PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2021 Fidelity® Select Insurance Portfolio Key Takeaways MARKET RECAP ® • For the fiscal year ending February 28, 2021, the fund gained 15.54%, The S&P 500 index gained 31.29% for outperforming the 13.76% advance of the MSCI US IMI Insurance the 12 months ending February 28, 2021, 25/50 Index, but underperforming the broad-based S&P 500® index. a volatile but productive period for U.S. risk assets. The early-2020 outbreak and spread of COVID-19 resulted in stocks • Portfolio Manager Peter Deutsch notes that insurance stocks were hit suffering one of the quickest declines on hard in the first months of the fiscal year – which coincided with the record, through March 23, followed by a onset of the coronavirus crisis in the U.S. – but that the industry historic rebound that included the index rebounded well for the balance of the 12-month period. closing 2020 at an all-time high and gaining modest ground in the first two • The largest segments within the MSCI industry index all achieved months of the new year. The crisis and double-digit percentage gains during this period, led by life & health containment efforts caused broad insurance providers (+25%), insurance brokers (+13%) and property & contraction in economic activity, along casualty (P&C) firms (+11%). The fund outperformed the index in all with extreme uncertainty and dislocation three of those categories. in financial markets. A rapid and expansive U.S. monetary/fiscal-policy • Out-of-industry positions in the shares of two alternative asset response partially offset the economic managers, Ares Management (+52%) and Apollo Global Management disruption and fueled the market surge, as did resilient corporate earnings. The (+22%), were among the top relative contributors – with Ares the rally slowed in September, when stocks largest single contributor. began a two-month retreat amid • Congress's inability to reach a deal on Among insurers, investments in P&C provider Travelers Companies additional fiscal stimulus, as well as (+24%) and life & health insurance firm CNO Financial Group (+49%), concerns about election uncertainty, both of which were overweight stakes versus the industry index, also indications the U.S. economic recovery helped. could be slowing and a new wave of COVID-19 cases. A shift in momentum • In contrast, an underweighting in personal auto coverage companies began in October and accelerated Progressive (+24%) and Erie Indemnity (+74%), as well as untimely following the U.S. elections, with the positioning in life insurance provider Lincoln National (+31%), were approval of three breakthrough COVID- key relative detractors. 19 vaccines and prospects for additional government stimulus fueling the • As of February 28, Peter feels insurance stocks are still competitively "reflation trade" through February 28. By priced, but is concerned about the effect of extremely low interest sector for the full 12 months, information technology (+50%) and consumer rates on insurers' profitability, as well as the difficulty for them to discretionary (+43%) led all gainers. implement needed price increases in a post-COVID-19 climate. Materials (+42%) and communication services (+37%) also stood out. In contrast, the defensive utilities (-3%) and real estate sectors (+5%) notably lagged. Not FDIC Insured • May Lose Value • No Bank Guarantee PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2021 Q&A An interview with Portfolio Manager Peter Deutsch Peter Deutsch Q: Peter, how did the fund perform for the fiscal Portfolio Manager year ending February 28, 2021฀ Fairly well. The fund gained 15.54% the past 12 months, Fund Facts topping the 13.76% advance of the MSCI U.S. IMI Insurance Trading Symbol: FSPCX 25/50 Index but trailing the 31.29% rise in the broad-based S&P 500® index. Start Date: December 16, 1985 We acted early and effectively in anticipating the impact of Size (in millions): $184.63 the COVID-19 crisis on the insurance industry at large. Our internal risk assessment efforts in the early months of the pandemic proved quite accurate and we made some good decisions, both on the buy side and the sell side. As awful as the 12-month period was in general terms, it actually Investment Approach provided some of the best stock-picking opportunities I've seen in my eight years managing the fund. And I think we • Fidelity® Select Insurance Portfolio is an industry-based, took advantage of them. equity-focused strategy that seeks to outperform its benchmark through active management. Q: How would you characterize the backdrop • Our investment philosophy is centered on the belief that for insurance stocks the past 12 months฀ price performance of insurance stocks is driven by book value growth over time. There are four contributing At the close of the period, each of the three largest segments factors to superior book value growth: return on equity within the MSCI industry index were in solidly positive (ROE), reinvestment opportunities, valuation and territory: led by life & health insurance providers (+25%), avoiding downside risk. insurance brokers (+13%) and property & casualty (P&C) • We use bottom-up, fundamental research, supported by insurance firms (+11%). I'm pleased to say that in each of Fidelity's deep and experienced global financials team, those categories, the fund outperformed the index. to find high-ROE stocks with sustainable returns given unique underwriting, distribution and scale advantages. Interestingly, the start of the fund's fiscal year on March 1, We also seek to emphasize companies with strong 2020, coincided closely with the onset of the COVID-19 organic reinvestment opportunities that can drive faster crisis. The World Health Organization declared the virus a earnings-per-share growth or with the ability to deploy pandemic on March 11, and a national emergency was capital on attractive terms. declared in the U.S. on March 13. The extraordinary nature of • We believe asymmetric risk in financial stocks is often the pandemic created certain market dynamics that were skewed to the downside, and superior returns can be unprecedented and likely unrepeatable. To name one generated by avoiding companies that may permanently example, the sudden and dramatic decline in driving impair capital. contributed to record profits for auto insurers during the period. The record results, however, triggered a regulatory • Sector and industry strategies could be used by investors response that obligated carriers to return excess profits to as alternatives to individual stocks for either tactical- or strategic-allocation purposes. customers in the form of rebates. As a result, auto insurance stocks did very well during the first half of the reporting period, but less well during the second half. More generally, both P&C and life & health insurance stocks were hit hard during the first months of the pandemic, as uncertainty around potential COVID-19-related losses weighed on valuations. In response to anticipated setbacks, many insurers raised prices by 10% to 20%. But actual losses 2 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A. PORTFOLIO MANAGER Q&A | AS OF FEBRUARY 28, 2021 did not prove as severe as initially feared. The additional detractor during the period. Stock selection in the multi-line revenues and higher margins, coupled with dissipating insurance category also had a negative impact. concern around losses, helped P&C and life & health Among other individual stocks, the portfolio was insurance equities rebound in the second half of the period. underweighted in Progressive and Erie Indemnity, personal As always, the interest rate environment presented either a auto coverage companies that performed well. In fact, I tailwind or headwind to different industry segments. For avoided Erie altogether – and so missed out on a stock that insurance brokers, low interest rates are a positive, making gained 74% in the index. Then I made the further mistake of the predictability of their cash flows more desirable to reducing the fund's underweighting in Progressive (+25%) investors. For insurance carriers, however – especially life & during the second half of the period, when the environment health insurance companies – low interest rates weigh on the for auto stocks became less advantageous. The investment income and corresponding profitability of their miscalculation in this segment was a real miss. contracts. After enjoying modest relief over the past two to three years from the historically low rates that have Q: Please describe any positioning changes, as predominated since 2009, this period saw the return of a well as your outlook as of February 28, Peter. near-zero rate environment. The strong performance of the life & health insurance category was achieved despite this, In January 2020, with the pandemic looming, I was but the continuing interest rate environment could weigh on concerned the reinsurance industry could be hit badly. I the segment in 2021 and beyond. subsequently sold the fund's stake in Reinsurance Group of America (RGA), the leading player within the consolidated Q: What factors aided the fund's performance life reinsurance market. While in the end the impact was not versus the MSCI industry index฀ as bad as I feared, my sale of the stock and our lighter-than- index weighting in reinsurance proved to be a good move Out-of-industry positions in the shares of two alternative that lifted the fund's relative result for the year. asset managers, Ares Management (+52%) and Apollo Looking ahead, the movement of interest rates, or lack Global Management (+22%), were among the top individual thereof, is one factor that will determine how the industry relative contributors during the 12-month period – in fact, fares. Higher interest rates will really help insurers. Insurance Ares was the fund's largest single contributor.