macro Outlook – Weak Global DemandGlobal demand remains weak with slowing nominal GDP and muted inflation in major economies.Nominal GDP Growth for Major Economies4-Qtr Avg. Growth, Nominal GDP.5US (left)43Eurozone (left)1221620141812161014Japan (left)126-11048260China (right)-34-4201120122013201420152016Source: Bureau of Economic Analysis, Bloomberg, Eurostat. As of 30 Sep ed80-23518PercentPercent224Percent6-21970 1975 1980 1985 1990 1995 2000 2005 2010 2015Source: Bloomberg. As of 30 Sep 16

Monetary Policy – The Fed Will Remain Very Cautious Due to Global InfluencesU.S. employment and inflation readings might argue for a rate hike but the weak global picture has forced the Fed toremain very cautious11Unemployment Rate: Actual and Forecast2.5Core PCE Inflation: Actual and ForecastPercent (Change Over 12-months)10Percent98762.01.51.00.550.042008 2009 2010 2011 2012 2013 2014 2015 2016Source: Federal Reserve, Bureau of Labor Statistics. As of 31 Oct 16362008 2009 2010 2011 2012 2013 2014 2015 2016Source: Federal Reserve, Census Bureau. As of 31 Oct 16

Monetary Policy – Fed is likely to hike in DecemberMarkets are pricing in two more hikes in 2017. But the Fed will look for signs from 1. Economic growth, 2. Realizedand expected inflation, and 3. Financial conditions.Long-Term Inflation ExpectationsUniversity ofNYTIPSMichigan (left)Fed (left)Breakevens 2.22.01.020122013201420152016Source: Bloomberg, New York Fed, Federal Reserve Board. As of 30 Nov 16New York Fed data as of 31 Oct 16Note: University of Michigan Survey refers to inflation expectations 5-10 yearsahead, NY Fed survey refers to expectations 3-5 years ahead, and TIPSbreakevens are 5-10 years aheadPercent2.5Index Level3.03.0Tighter1033.237Financial Conditions ource: Goldman Sachs, Bloomberg. As of 29 Nov 16Note: The Goldman Sachs financial conditions index is a weighted average ofinterest rates, credit spreads, equities and the US dollar, calibrated to the estimatedeffects of each on 1-year ahead US GDP growth

Investment Themes – Global Treasury Yields Pinned by Central Bank PoliciesCentral Bank

Highbury Pacific Capital Corp. International Paper Company John Lewis Partnership Pensions Trust Lennox International, Inc. LyonRoss Capital Management LLC Macy's, Inc. National Grid USA Nestle USA, Inc. Nisource, Inc. Orbital ATK PCS Administration (USA), Inc Pensioenfonds Horeca & Catering PPG Industries Southern California Edison Southern .